Marketing Management, MBA – University of Nairobi, Kenya
Business organizations do not only sell; they also buy vast quantities of raw materials, manufactured components, equipment, supplies, and business services. Business buyers purchase goods and services to achieve specific goals, such as making money, reducing operating costs, and satisfying social or legal obligations.
In contrast to consumer buying, buying decisions in a business setting are mostly made by a group of individuals. This group is referred to as the buying center. This term paper, seeks to identify the composition of this decision making unit, and to identify the possible roles that its members may play. It also identifies the factors that influence the buying center and expounds on the challenges it faces. Finally it suggests some of the ways in which the effectiveness of this important unit can be improved.
To help bring out these issues, a study of the buying center at Mater Hospital, a leading healthcare institution in Nairobi was done. Mater has defined and documented procedures for most of its functions, including its buying activities in pursuit of a high level of quality. It has been awarded the Kenya Quality Award by the Kenya Bureau of Standards.
Mater Hospital located in the Kenyan capital Nairobi. Founded in 1962 by a group of Catholic sisters, the Sisters of Mercy, it has since grown to be one is one of the most successful privately owned hospitals in the East African region. Operating as a non-profit trust, the hospital offers a wide range of health-care services and hosts the regions best rated heart unit. Recently, it became the first hospital in the country to be awarded the Kenya Quality Award by the Kenya Bureau of Standards. Mater has documented all its procedures to ensure top quality standards. Its procurement procedures also underwent the same process. Below, we analyze the nature, processes, challenges and steps that are being taken to improve organizational buying at the hospital.
A buying center (also known as a decision making unit), is a group of employees responsible for purchasing an item for the organization.
Webster and Wind call the decision-making unit of a buying organization the buying center. The buying center is composed of “all those individuals and groups who participate in the purchasing decision-making process, who share some common goals and the risks arising from the decisions.”
Hill and Hillier (1977) says “the DMU consist of the individuals who actively participate in the decision when it is in the negative and zero states”
2. Buying center roles
In the consumer market a very large percentage of purchase decisions are made by a single person. The business market is significantly different. While single person purchasing is not unusual, especially within a small company, a significant percentage of business buying, especially within larger organizations, requires the input of many.
In the marketing literature those associated with the purchase decision are known to be part of a Buying Center, which consists of individuals within an organization that perform one or more of the following roles:
* Buyer – responsible for managing company purchases. He/she supervises all purchases made by the company and identifies the suppliers to be used by the company. This person, however, is not the person who decides. Whenever the purchase does not involve the purchasing department, the purchaser can be someone from another department within the organization. dealing with suppliers and placing orders (e.g., purchasing department
* Decider/decision maker – this is the key person. s/he has the power to commit the firm to the supplier. – has the power to make the final purchase decision e.g. C.E.O
* Influencer – this is the person who influences the ultimate purchase. Such a person can be a member of the organization or may well be part of the external organization has the ability to affect what is ordered such as setting order specifications e.g. engineers, Doctors
* User – they receive the goods purchased. This person is often at the origin of demand and can influence the initial stages of the purchase and the evaluation of the offer. those who will actually use the product when it is received e.g. office staff
* Initiator – any buying center member who is the first to determine that a need exists
* Gatekeeper -controls communications between members of the buying unit and their relationship with the supplier involved. This person is also the purchaser. In our case (mater hospital) he has the capacity to blacklist a supplier, they do not necessarily have the authority to make the final decision.- anyone who controls access to other buying center members e.g. the administrative assistant
* Approvers – People who authorize the proposed actions of deciders or buyers. E.g. for Mater Hospital these are the Governing Council representatives
3. Types of Business Purchase Decisions
a) Straight Re-Purchase
These purchase situations involve routine ordering. In most cases buyers simply reorder the same products or services that were previously purchased. In fact, many larger companies have programmed re-purchases into an automated ordering system that initiates electronic orders when inventory falls below a certain pre-determined level.
b) Modified Re-Purchase
These purchases occur when products or services previously considered a straight re-purchase are for some reason now under a re-evaluation process. There are many reasons why a product is moved to the status of a modified re-purchase. Some of these reasons include: end of purchase contract period, change in who is involved in making the purchase, supplier is removed from an approved suppliers list, mandate from top level of organization to re-evaluate all purchasing, or strong marketing effort by competitors.
c) New Task Purchase
As the name suggests, these purchases are ones the buyer has never or rarely made before. In some ways new task purchases can be considered as either minor or major depending on the total cost or overall importance of the purchase. In either case the buyer will spend considerably more time evaluating alternatives. For example, if faced with a major new task purchase, which often involves complex items, such as computer systems, buildings, robotic assembly lines, etc., the purchase cycle from first recognizing the need to placement of the order may be months or even years.
4. Composition of a buying center
In a business setting, major purchases typically require input from various parts of the organization, including finance, accounting, purchasing, information technology management, and senior management.
Highly technical purchases, such as information systems or production equipment, also require the expertise of technical specialists. In some cases the buying center is an informal ad hoc group, but in other cases, it is a formally sanctioned group with specific mandates, criteria, and procedures. The employees that constitute the buying center will vary depending on the item being purchased. As depicted in the following table composition depends on the type of decision to be made.
Committee Composition Type of Decision Frequency of Meetings Central Tender Committee * Chief executive officer
* Financial controller
* Procurement manager
* Legal officer
* Quality analyst
* Medical Director
* Member of governing council
* Expert/specialist who prepares tender documents Capital nature Meet on ad hoc basis
Annual Tender Committee * Representatives from section or department
* Procurement specialist High cost but recurrent expenditure e.g. drugs, surgical equipments Annual meeting Table: Composition of a buying center (Case study: Mater Hospital)
5. Buyer decision process
Mater purchases a wide range of goods and services for its operations. These range from medicinal drugs, medical equipment, foodstuffs, cleaning services, communication services etc.
Mater Hospital like any other organization follows the same five-step buying process faced by consumers:
* Need Recognition
* Evaluate Options
* After-Purchase Evaluation.
a) Need Recognition
At Mater Hospital needs arise from just about anywhere within the organization. The Buying Center concept shows that Initiators are the first organizational members to recognize a need.
In most situations the Initiator is also the User or Buyer. Users are inclined to identify the need for new solutions (i.e., new drugs) while buyers are more likely to identify the need to re-purchase products.
As part of this step, a specifications document may be generated that lays out the requirements of the product or service to be purchased. Several members of the buying center may be involved in creation of the specifications.
The primary intention of their search efforts is to identify multiple suppliers who meet product specifications and then, through a screening process, offer a selected group the opportunity to present their products to members of the Buying Center. Mater Hospital keeps a database of approved suppliers to make search process easy.
c) Evaluate Option
Once the search has produced options, members of the Buying Center may then choose among the alternatives. In more advanced purchase situations, members of the Buying Center may evaluate each option using a checklist of features and benefits sought by the buyer.
Each feature/benefit is assigned a weight that corresponds to its importance to the purchase decision. In some cases the hospital requires that, suppliers must submit bids with the lowest bidder often being awarded the order, assuming products or services meet specifications.
At Mater Hospital this role is played by the procurement department
to actually place the order may require the completion of paperwork (or electronic documents) such as a purchase order. Acquiring the necessary approvals can delay the order for an extended period of time. And for very large purchases, such as expensive surgical equipments or large equipments, financing options may need to be explored.
e) After-Purchase Evaluation
After the order is received the purchasing company may spend time reviewing the results of the purchase. This may involve the Buyer discussing product performance issues with Users. If the product is well received it may end up moving to a straight re-purchase status thus eliminating much of the evaluation process on future purchases.
6. Major Influences on Business Buying
Business buyers respond to many influences when making buying decisions. When supplier offerings are similar, buyers can satisfy the purchasing requirements with any supplier and they place more weight on the personal treatment they receive. When supplier offerings differ substantially, buyers are more accountable for their choices and pay more attention to economic factors. Buyers at Mater Hospital respond to four main influences: environmental, organizational, interpersonal, individual and culture.
A number of environmental factors influence on the buying center. An example is the bargaining power of suppliers. Mater Hospital occasionally makes high cost purchases such as hospital equipment. In some cases only one supplier of the machinery is available and the hospital’s bargaining position with regards to price and other offerings is weakened.
Factors in the economic environment such as the exchange rate influence decisions whether to do a local purchase of import required hospital supplies.
Concerns about the pollution of the natural environment, such as disposal of certain hospital supplies influence decisions on their purchase.
Cultural factors may also have an influence on the buying center. Negative cultural influences not only reduce the effectiveness of the buying center but present a disadvantage to business marketers.
Relationships in Kenya are very strong along family lines. This has sometimes manifested itself negatively in form of nepotism, where persons making purchasing decisions may decide to grant supply contracts to their relatives. Mater recognizes chances of this happening and prohibits it in its procurement manual.
“Employees of the Mater Hospital or their relatives (i.e. spouses, children etc) shall not be vendors or contractors.”
Corruption has also been a big problem for African countries, Kenya included. Although mostly evident in government buying, the private sector has not been an exception. Mater hospital recognizes corruption as a possible negative influence on it buying processes and attempts to deal with it in its procurement manual
“Procurement Staff shall not use their positions to exert improper influence over suppliers and shall not offer, pay or accept bribes in any form. The practice of soliciting gifts or gratuities of any kind from suppliers or prospective suppliers is expressly forbidden.”
Every organization has specific purchasing objectives, policies, procedures, organizational structures, and systems. Consequently, these organizational plans have an influence on the structure, composition and functioning of the buying center. A major organizational factor that manifests itself at Mater Hospital’s buying center is its balance between centralized and decentralized decision making. Decisions on purchase worth Kshs. 1 million and above are made by the governing council at the headquarters, while for those worth KSh. 250,000 have to involve the CEO.
The organization’s policies also come into play. For example purchases that are of a capital nature are handled by a central tender committee, which includes the CEO. Decisions on high cost but recurrent expenditure e.g. drugs, surgical equipments are handled by the annual tender committee which is chaired by the procurement department manager.
Buying centers usually include several participants with differing interests, authority, status, empathy, and persuasiveness. The business marketer is not likely to know what kind of group dynamics take place during the buying decision process. Therefore, successful ones strive to find out as much as possible about individual buying center participants and their interaction and train sales personnel and others from the marketing organization to be more attuned to the influence of interpersonal factors.
Each buyer carries personal motivations, perceptions, and preferences, as influenced by the buyer’s age, income, education, job position, personality, attitudes toward risk, and culture. Moreover, buyers definitely exhibit different buying styles. Marketers approaching Mater Hospital need to understand these factors can better prepare marketers for dealing with individuals within the buying center.
7. Challenges faced by the Mater Hospital’s buying center
a) Breach of confidentiality
Due to the fact that several people are involved and access the buying center information, information might sometimes be divulged to competing suppliers thereby interfering with purchasing negotiations. Some members of departments may hold prior communications with suppliers or their representatives, without the knowledge of the buying center members.
Mater hospital requires that all purchasing personnel treat information received from suppliers in a responsible way such that any proprietary or confidential information be maintained within the hospital and is not disclosed. It also requires that commercial or technical information received from one supplier shall not be disclosed to another supplier, either before or after the award of an order or contract
Proprietary or confidential data means pricing, conditions, specifications, etc, of suppliers or specifications or data to Mater Hospital.
Suppliers often request information pertaining to their failure to win an order or contract. Whilst non-commercial reasons for failure, e.g. technical safety, capacity etc may be disclosed, commercial information, e.g. price differences, discounts etc may not be divulged.
b) Conflict of interest by buying center members
While the Mater Hospital purchasing program is based on honesty, fairness, personal integrity and impartiality toward suppliers, actions of employees may not always reflect and enhance these traits and may have personal financial interest in the procurement process.
Conflict of Interest exists when any outside interest may inhibit or influence an employee’s business judgment, or when an employee takes advantage of benefits due to the Hospital.
This could involve the practice of soliciting gifts or gratuities of any kind from suppliers or prospective suppliers or having employees of the Mater Hospital or their relatives (i.e. spouses, children etc) as vendors or contractors.
c) Maintaining a large Supplier Base
The Mater Hospital maintains a supplier base of over 100 suppliers who have been subjected to supplier evaluation, selection and appraisal (SESPA) Process. This is a tedious process that has to be done continuously. Quality critical goods suppliers or high volume/shilling value suppliers are evaluated as a minimum annually.
d) Delays in decision making as a result of supplier evaluation, selection and performance appraisal (SESPA).
All suppliers are subjected to supplier evaluation, selection and performance appraisal (SESPA) process. This process is carried out by a team composed of representatives (stakeholders) from user Departments who are most affected by the services of the potential supplier and those from Finance, Quality Assurance and Procurement.
The process takes long as representatives of the user departments are not always available. This also means the representatives will be absent from their duty work stations carrying out other duties that are not core.
e) Bureaucratic purchasing procedures
Supply requisitions will trigger off the purchasing process after need has been determined either through a stock out or re-order point (ROP). The buyers then forward all supply requisitions with prices to the originators budget holders or head of departments for approvals depending on limits of authority.
This process takes long especially when budget holders are unavailable for approval and may result to order delays.
f) Abuse of Blanket Purchaser Order
Blanket purchase order is an agreement to purchase specified items over a stated period of time and identified prices, terms and conditions, delivery schedule etc. Blanket purchase orders can be utilized for repetitive purchases of equipment, materials or services from a particular supplier over an established period of time.
Blanket orders can be abused where market prices for supplies been revised downwards but the buyer continues to requisition for them at the company approved prices.
g) Delays awaiting authorized Signatories
In the event that the signatories mentioned in section 4 above are not available, purchase orders are signed by company bank signatories and later countersigned by procurement manager when he/she is available.
h) Different objectives
For instance, the Decider, who may be the company president, wants to make sure the purchase will not negatively affect the company’s bottom line, the Buyer wants to be assured the product will be delivered on time. Focus on prices at the expense of brand performance.
In these cases the decision to buy is often whittled down to one concern – which has the lowest price.
i) Decision Making Time
Depending on the product, business purchase decisions can drag on for an extensive period. Unlike consumer markets where impulse purchasing is rampant, the number of people involved in business purchase decisions results in decisions taking weeks, months or even years. They also have to follow the organizations policies – request for contracts, quotations, proposals etc.
j) Unavailability of the Buying center members
The members of the buying center are usually very busy and sometimes its difficult to convene the meetings especially when they are required to avail themselves for a whole day
8. Improving efficiency of the buying center
The following measures have been put in place at Mater Hospital. In respect of specific functions within purchasing are as follows, so that for every purchase decision, every member of the buying centre has their role clearly defined. This has had the effect of improving the speed with which purchase decisions are made:
a) Defining Responsibilities
In respect of specific purchasing functions, responsibilities are defined as follows
* Procurement Manager
He/She is responsible for the formulation of purchasing policies, practices, and procedures, and to direct and supervise the activities of the procurement section.
All policy matters will however be agreed with the Chief Executive Officer.
* Senior Buyer and Buyers
Senior Buyer and buyers are responsible for purchasing equipment, goods and services, both stock and non-stock items on behalf of the Hospital and as required for the various operations serviced by the procurement section.
This includes sourcing, vendor selection commercial negotiation, placing as well as capturing of purchase orders, communication with suppliers and expediting of outstanding purchase orders.
In addition the buyers are responsible for ensuring that all customer/supplier queries are dealt with expeditiously.
* Purchasing Assistant (PA)
The PA is responsible for clerical functions in support of the day-to-day purchasing activities, including logging and tracking of all requisitions, preparation of orders and correspondence, filing, processing of price variation, preparing and processing of import documentation.
* Stores Coordinator
The stores coordinator is responsible for receiving, storing, issuing and accounting for stocks in all stores locations and coordinating setting of stock levels. He is responsible for the inventory management processes that trigger of timely replenishment of stocks including raising of on line supply requisitions.
He is therefore responsible for generating on line supply requisitions and vetting of all the supply requisitions for non-stock items raised by user departments. He is also responsible for disposal of obsolete, scrap and surplus stocks.
b) Delegation of Authority
All purchase orders are generated from a duly authorized Purchase/Stock requisition by respective Heads of Department. Approvals from the Tender Committee are deemed duly authorized from signed minutes of the committee.
The purchase order constitutes a formal contract between the company and a vendor and depending on the total order value Mater has adopted the following authorization policy:
All orders are signed by the buyer responsible based on limits of authority as indicated below:
* Buyers up to Ksh.. 50,000
* Senior buyer up to Ksh. 75,000
* Procurement Manager up to Ksh. 250,000
* CEO above Ksh. 250,000
The limits for financial commitment are as follows:
* Up to Ksh. 200,000 – Manager Financial Accounting
* Ksh. 201,000 – 500,000 – Financial Controller
* Ksh. 500,000 – 1,000,000 – CEO
* Above Ksh. 1,000,000 – Governing Council Representative.
c) Purchasing Policies And Procedure
No one has the authority to divulge information that would interfere with purchasing negotiations, except with approval of the procurement manager or Chief Executive Officer. In all such cases, the purchasing officer is kept advised and receives copies of all correspondence.
The Procurement Section employs the best operating practices (BOP) to reduce cost across the board by sourcing from the best in class suppliers that offer reduced acquisition costs and the necessary reliability that compresses the delivery cycle time and cut on production costs.
The Mater Hospital purchasing program is based on honesty, fairness, personal integrity and impartiality toward suppliers. Employee actions are expected to reflect and enhance these traits.
Personal financial interest or benefit of any kind resulting from personnel having interest, either direct or indirect, financial or otherwise, in any enterprise or profession doing business with the Hospital is prohibited under all circumstances.
Procurement Staff are not allowed to use their positions to exert improper influence over suppliers and should not offer, pay or accept bribes in any form. The practice of soliciting gifts or gratuities of any kind from suppliers or prospective suppliers is expressly forbidden.
Employees of the Mater Hospital or their relatives (i.e. spouses, children etc) are not allowed to be vendors or contractors.
e) Supplier Base and Supplier Relationships
Supplier relationships are considered important resources and as such, they are developed and maintained in the most ethical manner. These relationships are maintained with suppliers who have been subjected to supplier evaluation, selection and appraisal (SESPA) Process. Normally the Mater Hospital maintains a supplier base not exceeding 150 suppliers.
The Procurement Department is the initial and primary contact point for those wishing to sell equipment, materials, and services to the Hospital.
Persons visiting the Mater Hospital with the intent to solicit purchase orders are referred to the appropriate purchasing authority that may at his/her discretion, refer them to other personnel.
The purchasing personnel will treat information received from suppliers in a responsible way such that any proprietary or confidential information be maintained within the Hospital and is not disclosed. Commercial or technical information received from one supplier shall not be disclosed to another supplier, either before or after the award of an order or contract.
Proprietary or confidential data shall mean pricing, conditions, specifications, etc, of suppliers or shall mean specifications or data to Mater Hospital.
Should the hospital’s proprietary or confidential information be required to be sent to vendors for purposes of bidding and/or purchasing, it is the responsibility of the purchasing section to ensure that the vendor completes, acknowledges, and returns the applicable secrecy declaration form prior to being furnished the data considered proprietary.
g) Supplier, Evaluation, Selection and Performance Appraisal (SESPA).
All suppliers are subjected to Supplier, evaluation, Selection and performance Appraisal (SESPA) process. This process is carried out by a team composed of representatives (Stakeholders) from User Departments who will be most affected by the services of the potential supplier and those from Finance, Quality Assurance and Procurement.
The Procurement Manager is responsible for forming the team. The main purchasing function being to monitor, evaluate and document supplier performance on a continuous basis for major or crucial suppliers, and suppliers of quality critical items in accordance with the Mater Hospital’s standard supplier selection and Appraisal Process (SESPA).
h) Supply Requisition
The buyers forward all supply requisitions with prices to the originators budget holders or heads of departments for approvals depending on limits of Authority. Prices are obtained from the following sources:
* Quotations or Enquiries from Suppliers
* Contract prices
* Price lists
* Recent purchase orders
* Market Research Reports or just the market
* Purchasing journals and market reports
i) Computerized Purchasing System
Procurement makes use of available computer software to computerize purchasing and inventory management. Current system in use is Lifeline.
The system will allow Procurement personnel to create, change, and expedite purchase orders on-line.
j) Blanket Purchaser Order
Blanket purchase orders can be utilized for repetitive purchases of equipment, materials or services from a particular supplier over an established period of time. Blanket orders should not be utilized as substitution to competitive bidding and should be reviewed and bids invited competitively yearly or otherwise established period.
The buying center at Mater hospital involves a number of individuals playing a variety of roles; including users, buyers, influencers and deciders. The composition of the center varies with each class of purchasing decisions; from direct purchase of low cost and routine supplies being handled by procurement staff, to the annual tender committee being responsible for high cost but fairly routine purchases such as insurance services. A central tender committee decides on purchases of a capital nature.
A number of factors influence buying decisions at the hospital, including organizational factors such as centralized decision making and environmental factors such as bargaining power of suppliers.
The buying center at Mater hospital faces a number of challenges such as delays associated with group decisions, ethical issues such as corruption and at times and inflexible organizational structure.
The hospital has taken a number of steps to improve the effectiveness of the buying center. Most of these are documented in a procurement manual, a document that consists of policies, procedures and guidelines for obtaining materials, supplies, equipment, contractual services and all other items.
However more needs to be done to further improve the effectiveness and efficiency of this important decision making unit. These include defining clear responsibilities for temporary purchasing committee members, eliminating negative influences such as nepotism and corruption and improved confidentiality during tendering.
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5. Business Buying –
6. Mater Hospital Procurement Manual
7. Mater Hospital Website
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