Lecture 6 - Purchasing - Marketing

Organization and Management BME III/I
Lecture 6
6.0 Purchasing and Marketing
Iswor Bajracharya, PhD
Department of Mechanical Engineering
Pulchowk Engineering Campus
Outline
1.6 Purchasing and Marketing Management
1.6.1 Purchasing – Introduction
1.6.2 Functions of Purchasing Department
1.6.3 Methods of Purchasing
1.6.4 Marketing – Introduction
1.6.5 Functions of Marketing
1.6.6 Advertising
2 Iswor Bajracharya/Purchasing & Marketing 2/25/2016

Purchasing
There are four different groups of buyers: a) consumers, b)
intermediaries, c) government agencies, and d) manufactures

Consumers buy for self consumption. Intermediaries buy for
reselling. Government agencies buy to use in various
government departments.
Industrial Buyer: Manufacturers buy various raw materials,
parts, components, packaging materials to produce saleable
products.
The term purchasing should be referred to the industrial
buying or organizational buying.
Purchasing: In narrow sense, the meaning of purchasing is the
process of buying the required items at a price.

Organizational Purchasing: In broader sense, purchasing
with regard to an organization is a managerial activity which
involves the recognition of need of products, establishing
product specification, searching potential supplier, evaluation
and final selection of suppliers and placing orders to obtain the
required materials, parts, components or other consumable
supplies to produce a product or provide service.

Importance of Purchasing
Timely availability: Fundamental factor of production.
Purchasing makes available the right type of material in right
quantities and at right time.
Cost saving: Helps in saving material cost through bulk buying
and bargaining with suppliers. 1% saving in material cost is
equivalent to a 10% increase in turnover. Efficient purchasing
can achieve this.
Heavy investment: On an average, manufactures spend about
50% of earnings on material purchase.
Safeguard against scarcity: Safeguard against scarcity of
material in the market. Helps in timely execution of industrial
projects.
Objectives of Purchasing
In general the objective of purchasing is to buy the right quality
and quantity of material at right time and price from right
source. Specific objectives are:
To maintain the optimum level of inventory to maintain smooth
production.
Cost saving through bulk buying and negotiating with suppliers.
To search the potential suppliers and their evaluation
To select the right type of supplier and develop good
relationship with them.

Purchasing Department
As purchasing is one of the most important activity in
manufacturing organization, a separate department called
Purchasing Department is created to handle entire purchasing
related functions.The major purchasing functions are:
1. Functions related to purchasing activity:
Obtaining prices from vendors
Evaluation and selection of right vendors
Awarding purchase order
Follow up on delivery promises
Developing vendor relationship

2. Functions other than purchasing
Obtaining technical information and advice
Establishing material specification
Scheduling orders and deliveries
Specifying delivery method
Inventory policy and control

Purchasing Process
Business buyers buy goods and services to make money or to
reduce operating costs or to satisfy a social or legal obligation.
Therefore, business purchasing is not straight forward. The steps
involved are:
1. Need recognition:
2. Description of need
3. Supplier search
4. Proposal solicitation
5. Supplier selection
6. Purchase order
7. Performance review

1. Need Recognition
The user departments (Engineering, Production) identify the
need: new parts, raw materials etc.
This need is officially brought to the notice of purchasing
department which is known as need recognition.
Formally, the user departments issues the purchase requisition
notes with due sign by authorized personal.
Requisitions notes from the user departments are first sent to
the store and if it is in stock, it is supplied from there.
If the items in the requisition note are not in stock, it is sent to
the purchasing department for action.
When the stock reduces to a certain level, store also issues
purchase requisition note to purchase department.
2. Description of Need
The needed items should be described in terms of quantity
required and with complete technical specifications.
The purchase requisition notes should describe all the
needed information accurately in order to avoid the costly
mistakes.
Once the requisition form is received in the purchasing
department, the purchase manager cross checks and verifies on
the basis of his own knowledge of items, records of past
purchases and vendor catalogues.
In case if he finds some mistake or suspects some doubts in the
requisition, he sends it back to the issuing departments, seeking
clarification.
3. Supplier Search
After the need has been recognized and described, the
purchasing department proceeds to search the potential
suppliers.
In most cases, purchasing department knows the potential
suppliers. A regular list of approved suppliers called registered
suppliers is maintained by purchasing department.
Internet is also a good source to search the potential suppliers
In formal competitive purchasing, the purchasing department
publishes the tender notice with the specifications and
estimated quantities needed in the newspapers inviting to quote
price within a stated time from suppliers.

4. Selection of Suppliers
Before selecting a supplier, the purchasing department develops
certain criteria to select the most suitable suppliers.
The basic attributes used in rating potential suppliers are: Price,
Supplier reputation, Product reliability, Service reliability,
Supplier flexibility, Technical ability, Financial ability, After sales
service availability, Location, Experience etc.
Based on the criteria, the purchase department evaluates each
supplier and identify the most attractive suppliers.
Once the suitable suppliers have been selected, orders can be
placed

5. Placing Order
After selecting the suppliers, the purchase department
negotiate the final order, listing the technical specifications, the
quality and quantity needed, expected time of delivery,
warranties and so on.
Then legal order is placed with the suppliers which is known as
purchase order.
Some companies requires the order acknowledgement from the
suppliers upon the receipt of order agreeing to supply the items
stated in the order.
After the order has been placed, follow up is done to ensure
that the orders are delivered by supplier on time

6. Performance Review
The purchase department should periodically review the

performance of the selected suppliers based upon the service
he has provided.
The performance review may lead the purchase department to
continue, modify or end the relationship with the suppliers.

Methods of Purchasing
There are several methods that may be utilized to request

items or services.They are:
a) Blanket orders
b) Petty cash
c) Purchasing credit card
d) Purchase requisitions and orders
e) Bidding
f) Bulk Purchasing
g) JIT or Stockless Buying

Blanket Order: A method wherein the buyer issues an order
covering the requirement of a small item for one year. The order
is relevant for a year. Whenever the stock of item reaches low,
the buyer simply telephone the supplier and request his to
supply the items.
Blanket order reduces the paper work and time of buyer is
saved, facilitates price negotiation because one order covering a
year’s requirement is placed once.

Petty Cash: Petty cash is a purchasing method appropriate
for small, immediate purchases such as stamps, office
supplies, and other minor purchases. Petty cash purchases
tend to be too small to write a check and are often
intermittent in nature. Most businesses keep a petty cash fund
with a designated amount of cash, as well as a log for
recording the date, item and amount of the petty cash
purchase.
Purchasing Credit Card: A credit card to provide
departments with a widely accepted method of ordering
small amount, petty cash type items.

Purchase Requisitions and Orders: The purchase
requisition is a request, especially a formal written request on
a pre-printed form for goods or services and should be used
when the above methods cannot be utilized.
A requisition is used in business as an internal document used
to notify stores or the purchasing department of items that are
needed or need to be ordered. It sets out the quantity and the
time frame. It may also contain the authorization to proceed
with the purchase if the required items are not available in
stock.

Bidding: It involves asking potential vendors to provide price
lists and then choosing among available options based on the
price and quality.
Most companies that accept bids decide among available options
on the basis of price, but cost is not the only criteria.
A vendor bid also may include time considerations such as how
quickly a vendor can fill an order and how much advance notice
he needs. In addition, not every vendor provides products of
comparable quality, and sometimes better-quality items are
worth the additional expense.

Bulk Purchasing: Purchasing in bulk enables a company to
secure low prices by placing substantial orders. Although bulk
purchasing offers price advantages, it is not always the best
method to use because you do not need large quantities of
every product you purchase. In the case of perishable foods, in
particular, it makes sense to limit purchases to the amount
you will be able to use before the products spoil. In addition,
keeping excessive inventory on hand can raise labor costs
because of the need to store and rotate stock.
JIT Purchasing: Placing an order as and when required
within minimum lead time to minimize the inventory.

Marketing

Marketing
What is marketing?
Why is marketing
important?
What are the core concept
of marketing ?

What is Marketing?
“The art of advertising and selling products”
“Art of telling and selling”
“Identifying and meeting human & social needs
profitably”
An organizational function & processes
to create, communicate & deliver
value to customers
& manage customer relationships
to benefit organization & stakeholders
The American Marketing Association defines the following
formal definition :
Marketing is the activity, set of institutions, and processes for
creating, communicating, delivering, and exchanging offerings
that have value for customers, clients, partners, and society at
large.
Marketing management is the process of planning and
executing the conception, pricing, promotion and distribution
of goods and services to create exchanges that satisfy
individual and organizational goals.

Marketing and Selling Concept
This concept holds the view that organization should offer what the target
market wants and deliver the same effectively and efficiently than the
competitors do.
Starting
Focus Means Ends
point
Factory Focuses on existing Promoting & Profits through sales

products Selling volume
Focuses on Profits through

Integrated
Market customer need & customer
marketing
Wants satisfaction
Fig: Contrast between selling and marketing

Core Concepts of Marketing
The set of all actual Needs, Wants and Human need shaped by
and potential buyers culture and individual
Demands
of a products/services personality
Products and
Markets Services
Concepts of
Anything that can be
A trade between Marketing offered to market
two parties is
transaction
Value, Satisfaction
Exchange, Transactions & and Quality
Relationship The ratio of benefits and costs is the
The act of obtaining a desired object value. The match between buyers’
from someone by offering expectation and product performance
something in return. is the quality
Iswor Bajracharya/Purchasing & Marketing Fig: Concepts of Marketing 2/25/2016
29
Marketing Management
Marketing management is defined as the analysis of market,
planning and implementation of marketing programs to create,
build, and maintain beneficial exchanges with the target buyers to
achieve organizational objectives. Thus marketing management
involves segmenting the market, selecting the target market,
developing the strategy and positioning the product in the target
market .
In short, marketing management involves the managing
demand and customer relationship.

Why is Marketing Important ?
The success of business organization comes from the profit
it makes.
Profit depends on the volume of its products/services
sold.
Sales depends on marketing
Less selling/ demand - less business
Marketing decision is tough today’s competitive business
environment.

Marketing Process
Design and Construct Build customer
Understanding
develop Making integrated relationship &
Customers’
customer- marketing marketing create customer
Need, Want, and
driven decisions programs to delight
Demands
marketing deliver
strategy Product superior
Market research
mix value
Analyze consumer Market
market & behavior segmentation & Branding Capture value
decision Managing
Scan marketing targeting marketing from
environment Product Packaging & customers to
channel
positioning labeling create profit
Direct &
Product Pricing online
differentiating product marketing
Marketing mix Retailing &
(4Ps’) Wholesaling
Product
Price
Promotion
Place
Fig: Marketing process

Market Segmentation
Companies cannot serve all customers in a broad market. So
necessary to identify the market segments that it can serve
effectively. Companies use the concept of market segmentation
to serve and enter the particular market.
Market Segmentation: Dividing a market into distinct
groups of buyers on the basis of needs, characteristics, or
behaviors.
Market Segment: A group of consumers who require the
similar product, purchasing power, geographical location,
buying habit or buying attitude.
It is homogenous within the segment (with common attributes)
It is distinct from other segments (heterogeneity)
Marketing Functions
1. Marketing involves number of activities known as marketing

functions.
2. The purpose of these functions is to allow the companies to
bring the products to the market and achieve the ultimate
objectives of the organization and build customer relationship
through Pricing
Selling
Distributing
Promoting
Marketing information management
Product management

There are 8 major functions Market
Produc
of marketing: Researc
t
Custo h
1. Marketing information management Manag
mer
2. Product/Service Management suppor ement
3. Physical Distribution t Distrib
4. Pricing ution
5. Promotion Marketing
6. Product Positioning Brandin Function
7. Branding, Packaging and Labeling g
8. Customer support Pricing
Position
ing Promot
ion

Market Information Management
Gathering and analyzing market information is an important

function of marketing.
The purpose of this function is to understand the need, wants
of customers, to understand the competitors, potential rivals
in the market, their strategy, strength, weakness.
Questions pertaining to this are:
a) What do the consumers want?
b) In what quantity?
c) At what price?
d) When do they want (it)?
e) What kind of advertisement do they like?
f) Where do they want (it)?
g) What kind of distribution system do they like?
All the relevant information about the consumer is collected
and analyzed. On the basis of this analysis an effort is made to
find out as to which product has the best opportunities in the
market.
For this purpose, market research is done.
Market research helps not only in understanding the
customers’ need but also to scan the external environment.
Scanning the external environment helps to understand
customers’ need and want and other competitors’ presence,
political economic, demographic (macro environment forces)
helps to understand Opportunities for new business in the
market and Threat.
Internal environment scanning helps to understand the
Strength and Weakness of own company.
Scanning the external and internal environment helps the
SWOT (Strength, Weakness, Opportunities and Threat )
analysis.

Figure : Market research
2. Product /Service Management
After understanding the customers’ need and wants, the next

function is to design, develop, upgrade, maintain and improve
the product/service quality that meet customers’ need.
Product designing plays an important role in product selling.
The company whose product is better and attractively
designed sells more than the product of a company whose
design happens to be weak and unattractive.
In this way, it can be said that the possession of a special design
affords a company to a competitive advantage.
Companies should upgrade, modify the old products and
develop the new products continuously through firm’s own
R& D.
3. Physical Distribution
The main objective of this function is to decide how to make
the products available from the place of production to the
place of consumption to meet the customer need.
Physical distribution involves determining the marketing
channels (wholesalers, retailers, direct marketing),
transportation, warehousing and inventory.
Manufacturer Manufacturer Manufacturer
Wholesaler Wholesaler Retailer
Retailer Consumer Consumer
Consumer

4. Pricing
The most important function of a marketing manager to fix
price of a product.
The price of a product is affected both internal and external
factors.
The price of a product should be fixed in a manner that it
should not appear to be too high and at the same time it
should earn enough profit as well.
Internal Factors External Factors
Cost Pricing Competition
Profit Rate Decisions Demand of products
Marketing mix Other factors ( economy,
strategy (4Ps) government policy )

5. Promotions
Promotion means informing the consumers about the products
of the company and encouraging them to buy these products.
There are four methods of promotion:
Advertising: Any paid form of nonpersonal presentation and
promotion of ideas, goods or services by an identified sponsor.
Personal selling: Personal presentation by the firm’s sales force for the
purpose of making sales & building customer relationship.
Sales promotion: Short-term incentives to encourage the purchase or
sale of product.
Public relations: Building good relations with the publics or customers
by making publicity, building up a good corporate image.
Every decision taken by the marketer in this respect affects the
sales. These decisions are taken keeping in view the budget of
43
theIsworcompany
Bajracharya/Purchasing & Marketing 2/25/2016
6. Product Positioning
Product positioning is making a product a distinct relative to
competitors’ product in the minds of customers.
Product position is how the product is viewed, defined by
customers – the place the product occupies in the minds of
customers relative to the competitive products.
A product’s position is a complex set of perception,
impressions, and feelings that consumers have about the
product.
A good product position in the market provides the
competitive advantage to the company.

Product positioning can be done through
a) Differentiation : Differentiating the company’s
marketing offer to give consumer more value than
competitors’ offer do.
A company can differentiate its product (product
differentiation) in terms of features, quality, safety,
reliability, durability etc.
Company can differentiate its service (service
differentiation) like better after sales service, free
delivery and installation, customer training etc.
Channel differentiation : By designing market
channel’s coverage, expertise, and performance
Image differentiation: Company can differentiate its image
through branding.
b) Value proposition: The full positioning of brand-the
full mix of benefits upon which the brand is positioned.
Price
More Same Less
More More
More
More for
more for same for less
Benefits
Same
Same
for less
Less
Less for
much less
46 Iswor Bajracharya/Purchasing & Marketing Fig: Possible value proposition 2/25/2016

7. Branding, Packaging and Labelling
The most important function of marketing is to create ,
maintain, protect and enhance the brand of the products and
services.
A brand is a name, sign, symbol or combination of these that
identifies the maker or seller of a product or services through
advertising campaigns with consistent theme.
Branding aims to establish a significant & differentiated
presence in the market that attract and retains loyal customers.
A brand has a value which is known as brand equity.
Product Product
Branding Packaging Labeling
Attributes support service
Figure: Development & marketing of product/services

Packaging involves designing and producing the containers
or wrapper for a product.
It avoids breakage, damage, destruction, etc., of the goods
during transit and storage. Packaging facilitates handling,
lifting, conveying of the goods. Many a time, customers
demand goods in different quantities. It necessitates special
packaging. Packing material includes bottles, canister, plastic
bags, tin or wooden boxes, jute bags etc.
Innovative packaging can give a company an advantage over
competitors

Label is a slip or tag which is found on the product itself or
on the package providing all the information regarding the
product and its producer. This can either be in the form of a
cover or a seal.
For example, the name of the medicine on its bottle along
with the manufacturer’s name, the formula, date of
manufacturing, expiry date, batch no., price etc., are printed
on the slip thereby giving all the information regarding the
medicine to the consumer. The slip carrying all these is details
called Label and the process of preparing it as Labelling.
Labeling is required by law in food and medicine product.

8. Customer Support
Customer is the king of market. So, one of the chief functions

of marketer is to offer every possible help to the customers.
Following services can be offered to the customers:
a) After-sales-services
b) Handling customers’ complaints
c) Technical services
d) Credit facilities
e) Maintenance services
Helping the customer in this way offers him satisfaction and in
today’s competitive age customer’s satisfaction happens to be
the top-most priority. This encourages a customer’s attachment
to a particular product and starts buying that product time and
again.
Advertising

Advertising is any paid form of nonpersonal presentation and
promotion of ideas, goods or services by an identified sponsor.
Advertisers include not only business firms but also charitable
organization, government agencies that direct messages to
target publics
Advertising is a cost effective way to disseminate messages for
product promotions.
In developing an advertising, the first step is to identify the
target market and buyer motives
Then they can make use of 5M (Mission, Money, Message,
Media and Measurement) decisions in developing an advertising
program
5 M principle of an advertising:
a) Mission: What are the advertising objectives?
b) Money: How much can be spent ?
c) Message: What message should be conveyed?
d) Media: What media should be used?
e) Measurement: How should the result be measured?

MESSAGE
Message generation
MONEY Message evaluation &
MISSION
Factors to consider: selection
Sales goals MEASUREMENT
Stages in PLC Message execution
Product Communication
Market share &
positioning impact
consumer base
Advertising Sales impact
Competition MEDIA
objective (inform,
Advertising Reach , Frequency,
persuade or remind)
frequency impact
Major media vehicles
Media timing
Geographical media
allocation
Figure: The 5 Ms of advertising


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Organization and Management BME III/I

2 Iswor Bajracharya/Purchasing & Marketing 2/25/2016

3 Iswor Bajracharya/Purchasing & Marketing 2/25/2016

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The purchase department should periodically review the

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There are several methods that may be utilized to request

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Factory Focuses on existing Promoting & Profits through sales

Focuses on Profits through

Fig: Contrast between selling and marketing

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1. Marketing involves number of activities known as marketing

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Gathering and analyzing market information is an important

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After understanding the customers’ need and wants, the next

Wholesaler Wholesaler Retailer

Retailer Consumer Consumer

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46 Iswor Bajracharya/Purchasing & Marketing Fig: Possible value proposition 2/25/2016

Figure: Development & marketing of product/services

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Customer is the king of market. So, one of the chief functions

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Figure: The 5 Ms of advertising

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