The product type

Products can be classified according to four types: materials, components, plant and equipment, and maintenance repair and operation (MRO):

1. materials - to be used in the production process, e.g. aluminium

2. components - to be incorporated in the finished product, e.g. headlights

3. plant and equipment - for example, bulldozers

4. products and services for MRO - for example, spanners, welding equipment and lubricants.

This classification is based on a customer perspective- how the product is used- and may be employed to identify differences in organizational buyer behaviour. First, the people who take part in the decision-making process tend to change according to product type. For example, senior management tend to get involved in the purchase of plant and equipment or, occasionally, when new materials are purchased if the change is of fundamental importance to company operations, e.g. if a move from aluminium to plastic is being considered. Rarely do they involve themselves in component or MRO supply. Similarly, design engineers tend to be involved in buying com­ponents and materials, but not normally MRO and plant equipment. Second, the decision-making process tends to be slower and more complex as product type moves along the following continuum.

MRO components materials plant and equipment

The importance of purchase

A purchase is likely to be perceived as being important to the buying organization when it involves large sums of money, when the cost of making the wrong decision, e.g. in terms of production downtime, is high and when there is considerable uncertainty about the outcome of alternative offerings. In such situations, many people at different organizational levels are likely to be involved in the decision and the process will be long, with extensive search for and analysis of information. Thus extensive marketing effort is likely to be required, but great opportunities present themselves to sales teams who work with buying organizations to convince them that their offering has the best pay-off; this may involve acceptance trials (e.g. private diesel manufacturers supply railway companies with prototypes for testing), engineering support and testimonials from other users. Additionally, guarantees of delivery dates and after-sales service may be necessary when buyer uncertainty regarding these factors is pronounced.

3.2 e-Marketing

e-Procurement- a Revolution in Purchasing

A confusing array of labels are being used to describe business-to-business (B2B) marketplaces, including trading exchanges, vertical hubs, vertical portals (vortals), supply chain backbones, net markets and electronic communities. Essentially, they all offer the same value proposition, namely an effective mechanism of bringing buyers and sellers together. Most of the existing sites offer a range of services including information, product catalogues, introductions to new suppliers and customers, electronic procurement, auctions and collaboration. The potential benefits to buyers include dramatically reduced procurement administration costs and times, lower materials prices, and reduced inventory requirements. The marketplaces help buyers find new suppliers and vice versa.

All operations of the marketplace are geared towards removing inefficiencies in the supply chain, which can be very significant in highly fragmented industries. For example, because of the many layers of bureaucracy involved, the average cost of issuing a purchase order for any MRO item such as paper clips and stationery can be between £150 and £250. Automating these processes slashes such costs by a factor of 10. Putting procurement online also makes the whole supply chain more transparent, and allows buyers and suppliers to see how they and the system as a whole can become more efficient. Electronic marketplaces derive revenue from a number of sources such as subscriptions, advertising, transaction fees (varying between 0.5 per cent and 4 per cent), value-added services, sales of data, lead generation, and integration. The key challenge for the marketplaces is to build liquidity- that is, a sufficient number of buyers and sellers to both generate a profit and present an attractive site to potential new members.

One of the first companies to spot the potential of these new exchanges was General Electric. The company set up its Trading Process Network (TPN) as a website where it does US$1 billion worth of business a year with about 1400 of its suppliers. It has software that lets General Electric's purchasers specify to whom they want their request for bids to go and what sort of information such as drawings to include; the software then manages the bids as they come back, eliminating low bidders and finally notifying the successful vendors. General Electric reports that it has lowered the costs of goods by between 5 and 20 per cent, that 15 per cent of orders now go abroad, and that because the bidding process is now quicker and simpler, fewer procurement staff are needed.