Industrial Selling

Industrial Selling: - (Definition)

Industrial Selling is nothing but selling of industrial products to manufacturing firms who in turn make use of these products for further production of their goods or services. (E.g). A company manufacturing and selling steel tubes to bicycle manufacturers (like Hero cycles, Atlas cycles) is doing industrial selling of steel tubes . Industrial Selling is also called as Organizational Selling as the sale takes place between two organizations. How Industrial Selling is different from Consumer Selling? Consumer selling is the sale of products and services to individuals, families, and households. In this case, consumers buy products and services for their own consumption. Where as, in Industrial selling, the sale is taking place between two organizations, (ie) sale is not taking place directly with the end consumers.
Industrial Selling Customized products. Relatively few buyers. Purchase decisions made on rational / performance basis. Involves technical expertise. Competitive bidding & negotiated prices. Consumer Selling Standardized Products. Mass markets. Decisions made on Social / psychological needs. Less technical expertise. List prices or MRP.

Product Characteristics of Industrial Goods: The products are technically complex in nature. Because of the importance given to the technical aspects of industrial products, the purchases are made based on specifications evolved by the buyers. Industrial customers give greater importance to service (ie), timely delivery of the products, because any delay will have a significant impact on their further production.

Market Characteristics in Industrial Selling: A large number of households are involved in the mass market for consumer goods and services (e.g. tooth paste, soaps are required by almost all households in India). However in the industrial market, relatively lesser number of customers are involved (e.g. very limited number of organization like State EBS, large private & public sector organizations will be representing the whole countries requirement of industrial products like large power transformers or high tension switch gears). Buyer behavior of Industrial goods: Buying process is more complex here, compared to consumer selling. Purchase decisions are based on compliance with product specification, product quality, timely delivery, acceptable payment terms, cost effectiveness etc.

Purchase decisions take longer time and involve many individuals from technical, commercial, materials & finance department of buying organization.
Over a period of time, inter organizational contacts take place between seller and buyer and interpersonal relationships are developed which remain stable because of high degree of interdependence.

Types of Industrial Customers: Commercial enterprises (ie. Private concerns, e.g. Telco, Bajaj Auto). Government organizations ( e.g. Railways, defence, department of telecommunication, state transport departments / undertaking). Institutional Customers (Public or Private institutions such as hospitals, schools, colleges, universities, prisons etc). Cooperative Societies (Cooperative sugar mills, cooperative banks, cooperative housing societies). Classification of Industrial Products:Classification of Industrial products is made based on how the products are further used in the production process of another organization. Major classifications of Industrial products are: Raw materials These are the basic products which directly enter the production process with no alteration. (e.g) Aluminum billets are as such used for its further process in making aluminum doors & window frames by aluminum extrusion units. Capital items:- These are required in the production process and they wear out within certain time frame. (e.g) general purchase machines, special purpose machines, furnace, etc. Supplies & Services:- They do not become part of the finished products. They are treated as operating expenses. (e.g. lubricants for the machines, paints, grease required for the process, courier service, auditing service etc.)

Procedures & practices in buying industrial goods:Purchasing in Commercial Enterprises: The purchasing practices depend upon the nature of business and the size of the commercial enterprise and also depends on the volume, variety and technical complexity of the products purchased. In large & medium size organizations, the purchase decisions involve persons from several departments like engineering, production, materials, quality, finance and of course senior management, as detailed below.
Activity User dept issues purchase requisition (P.R) or indent to purchase dept. If the material (reqd as per P.R) is not in stock, identify potential suppliers, select one of them, issue P.O. Follow up with the supplier. Supplier despatches the matls & informs despatch details to purchase dept. Responsibility Production, Mktg, R & D.

Purchase dept (with the support of technical & finance dept during negotiation). Purchase dept. Supplier.

Check the matls against delivery chalan & P.O. and issue material receipt report (M.R.R).
Quality control dept inspects the malts & issues inspection report (I.R). Suppliers invoice with M.R.R and I.R sent to finance dept for payment release to supplier. A/c dept checks all the documents with P.O and releases payment to supplier .

Stores dept.
Quality dept. Purchase dept. Accounts dept.

Purchasing in Government Departments / Organizations: The name of the supplier organization & its products are to be registered with the government units. Government units depute their inspectors to inspect & assess the firms manufacturing facilities and checks the quality aspects of the products. Based on the inspection report, the government unit registers the firm as its approved supplier.

For standard products, tender notices are advertised in newspapers. Suppliers procure tender papers from government units and submit the duly filled in tender documents in sealed envelop within the specified time & date.
The tender offers of various suppliers are opened by government units representative in presence of all suppliers and the prices, delivery are read out (in open tender cases). Based on the lowest prices, the purchase order is released on the lowest bidder. If the tender value is large, maximum share of the total value is decided on the lowest bidder (called L1) & the balance orders are distributed to L2 & L3 vendors, provided they agree to match with lowest price. (In the case of closed tenders or limited tenders, tender enquiry is sent only to few reputed suppliers who are registered with the government units. P.Os are placed upon evaluation of the tender offers with or without negotiations with the suppliers. The tender offers of various suppliers are kept secret & not made known to suppliers in these cases).

Institutional Purchasing:- (Hospitals , Colleges)

If the institutional buyer is from a government organization, it follows the government purchase procedure. If the institutional buyer is from a private organization, it follows the procedure of commercial enterprises.

Purchasing in Cooperative Societies:The procedure followed by them is similar to institutional purchasing procedure.

Purchasing in the resellers market: Reseller market (also called as replacement market) consists of industrial dealers or distributors whose main goals are profits and sales volume. The dealers / distributors (called intermediaries, or middlemen or traders) select a supplier based not only on product quality but also on the basis of the policies and terms & conditions of the supplier. An industrial dealer could deal either exclusively with one suppliers product or may deal with competitors products also. Supplier related polices (such as sharing of local advertising cost, competitive prices and trade discounts, flexible payment terms) will have a say on the competitiveness in this market.

Buyer Seller relationship in Industrial Selling:Following two major factors form the basis of buyer seller relationships.

The content of information (which includes product features, prices, service after sales etc). The style in which information is exchanged (which includes mannerism and the format used by a buyer & seller in their interaction). Various types of transactions, based on style & content.
Compatible style Incompatible style Compatible Content Incompatible Content Ideal Transaction Inefficient Transaction Inefficient Transaction No Transaction

Types of Seller buyer relationships: Transactional relationship:- This is an one time exchange / relationship. Price & necessity of the product is the main motivational factor. These customers show less loyalty to a particular supplier since many suppliers are available in the market. Value added relationship:- The focus here is, complete understanding of the present & future needs of the customer & meeting those needs better than competitors. This will enable in obtaining maximum share of the customers business. Collaborative / partnering relationship:- The focus is, in joint problem solving for improving the product features by mutual sharing of their knowledge & experience. Thus, in this case, mutual trust and commitment is ensured between buyer & seller organization.

Customer Relationship Management : (CRM)

CRM aims to retain each valued customer by developing a long term relationship and providing an excellent real time customer service. It improves customers loyalty and ultimately the companies' profitability. To achieve these aims, many companies are investing in CRM systems, which include software application to integrate sales ,customer & marketing information. CRM software keeps the company's customer service persons, sales persons, intermediaries and others to have the same real time information on each valued customer. This software gives information about the progress on current orders, warranty or AMC services of each customer. It gives up-to-date information to customer contact employees, which enables them to give superior customer service.

Relationship Marketing :

The aim of relationship marketing is to build mutually satisfying long-term relations with key parties of the business like customers, distributors, and suppliers in order to earn and retain their long term preference and business. This is achieved by ensuring delivery of high quality products / services at reasonable prices over a long period of time.

Customer Service in Industrial Selling: In Industrial Selling, the customer service is more important than the physical product. The Customer service supplements the sale of physical products and create a total value for the customer. The nature of customer service varies based on the type of the product and the stage of product life cycle. a) Mature markets & products of no major product differentiation:Timely delivery is the major part of the customer service. Technical support service and Product quality are the remaining parts of service here. (e.g.) in steel tubes supply for cycle mfg, timely delivery helps in less inventory ; Quality tubes ensure nil rejection in shop floor. b) Large equipments or machines:The important elements here are installation, maintenance, repair, availability of spares and replacement units on time. (e.g.) For diesel generating sets, installation & maintenance, and

repair service will be generally preferred by customers through nearby service centers.
c) For large industrial customers, the component and material suppliers (vendors, sub-vendors, subcontractors) build their production facilities very nearer to the industrial customers unit (e.g.) Escorts motor cycle division has developed a large number of vendors very nearer to its

factory with long term business relationships.

Factors influencing pricing decisions in Industrial Selling:An industrial marketer has to analyze the following factors (which influence the pricing decisions) and then he has to decide the appropriate pricing strategy. Pricing objectives:a) For survival (prices to cover variable cost at least). b) For market penetration (prices to be kept as low as possible). c) For product quality leadership (premium quality product at a slightly higher price). Demand Analysis:- The demand for industrial products is relatively inelastic (or) less price sensitive as these products are technically sophisticated, customized and important for buyers operations. Cost Analysis:- Costs vary at different levels of production (as fixed cost remains the same, even if production volume goes up). The effect of break even point on cost is another factor for consideration. Competitive Analysis:- If the objective is to increase market share, price has to be matched to competitor's price. It the objective is to maximize profit, customer service to be improved to have on edge in the market ( with the same price level ). Government Regulations:Government regulations (such as MRTP- Monopolies and Restrictive Trade Practices act) are to be kept in mind, while price fixing by industrial sellers.

Pricing Policies in Industrial Selling: Industrial sellers deal with different types of customers (like users, OEMs, and dealers) who by the goods in varying quantities located in various geographical locations. (accounting for these differences i.e. qty, location, pricing policies evolved.). Besides, a price structure is set to cover different product items which cover varying sizes and specifications of a product. (e.g. electric motor with different horse power rating, with different speeds, with different enclosures require list prizes for the entire range of products).

Pricing Strategies in Industrial Selling:Pricing strategies would be different depending on the product & market situation. Competitive Bidding:Depending upon the total price of the bid, and the minimum profit required by the seller and the probability of winning the contract, pricing strategy is accordingly evolved.

Pricing New Products:While introducing the new products in the market, thrust is generally on market penetration and accordingly price is fixed to cover the variable cost (fixed cost is normally ignored here).

Pricing across the product life cycle:Different pricing strategies are to be adopted when the product moves through its life cycle (growth stage, decline stage).

Commercial terms & conditions in Industrial Market:a) Terms of payment (TOP): Direct Payment:- After the despatch of goods to the customer, commercial invoice is sent to the customer along with excise gate pass, inspection certificate, and consignee copy of LWB /RR. Customer makes the payment to the seller within some agreed time frame (ie 30,45,60, or 90 days). Payment through bank:- The supplier routes the commercial invoice along with other documents (LWB /RR, IR, excise gate pass) through bank. After customer makes the payment to the bank, the documents are handed over to the customer by bank, for taking delivery of consignment. 95% / 5% (or) 98% / 2% payment terms:- In government organization, 95% or 98% (as the case may be) payment is released to the supplier based on proof of despatch (LR / RR), and the balance 5% or 2% is paid after MRC (material receipt certificate). b) Bank Guarantee (BG): Some industrial customers (government organisations) ask suppliers to furnish BG towards security deposits (for fulfillment of contracts), or while release of initial advance payment, or while release of last 5 % (or) 2% payment ( for equipment performance to cover warranty period ). In case of non fulfillment of any of the contractual obligations by supplier, the buyer can invoke the BG and collect its value from bank.

c) Price basis: Prices are quoted either as firm (no changes in price) or with price variation clause (PVC). Generally, prices are quoted on ex-works basis (price includes net price of the product & cost of packing but excludes E.D, S.T, Freight). d) LD/ Penalty:- If the supplier fails on delivery period, liquidated damage / penalty is levied by the buyer for the delayed portion of supplies. ******