BRL-010 UNIT-2 The Process Of Buying| IGNOU BBARL Notes

UNIT 2 THE PROCESS OF BUYING

* TOPICS IN THIS CHAPTER :-

1. INTRODUCTION


2. OBJECTIVES OF BUYING PROCESS


3. ROLE OF BUYING FUNCTION


4. ORGANIZATIONAL BUYING


5. BUYING BEHAVIOUR OF RETAILERS


6. BUYING BEHAVIOUR MODEL


7. RESPONSIBILITIES OF A BUYER


8. CHARACTERISTICS OF A BUYER


9. SUMMARY OF THIS CHAPTER


10. VERY VERY IMPORTANT QUESTIONS

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2.1 INTRODUCTION :-

• Buying is a process which is in existence since the trading activities got evolved over the ages.
• Hence for every organization, this is one of the most basic and universal process.
• It plays significant role to survive in a competing situation.
• In case of a retailer, the main function of the Buying Department is to obtain the best value for the money spent on purchase of the required merchandise.
• The retailer’s buying department has to ensure that the material procured is as per the requirement and more particularly in tune with its strategic needs for a given product or category.
• While performing its buying function, the Buying department has to balance all the factors like material quality, cost of material, sources of supply, supplier’s strengths and weaknesses, and customers expectations vis-à-vis product price.
• In this unit, you will learn about the importance and objectives of the buying process, the organizational buying and the buying behaviour of the retailers.
• You will also learn about the buying behaviour model and functions and responsibilities of a buyer.

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2.2 OBJECTIVES OF BUYING PROCESS :-

The objectives of the buying process at an operational level are as follows:-

• To help identify the right source of supply among the alternatives available based on the criteria predefined for a given product or category.
• To help identify the right source of supply among the alternatives available based on the criteria predefined for a given product or category.
• To identify the right price or cost of material or services, i.e. it must buy the material or services at the most competitive price.
• To ensure that the investment in inventory is at an optimum level, neither less nor more than the required levels.
• To make sure that the quality of goods and services received is of the required standard, and match with the pre-decided specifications and levels.
• To be constantly on watch of performance of suppliers with regard to the predefined supply parameters.
• To identify the good performers in terms of reliability of supplies with respect to quality and regularity, and develop and maintain good relationship with such suppliers.
• To work closely with the reliable suppliers for undertaking necessary research and developmental work for introduction of any new norms or specifications of materials – by providing know-how or through collaboration of the concerned personnel of the two companies.
• To guide suppliers by introducing new work norms that will help both the companies in streamlining their internal operations and save on cost.
• To achieve an effective integration with all the departments of the company by providing the best and smooth service to all concerned.
• To be proactive in the matters of procurement and operational issues, so as to achieve cost effectiveness in its operation.
• At an overall perspective or from the perspective of a General Manager, the Buying or Purchase department has to satisfy the following objectives:-
  1. To Procure the Right Quality:-
     • The buyer must be aware of the needs of the consumer in terms of the content of the item, and the quality parameters that would satisfy the consumer need.
     • For example, in summer the consumer will need garment with light fabric, preferably with cotton content, that will maintain coolness in hot weather.
  2. From the Right Supplier:-
     • The supplier is selected on certain criteria, which will ensure that the right quality and quantities are supplied regularly at the right time and location.
     • The supplier must satisfy the requirement on the preset parameters of the company.
  3. At a Right Price:-
     • The buyer has to ensure that products are purchased at a right price from the supplier, so as to provide the same at selling prices to consumer.
     • This will give them satisfaction as well as bring profitability to the retailer.
     • For example, if the need is to supply Shirts at a starting selling price point of Rs 300, then the buyer must be able to procure the shirts from a right vendor at a right price.
     • He/she should keep in mind that at selling price of Rs 300, the required profit is earned.
  4. In Right Quantity:-
     • The buyer must buy the product in right quantity, so as to ensure that there are no shortages felt at the store level.
     • For this the buyer must have proper understanding on various factors like consumer demand, transport time for delivery of goods, replenishment frequency, stocking facility at each store level; for working out the minimum quantity to be ordered for each of the store.
  5. At a Right Time:-
     • The quantity against each of the items in a category must be delivered in time to avoid stock out situations, thereby leading to dissatisfaction of consumers.
  6. Send it to a Right Place or Department:-
     • The goods need to be sent to the right location and the store.
     • For this the buyer will have to work out the right logistics of supply including transport to ensure there is not only timely supply but also at the right location and the department concerned.

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2.3 ROLE OF BUYING FUNCTION :-

- The role of buying function include:-
• To understand the consumer segment for whom the merchandise is being created, in all its aspect.
• To identify the products or merchandise that will best suit the taste and requirement of the selected consumer segment.
• To evaluate the selected merchandise for its quality specifications that will best fit into the cost factor. This will give utmost satisfaction to the selected consumer segment.
• To work out an assortment of different product types that will make a complete basket of offering to the selected consumer segment.
• To identify the best suited vendors and suppliers, through the process of extensive search and interaction at various levels. They will be able to supply the said products or merchandise.
• To negotiate with the select suppliers and vendors for favorable terms of supplies, so as to attain the best pricing for its consumer segment. This will help to achieve profitable working for the company.

- According to Hirschman and Stampfl, a retail buyer has to perform three major functions:-
1. As a Change Agent:-
   • The buyer influences the buying behaviour of consumers by offering them new range of products and services.
   • The products or services may be either as a totally new experience or with new ingredients or attributes.
2. As a Gatekeeper:-
   • The buyer is responsible for ensuring right quality of products from suppliers to the final end consumers.
3. Opinion Leader:-
   • The buyer plays the role of an opinion leader, in conjunction with its role as a change agent, by influencing consumer opinion through various means and medium.

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2.4 ORGANIZATIONAL BUYING :-

• Organizational buying is part of the business market, which consists of all organizations that acquire goods and services used in the production of other goods or services that are sold, rented, or supplied to others.
• Compared to consumer markets, business markets generally have fewer and larger buyers, a close customer relationship, and more geographically concentrated buyers.
• . Demand in the business market is naturally derived from the consumer market.
• For example, for Dell Computers, purchase of the Intel Chips will be part of organizational buying process, and the demand for Intel Chips is dependent on the demand from the business market, which in turn is dependent on the demand from consumers for laptop and desktop computer systems.
• For example, for Dell Computers, purchase of the Intel Chips will be part of organizational buying process, and the demand for Intel Chips is dependent on the demand from the business market, which in turn is dependent on the demand from consumers for laptop and desktop computer systems.
• This will vary as per the business cycles and fluctuations experienced in the consumer market.
• The consumer market uses the final product with the said product part as its component.
• The decisions of the buying organization are made by a buying centre.
• The buying centre comprises of all those individuals and groups that share common goals and risks arising from the decisions made.
• The buying decisions made by a buying centre are affected by environmental, organizational, interpersonal and individual factors.
• The buying centre does have to take into account environmental factors like demand for the product, economic trends, technological changes, political and regulatory environment, competition, and social responsibility.
• The buying centre has to keep in mind the organizational goals, policies & procedures, its structure and systems while arriving at a decision.
• The buying centre has to keep in mind the organizational goals, policies & procedures, its structure and systems while arriving at a decision.
• It is always the endeavour of the buying centers to deal with few reliable vendors/suppliers who are attuned with its decision making process and are able to satisfy its terms and conditions while satisfying overall objectives of the organization.

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2.5 BUYING BEHAVIOUR OF RETAILERS :-

• In Industrial buying, the decision is influenced by the buying committee, Buyers or final users of the finished products.
• In the case of retailers, the buying decision is influenced by the consumers’ buying trends or preferences, and the marketing strategy.
• Retailers do not only buy the finished products and then sell to final consumers.
• They are also responsible to offer certain guarantees on after sales service and quality to its final consumers.
• The retailer is not just selling the finished products to its consumers.
• He/she is also offering a value added experience to consumers by providing better shopping experience.
• The retailer is not just concerned about buying products at best prices.
• He/she also needs to generate revenues and profits, in order to ensure its survival and longevity.
• The recent trend among large format stores to develop their own private labels have further pushed such stores into several activities.
• These activities may involve: nurturing these labels, understand the consumer buying behavior with respect to these products, and seriously get into product development activities.
• Retailers need to deploy their own buying and merchandising teams to do consumer research.
• The research may involve: existing and new trends in buying by consumers, understand the competitive positions of various brands and suppliers, understand the issues in category management, study new offerings, and evolve a buying policy that will help the retailer to optimize on its investments in stocks and fixed assets.
• The retailers have to keep a constant watch on the market trends and competition to work on promotion schemes.
• These schemes may be below the line and top of the line activities, as well as joint promotions and activities with vendors/suppliers and manufacturers.
• These activities can help generate additional sales, as well as prevent their sales from sudden downturns.
• Sometimes retailers may form cartels to control the prices of the supplies, thereby leveraging their buying strengths.
• For example in case of bulk buying of grains, cereals and pulses, or in textiles trade, one can see such cartel formation.
• Retailers may also form associations to formulate certain policies and norms in their dealings with manufacturers and suppliers.
• The evolution of information technology has helped the retail channel tremendously in knowing more about the latest trends in different product categories in the international markets.
• This facilitates the retail channel decide on their strategy and policy on importing competitive and new found products.
• The retailer may procure them from different sources and may offer these products at the best prices.

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2.6 BUYING BEHAVIOUR MODEL :-

• This is well-known as Sheth’s Model.
• Jagdish N Sheth has been one of the pioneers in the conceptualization of the buying behaviour for Industrial Buyers.
• This model can be used for understanding both the Retail and Industrial buyer buying behaviour or for that matter, any bulk buying behaviour.
• For deciding on merchandise requirement of a retailer, the retail buyer needs to consider inter-organizational factors for deciding its choice of merchandise vis-à-vis other competing organizations.
• First of all, the retail buyer has to take into account retailer’s size in terms of the level of business or its business goals.
• Whether it is a large format store run by a family or partners or corporate house - or a family-run small to medium sized retail outlets like convenience stores or specialty stores or multi-branded outlets, etc.
• Retailer’s type of business – whether it is a departmental or super market or hyper market or single product or multi-product type.
• Management’s mentality in terms of its objectives.
• Whether it wants to be a leader in any particular product type or to be a niche retailer or a market leader in any category.
• Retailer’s location; whether it is based in Metro or semi-metro or in a town as it will also influence the type of merchandise it needs to carry.
• It can be seen from the above model diagram that the retailer’s buying behavior is determined by his merchandise requirements, choice and supplier’s accessibility.
• Although ideally he should try to select the best supplier, the actual choice may be different from the best supplier due to various reasons.
• These reasons may be business climate, company’s financial position, business negotiations and market disturbances.
• Sheth grouped these factors as adhoc situational factors.
• The influence of the situational factors on the business decisions cannot be anticipated.
• The Intra-organizational factors like type of merchandise; whether food products, or clothing or footwear or pharmaceuticals will decide on type of merchandise the retailer needs to carry.
• Furthermore, product positioning (the major factors or attributes of the product or brands the retailer wants to be focused on).
• The niche in which the retailer wants to operate; whether in high, medium or lower priced products, will decide on the class of merchandise, including the price factor.
• Regulatory constraints like the government’s ban on carrying certain products or drugs may also influence the merchandise type in a retail store.
• Supplier accessibility is decided by the supplier’s corporate image or position, the level of competition in the supplier’s product category and its relative marketing effort.
• The choice calculus is majorly influenced by the merchandise requirement and the supplier accessibility.
• The choice calculus determines the number of items and quantity to be stored against each product type for selling to consumers.
• It also comprises the trade terms and profit margins for each product type.
• The choice calculus guides the retailer in the final selection of merchandise and the attribute of an ideal supplier for each product type.
• The selection of actual supplier and products is dependent on the business climate.
• Whether recessionary or inflationary trends, market disturbances – whether shortage or surplus of supplies – economic trends, etc.
• These have impact on actual selection process; besides the business negotiations.
• Whether the retailer is in the buyer’s or seller’s market situation, and retailer’s financial position, etc.
• These will influence the final choice of products and their supplies.
• A revised model was introduced by Hansen and Skyte in 1998 to take into account the effect of the factors like electronic data interface, buyer’s characteristics, Information Technology and Buying Associations.
• These factors have great influence on the final choice of the merchandise and suppliers, besides deciding on the marketing and buying strategies of the retailer.

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2.7 RESPONSIBILITIES OF A BUYER :-

• With the evolution of the organized retail industry, the role of the buyer has come into quite a prominence.
• Buying has come to occupy an important role in the organized retail industry as the customers are always on the lookout for the increased value from their purchases.
• Certain large retailing formats have centralized buying systems.
• This makes the role of the buyers in these organizations very prominent.
• The centralized buying also provides a stronger bargaining strength to the buyer, thereby providing better price advantage to the final consumers.
• In store chain formats, the buyer is stationed at the main office, and hence, he/she is not in direct touch with the day-to-day happenings at the store level.
• He/she has to depend greatly on the information technology for receiving vital information on sale-through sales to stock ratios, and stock covers, etc.
• The buyer is an important link between the supplier and the final consumers.
• Hence, any lapse on the buyer’s part in understanding the correct product sales trends and consumers’ preferences will result into unwanted excess stocks or low sales or value loss in a given product or category.
• According to Clodfelter Richard, the buyer has to deal with many departments, particularly in large format stores; he/she will be dealing with merchandising, marketing, product management, physical distribution, retail store operations, inventory management, packaging/design, technologists, market research/analysis, finance/accounts, advertising, space allocation/planning, promotions/publicity, board/top management, corporate planning, and personnel training.
• The buyer also takes care of the private labels procurement for the store and has to keep in mind such issues like pricing, product positioning, packaging, finalizing best terms with the suppliers. inventory levels, etc.
• In case of retailers who have to source the merchandise globally, the buyer has to keep in mind the environmental and social compliance issues by the vendors/suppliers.

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2.8 CHARACTERISTICS OF A BUYER :-

The important characteristics a good buyer should have are as below:-
1. Negotiating Skill:
   • A retail buyer needs to be a master of negotiating skills.
   • This will determine his level of success in his given profession.
   • He also needs to be sensitive to demands of both the suppliers and his merchandising department as well as store managers.
   • He must be able to balance between demands from both the sides.
   • For doing this he must have very good analytical abilities.
   • He must be able to evaluate offerings of various suppliers besides understanding their strengths and weaknesses.
   • He should match the best offer with the requirements of the merchandisers and store managers for achieving the best overall profit percentage on the given deal.
2. Communication Skill:-
   • He must have good communication skills.
   • He/she has to discuss/interact with host of suppliers on a variety of issues.
   • He needs to listen to the demands of his merchandisers, consumers, store managers, as well as to the suppliers.
   • He/she has to understand the true needs that needs to be satisfied while keeping in mind the perspectives of different stake-holders.
3. Market Awareness:-
   • The buyer must have very good understanding of customers buying patterns and behaviours in order to identify the merchandise that will meet their requirements.
   • He/she has to also understand how the competition is meeting the buyers’ needs, including the price offers, services, features and quality being offered to customers.
4. Commercial Tastes:-
   • The buyer must be able to balance between the needs of customers and the profitability needs of the retailer.
   • For this the buyer must know at what quality and at what price the given product will meet the needs of both the customer and the retailer.
   • Buyers are mainly evaluated on the basis achievement of sales turnover, profits, and meeting budgeted targets for purchasing.
   • Besides these other important criteria on which the buyer is assessed are percentage Margin, Gross profit, Increasing profit, Managing/motivating staff, Successful new product development, Training staff, Quality control, and No waste/unnecessary markdowns, etc.
   • Good Buyers need to be very clear about achievement of store profitability and turnover.
   • An effective buyer will need to have right mix of different characteristics.
   • The other important characteristics are Financial Awareness, Numeracy, Product-knowledge, Good Planning, Determination/tenacity, Innovation/ creativity, and Common sense.

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2.9 SUMMARY OF THIS CHAPTER :-

• Buying Process is an important constituent of the retail business.
• The main function of the buying department in an organization is to obtain the best value for the money spent on purchase of the required merchandise.
• The important objectives of the buying process are: identifying the right source of supply, ensuring constant flow of the supplies, buying material or services at the most competitive price, ensuring investment in the inventory at an optimum level, procuring goods and services of the required standard, working closely with the suppliers for undertaking necessary research and development, etc.
• Buying process has assumed tremendous importance as it represents not only the retailer but also the consumers.
• It involves identification, evaluation and selection of merchandise.
• Organisational buying is part of the business market, which consists of all organizations that acquire goods and services used in the production of other goods or services that are sold, rented, or supplied to others.
• Demand in the business market is derived from the consumer market.
• With the evolution of Mall culture and large Format Retail Chains, the earlier elements of the supply chain have undergone a substantial change.
• Many Large Format Retail Chains have started procuring goods on SOR (Sale or Return) basis.
• This may shift the risk of wrong decision making on purchases of products/brands from retailers to the manufacturers.
• Hyper Stores have started making purchases directly from the farmers and mandis.
• This may help in passing on the savings to the consumers in the form of lower prices and better ambience.
• A number of factors such as the retailer’s type of business, its objective, location, etc. influence the buying behaviour model.
• With the evolution of the organized retail industry, buyer has important functions and responsibilities.
• The buyer is an important link between the supplier and the final consumers.
• Therefore, any lapse on the buyer’s part will have serious detrimental consequences.
• Thus, good buyers need to be very clear about achieving store profitability and turnover.
• An effective buyer will need to have right mix of different characteristics.
• The major good buyer’s characteristics are: negotiating skill, communication skill, market awareness and commercial tastes.

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2.10 VERY VERY IMPORTANT QUESTIONS :-

1. discuss the objectives of the buying process.
2. describe the role of the buying function.
3. discuss the organizational buying.
4. explain the buying behaviour of the retailers.
5. discuss the buying behaviour model.
6. explain the responsibilities of a buyer.
7. describe the characteristics of a buyer.
8. What is meant by buying process? Enumerate its important objectives.
9. ‘Buyers are often referred to as customers’ advocates’. Elaborate.
10. Define organisational buying. Explain the factors that affect organisational buying.
11. What do you mean by buying behaviour of retailers? How has it undergone changed during the last few years?
12. Giving a suitable example, explain the concept of the ‘Buying Behaviour Model’.