Character of Business

Marketing
Classifying Commercial Enterprises
• NAICS = North American Industrial Classification System
• Replaces SIC (Standard Industrial Classification) codes
• Common for NAFTA countries
• NAICS hierarchical structure:
XX Industry sector
XXX Industry subsector
XXXX Industry group
XXXXX Industry
XXXXXX U.S., Canadian, or Mexican national
specific

http://www.naics.com/cgi-bin/search.pl
(continued)
 NAICS Codes
Divides economy into 20 major industry sectors
(at two-digit level):

11 Agriculture, Forestry, Fishing, 54 Professional, Scientific, and Technical

and Hunting services
21 Mining 55 Management of Companies and Enterprises
22 Utilities 56 Administrative and Support, Waste
23 Construction Management, and Remediation Services
31–33 Manufacturing 61 Education Services
42 Wholesale Trade 62 Health Care and Social Assistance
44–45 Retail Trade 71 Art, Entertainment, and Recreation
48–49 Transportation 72 Accommodation and Food Services
51 Information 81 Other services (except Public Administration)
52 Finance and Insurance 92 Public Administration
53 Real Estate, Renting,
and Leasing

(continued)
 Supply Chain Management

• Technique for linking manufacturer’s

operation with those of all its strategic
suppliers, key intermediaries, and
customers.
 Supply Chain Characteristics

• Supply chains
– Are multi-tiered
– Are customer driven
– Exist externally AND internally
• Require a cross-functional effort
– And their management are ongoing
journeys – not destinations
– Require good procurement activities

Source: Roberts, Julie S. (2003) “The Buzz About Supply Chain,” Inside Supply
Management, (July), 24-28.
 Supply Chain Goals

• Waste Reduction
• Time Compression
• Flexible Response
• Unit Cost Reduction
• Increased Final-Customer-Benefits
 Supply Chain Example

Source: Roberts, Julie S. (2003) “The Buzz About Supply Chain,” Inside Supply Management, (July), 24-28.
Procurement (Purchasing) Goals
Uninterrupted Flow of Materials
Manage Inventory
Improve Quality
Develop & Maintain Supplier
Relationships
Achieve Lowest Total Cost
Reduce Administrative Costs
Advance Firm’s Competitive Position
 Evaluating Potential Vendors

Basic Considerations
Performance Considerations
Plant Visits
Geographic Locations
Capacity
 Performance Considerations
Must predict supplier’s total
ability to fulfill the contract
as it relates to:
price
delivery
quality
service
or any factor that is
important to the buying
firm
 Plant Visits
 Be sure to visit the supplier’s
plant if possible
 Serves as indication of vendor’s
ability to provide necessary pre-
and post-sale service
 Try to gain insight into the:
type of facility
personnel
housekeeping
procedures
Geographic Location
 Long distance shipments increase
the chance of
 accidents
 strikes
 acts of God
 Geographic disadvantages can be
overcome with
 special transportation
arrangements
 inventory make-and-hold service
 Capacity
Must consider several items
Physical plant and facilities
Supplier’s technical skills
Supplier’s managerial skills
Vendor Rating Systems

The Categorical Plan

The Weighted-Point Plan
The Cost-Ratio Plan
 The Categorical Plan
 Buyers keep notes on supplier dealings as
events occur
 Buyers compare notes (usually at monthly
buyer meetings)
 Suppliers are categorized as being in the good,
neutral, or unsatisfactory category
 Highly subjective, but easy to use & understand
 Disadvantage is it’s subjectivity:
relies on memory, personal judgment, and the
experience/ability of the buyers.
 Categorical Method Example

Vendor Cost Quality Speed Total

A Good(+) Unsatisf(-) Neutral(0) 0
B Neutral(0) Good(+) Good(+) ++
C Neutral(0) Unsatisf(-) Neutral(0) -
 The Weighted Point Plan
Assign weights (importance) to quality,
price, and service (or other relevant
criteria)
Should fit buying organization’s needs
Sellers are rated on each factor
Simple, but effective plan that can be
modified to suit specific conditions
Somewhat more objective than the
categorical plan
Weighted Point Plan Example:
Quality
Lots Lots Lots % Acc. * Quality
Vendor Received Accepted Rejected Factor Rating
A 60 54 6 90.0 * 40 36.0

B 60 56 4 93.3 * 40 37.3

C 20 16 4 80.0 * 40 32.0
 Weighted Point Plan Example:
Price
Unit - Tran / *
Vendor Price Dis + Chg Net Low Net % Factor Rate
A 1.00 10% 0.90 .03 .93 .93 0.93 100% 35 35.0

B 1.25 15% 1.06 .06 1.12 .93 1.12 83% 35 29.1

C 1.50 20% 1.20 .03 1.23 .93 1.23 76% 35 26.6

Weighted Point Plan Example:
Service

Promises Service Service

Vendor Kept Factor Rating
A 90% 25 22.5

B 95% 25 23.8

C 100% 25 25.0
Weighted Point Plan Example:
Composite Total

Rating Vendor A Vendor B Vendor C

Quality 36.0 37.3 32.0
Price 35.0 29.1 26.6
Service 22.5 23.8 25.0

Total 93.5 90.2 83.6

 The Cost-Ratio Plan
All activities regarding a supplier’s
performance are valued in terms of dollars
Total cost of buying is determined including:
letters, telephone calls, visits, etc
Total (real) cost varies from vendor to vendor
based on vendors’ skills & dependability
Future vendors selected on basis of lowest
total cost incurred
 Cost Ratio Plan Process

Initial costs associated with Quality,

Delivery, and Service are determined
Each cost is then converted to a ratio
Ratio expresses cost as a percentage of
the total value of the purchase
Sum the three individual cost rates to
obtain overall cost ratio
Apply overall ratio to quoted unit price
 Abbreviated Example:
Cost-Ratio Plan
Quality Delivery Service Total Quoted Net
Vendor Cost Cost Cost Penalty Price/ Adjusted
Ratio Ratio Ratio Unit Cost
A 1% 3% -1% 3% 86.25 88.84

B 2 2 3 7 83.25 89.08

C 3 1 6 10 85.10 93.61
 Governments & Institutions
• Compliance Programs
– Must maintain affirmative action
programs for minorities, women &
disabled
• Set-Aside Programs
– % of contracts offered only to small
or minority-owned businesses
• Other aspects of non-profit
buying will be addressing in
Pricing
 Two Types of Contracts
1.Fixed-price contracts
• A price is agreed to before contract is
awarded and payment is made at
conclusion of work.
• Provides for the greatest profit potential.
• Poses greater risks.
2.Cost-reimbursement contracts
• Reimbursement for allowable costs may
be allowed and sometimes a number of
dollars above costs as profit is allowed.
 Relationship Marketing
• All marketing activities directed
toward
• establishing, developing, and
maintaining
• successful relational exchanges
• for the mutual benefit of all
involved parties.
Partners in Relational Exchanges

Goods Services
Suppliers Suppliers
Business Supplier
Partnerships
Units Competitors
Internal Focal Lateral
Partnerships Firm Partnerships
Employees Non-Profits
Buyer
Partnerships
Functional Government
Dept.’s Intermediate Ultimate
Customers Customers
 Value of RM to Sellers
• Helps to ensure substantial
and reliable purchase
volumes at adequate
margins.
• Helps to determine the
buyer’s choice the next time
around.
 Value of RM to Buyers
• Costs of carrying safety stocks, and
those of high return rates, numerous
reorders, & long lead times have
steadily risen.
• RM helps to eliminate waste and
improve system economies.
–inventory reduction
–decreased line shutdowns
–purchasing labor savings
 REQUIREMENTS FOR HIGH
PERFORMANCE RELATIONSHIPS
• BEYOND THE FINANCIAL CONSIDERATIONS:
– INTEGRITY
– FAIRNESS
– LOYALTY
– FLEXIBILITY
– INPUT INTO PARTNER’S STRATEGY
– PARTNER’S INPUT INTO YOUR STRATEGY
– COMPLIANCE WITH PROCEDURES & AGREEMENTS
 Types of Relationships
• Discrete Transactions
– have a distinct beginning, short duration, and
sharp ending by performance.
• Value-Added Exchanges
– Focus shifts from attracting customers to
keeping customers. Begin focusing more
closely on understanding & fulfilling needs.
• Collaborative Exchanges
– traces to previous agreements, and is longer in
duration, reflecting an ongoing process.
 Why is Trust So Important?
• The parties have confidence in their
relational partner’s reliability and
integrity
• Without trust, there is NO
commitment
• Without commitment, future
exchanges are questionable at best
• Without trust and commitment,
negotiation costs are increased
• Without trust and commitment,
monitoring costs are increased
Synthesis and Extension Model of
Relationship Management
Relationship
Knowledge Termination Constraint-Based
Costs Relationship Relationship
Commitment
Involvement Relationship Dedication-Based
Benefits Relationship
Trust
Shared
Values

Trust Opportunistic
Communication
Dimensions Behavior
 Different Customer Motivations
• Constraint-Based Relationships
–One party believes it cannot exit the
relationship due to economic, social,
or psychological costs.
–The strength of the constraints is a
function of the party’s perceived
dependence upon the other.
 Different Customer Motivations
• Dedication-Based Relationships
–Party remains in relationship
because he/she is committed to
the relationship and wants to
remain.
–Dedication generally arises
due to dependence and/or trust.
 The Consequences

Constraint-Based Dedication-Based
Relationship Relationship

Acquiescence
Propensity Cooperation
To Leave
Enhancement
Interest in
Alternatives Identity

Advocacy
 Outcomes Associated with
Constraint-Based Relationships
• Interest in Alternatives
– lasts only as long as constraints
– individuals in constrained relationships
attempt to restore freedom to chose.
– increased attempts to identify alternative
suppliers.
– more environmental monitoring
– more receptive to competitors’
relationship offers.
 Outcomes Associated with
Constraint-Based Relationships
• Acquiescence
–degree to which partner
accepts or adheres to another’s
specific requests or policies.
–passive agreement to maintain
the relationship.
 Outcomes Associated with Dedication-
Based Relationships
• Cooperation
–active participation for mutual benefit
• Enhancement
–broaden/deepen relational bonds
• buying additional services
• providing capital, information,
labor, or other resources
• participating in company events
Outcomes Associated with Dedication-
Based Relationships

• Identity
–thinks of relationship partnership
as a team and considers the
partner in proprietorial terms.
Outcomes Associated with Dedication-
Based Relationships
• Advocacy
–ultimate test of relationship
–promote relationship partner to
others
–defend relationship partner against
detractors
–main purpose is to, of course, benefit
from positive word-of-mouth.
 SUGGESTIONS FOR MAKING B2B
RELATIONSHIPS LAST
• On-site visits
• Trade personnel
• Manage total dependence with
alternate suppliers
• Continuous service
• Develop a relational contract
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