MARKETING PLANNING FOR HILLSIDE VETERINARY CLINIC
Step 3: Managing Buyer–Seller Relationships
After selecting a supplier, the buyer and seller must figure out how to structure and manage the relationship. Many organizational purchases are ongoing—a buyer will make regular purchases. Other purchases, might involve a single transaction—buying a replacement part for example. Buyers and suppliers should work together to figure out the best way to structure the relationship. In this section we look at the many dif- ferent considerations for managing buyer–seller relationships.
There are often significant benefits of a close working relationship between a sup- plier and a customer firm. And such relationships are becoming common. Many firms are reducing the number of suppliers with whom they work—expecting more in return from the suppliers that remain. The best relationships involve real partnerships where there’s mutual trust and a long-term outlook. Closely tied firms often share tasks at lower total cost than would be possible working at arm’s length.
The partnership between AlliedSignal and Betz Laboratories, for example, shows the benefits of a good relationship. A while back, Betz was just one of several sup- pliers that sold Allied chemicals to keep the water in its plants from gunking up pipes and rusting machinery. But Betz didn’t stop at selling commodity powders.
Teams of Betz experts and Allied engineers studied each plant to find places where water was being wasted. In less than a year, a team in one plant found $2.5 million in potential cost savings. For example, by adding a few valves to recycle the water in a cooling tower, Betz was able to save 300 gallons of water a minute, resulting in sav- ings of more than $100,000 a year and
reduced environmental impact. Because of ideas like this, Allied’s overall use of water treatment chemicals decreased.
However, Betz sales to Allied doubled because it became Allied’s only supplier of water chemicals.15
As the Allied–Betz Laboratories col- laboration shows, some buyer–seller re- lationships can involve multiple buying influence—more than just a purchasing agent and a salesperson. To develop effective solutions, those closest to the problems should be directly involved.
This may mean bringing people together from accounting, finance, production, information systems, and/or other func- tional areas of both the buyer and seller firms.
Although close relationships can pro- duce benefits, they are not always best.
For buyers, long-term commitments can also reduce flexibility. When competi- tion drives down prices and spurs inno- vation, customers may be better off letting suppliers compete for their busi- ness. It may not be worth the customer’s investment to build a relationship for purchases that are not particularly LO 6.5
Close relationships may produce mutual benefits
Relationships can involve many from both sides
Relationships may not make sense
In today’s business markets, suppliers of both goods and services are working to build closer relationships with their business customers—to meet needs better and create a competitive advantage. Aflac provides cost-effective insurance products that help companies attract and retain employees.
Aflac builds close relationships with customers to assure they see these benefits.
Source: Used with permission of American Family Life Assurance Company of Columbus.
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important or made that frequently. Besides that, close relationships take time and attention to build and manage.
Sellers don’t usually want closer relationships with all of their customers either.
Some customers may place orders that are too small or require so much special atten- tion that the relationship would never be profitable for the seller. Also, in situations where a customer doesn’t want a relationship, trying to build one may cost more than it’s worth. Buyers and sellers should choose closer relationships where the benefits outweigh the costs.16
Relationships are not “all or nothing” arrangements. Many firms may have a close relationship in some ways and not in others. Thus, it’s useful to think about five key dimensions that help characterize most buyer–seller relationships: cooperation, infor- mation sharing, operational linkages, legal bonds, and relationship-specific adapta- tions. Purchasing managers for the buying firm and salespeople for the supplier usually coordinate the different dimensions of a relationship. However, as shown in Exhibit 6–7, close relationships often involve direct contacts between a number of people from other areas in both firms.17
In cooperative relationships, the buyer and seller work together to achieve both mu- tual and individual objectives. The two firms treat problems that arise as a joint responsibility. National Semiconductor (NS) and Siltec, a supplier of silicon wafers, found clever ways to cooperate and cut costs. Workers at the NS plant used to throw away the expensive plastic cassettes that Siltec uses to ship the silicon wafers. Now Siltec and NS cooperate to recycle the cassettes. This helps the environment and also saves more than $300,000 a year. Siltec passes along most of that to NS as lower prices.18
Some relationships involve open sharing of information. This might include the exchange of proprietary cost data or demand forecasts or working jointly on new prod- uct designs. Information might be shared in discussions between personnel, or through information systems connected via the Internet, a key facet of B2B e-commerce. The electronic approach has a big advantage in that it is fast and easy to update the infor- mation. It also saves time. A customer can check detailed product specs or the status of a job on the production line without having to wait for someone to respond.
Information sharing can lead to better decisions and better planning. However, firms don’t want to share information if there’s a risk that a partner might misuse it.
For example, one of General Motors’ suppliers shared some of its planned technology Relationships have many
dimensions
Cooperation treats problems as joint responsibilities
Shared information is useful but may be risky
Relationship
Supplier Customer
R&D
R&D
Quality Quality
Finance Purchasing manager Salesperson
Marketing Production
Production Engineering
Accounting Accounting
Information sharing Operational linkage
s
Legal bonds Relations
hip-specificadaptations Cooperation
Exhibit 6–7 Key Dimensions of Relationships in Business Markets
158
to the automaker. It later found out that General Motors’ purchasing chief showed blueprints of that secret technology to competing suppliers. Violations of trust in a relationship are an ethical matter and should be taken seriously.
Suppliers can be wary of sharing bad news with an important customer. For exam- ple, a supplier may wait to tell a customer of financial problems—and that can cause trouble. When Edscha, a German supplier of sunroofs to BMW, unexpectedly filed for insolvency, BMW had a crisis in the making. BMW was about to launch its new Z4 convertible—and Edscha supplied all the tops. Getting a new supplier up-to-speed would have taken six months, so BMW scrambled to support Edscha and launch the Z4 on schedule. A more trusting and open relationship might have provided more lead time to work out problems.19
Operational linkages are direct ties between the internal operations of the buyer and seller firms. These linkages usually involve ongoing coordination of activities between the firms. Shared activities are especially important when neither firm, working on its own, can perform a function as well as the two firms can working together.
Business customers often require operational linkages to reduce total inventory costs, maintain adequate inventory levels, and keep production lines moving. On the other hand, keeping too much inventory is expensive. Providing a customer with in- ventory when it’s needed may require that a supplier be able to provide just-in-time delivery—reliably getting products there just before the customer needs them. We’ll discuss just-in-time systems in more detail in Chapter 11. For now, it’s enough to know that closer relationships between buyers and sellers involve operational linkages that lower costs and increase efficiency.
Many purchases in business markets are simple transactions. The seller’s responsi- bility is to transfer title to goods or perform services, and the buyer’s responsibility is to pay the agreed price. However, more complex relationships may be spelled out in detailed legal contracts. An agreement may apply only for a short period, but long- term contracts are also common.
For example, a customer might ask a supplier to guarantee a 6 percent price reduction for a particular part for each of the next three years and pledge to virtually eliminate defects. In return, the customer might offer to double its orders and help the supplier boost productivity.
Operational linkages share functions between firms
Contracts spell out obligations
Spain’s EmpordAigua offers consulting services to help firms manage water quality and usage. EmpordAigua believes that no two drops of water are alike—nor are any two customers’ water needs. So EmpordAigua develops close buyer–seller relationships based on cooperation, information sharing, and relationship- specific adaptations to develop custom water solutions for each of its client’s needs.
Courtesy EmpordAigUA® Water Design & Technology.
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CHAPTER 6Business and Organizational Customers and Their Buying Behavior
159 Sometimes the buyer and seller know roughly what is needed but can’t fix all the details in advance. For example, specifications or total requirements may change over time. Then the relationship may involve negotiated contract buying, which means agreeing to contracts that allow for changes in the purchase arrangements. In such cases, the general project and basic price is described but with provision for changes and price adjustments up or down.
Some managers figure that even a detailed contract isn’t a good substitute for regu- lar good-faith reviews to make sure that neither party gets hurt by changing business conditions. Harley-Davidson used this approach when it moved toward closer relation- ships with a smaller number of suppliers. Purchasing executives tossed out detailed contracts and replaced them with a short statement of principles to guide relationships between Harley and its suppliers.
Relationship-specific adaptations involve changes in a firm’s product or procedures that are unique to the needs or capabilities of a relationship partner. Industrial suppli- ers often custom design a new product for just one customer; this may require invest- ments in R&D or new manufacturing technologies. MetoKote, in its relationship with John Deere in the case at the beginning of this chapter, made a specific adaptation by building its coating plant right next door to Deere’s factory.
Buying firms may also adapt to a particular supplier. When Apple designed Mac- Book computers with an Intel computer chip, it made it difficult later to change to a different chipmaker. However, buyers are often hesitant to make big investments that increase dependence on a specific supplier. Typically, they do it only when there isn’t a good alternative—perhaps because only one or a few suppliers are available to meet a need—or if the benefits of the investment are clear before it’s made.
Specific adaptations are usually made when the buying organization chooses to outsource—contract with an outside firm to produce goods or services rather than to produce them internally. Many firms have turned to outsourcing to cut costs—and that’s why much outsourcing is handled by suppliers in countries where labor costs are lower. For example, many American companies are outsourcing production to firms in China and customer service to India.20
Although a marketing manager may want to work in a cooperative partnership, that may be impossible with large customers who have the power to dictate how the rela- tionship will work. Often a powerful customer negotiates lower prices from suppliers.
For example, when Hewlett-Packard started selling personal computers through Walmart stores, it knew a rock-bottom price would be required. So it used its large sales volume to demand lower prices from its suppliers and the contract manufacturers that assembled the PCs. This helped H-P offer lower priced computers while maintain- ing higher profit margins than its competition.21
Even if a marketing manager develops the best marketing mix possible and culti- vates a close relationship with the customer, the customer may not give all of its busi- ness to one supplier. Buyers often look for several dependable sources of supply to protect themselves from unpredictable events such as strikes, fires, or floods in one of their suppliers’ plants. For example, Western Digital, the world’s largest provider of hard-disk drives, produces most of its drives in Thailand. When flooding in Thailand closed down many of Western Digital’s manufacturing plants, it significantly tight- ened the world’s supply of personal computers.22
Even when buyers don’t want a single source of supply, a good marketing mix is still likely to win a larger share of the total business—which can prove to be very important. From a buyer’s point of view, it may not seem like a big deal to give a par- ticular supplier a 40 percent share of the orders rather than a 20 percent share. But for the seller that doubles their sales with that one customer—a 100 percent increase.
Organizations routinely monitor supplier performance. Suppliers that fail to meet a buyer’s performance expectations may be dropped. The process can be good for both Specific adaptations
invest in the relationship
Powerful customer may control the relationship
Buyers usually use several sources to spread their risk
Buyers monitor supplier performance
160
buyer and supplier. Suppliers that perform well may find their share of a buyer’s pur- chases go up. Suppliers that listen to feedback from customers can learn how to im- prove and increase the value of the relationship. Good buying organizations provide regular feedback to their suppliers without being asked—and smart suppliers listen closely and respond to them. Honda, for example, provides a monthly report card that details the supplier’s performance in five areas: quality, delivery, quantity delivered, performance history, and any special incidents. The report fosters an ongoing dialogue between Honda suppliers about ways that both Honda and the supplier can work together to improve supplier performance.23
We’ve been discussing aspects of relationships and buying approaches that generally apply with different types of customer organizations—in both the United States and inter- nationally. However, it’s also useful to have more detail about specific types of customers.
Knowing the size, number, geographic location, and buying procedures of manufacturers, service firms, retailers, wholesalers, and governments help marketing managers to seg- ment markets, identify targets, and create more effective marketing mixes.
Manufacturers Are Important Customers
One of the most striking facts about manufacturers is how few there are compared to final consumers. This is true in every country. In the United States, for example, there are about 330,000 factories. The majority of these are quite small—more than half have less than 10 workers. In small plants, the owners often do the buying. And they buy less formally than buyers in the relatively few large manufacturing plants—which employ most of the work- ers and produce a large share of the value added by manufacturing. For example, only about 3 percent of all plants have 250 or more employees, yet they employ almost half of the production workers and produce about 60 percent of the value added by manufacturers.
In addition to concentration by company size, industrial markets are concentrated in certain geographic areas. Internationally, industrial customers are concentrated in countries that are at the more advanced stages of economic development. From all the talk in the news about the United States shifting from an industrial economy to a service and information economy, you might conclude that the United States is an exception—that the industrial market in this country is shrinking. It is true that the number of people employed in manufacturing has been shrinking, but U.S. manufac- turing output is higher than at any other time in the nation’s history. The rate of growth, however, is fastest in countries where labor is cheap.24
Within a country, there is often further concentration of manufacturing in specific areas. In the United States, many factories are concentrated in big metropolitan areas—
especially in New York, Pennsylvania, Ohio, Illinois, Texas, and California. There is also concentration by industry. In Germany, for example, the steel industry is concen- trated in the Ruhr Valley. Similarly, U.S. manufacturers of high-tech electronics are concentrated in California’s famous Silicon Valley near San Francisco.
The products an industrial customer needs to buy depend on the business it is in.
Because of this, sales of a product are often concentrated among customers in similar businesses. For example, apparel manufacturers are the main customers for zippers.
Marketing managers must focus their marketing mixes on prospective customers who exhibit characteristics similar to their current customers.
Detailed information is often available to help a marketing manager learn more about customers in different lines of business. The U.S. government collects and publishes data by the North American Industry Classification System (NAICS) codes—groups of firms in similar lines of business. (NAICS is pronounced like
“nakes.”) The number of establishments, sales volumes, and number of employees—
broken down by geographic areas—are given for each NAICS code. A number of Variations in buying by
customer type
LO 6.6
There are not many big ones
Customers cluster in geographic areas
Business data often classify industries
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other countries collect similar data, and some of them try to coordinate their efforts with an international variation of the NAICS system. However, in many countries data on business customers are incomplete or inaccurate.
So let’s take a closer look at how the NAICS codes work. The NAICS code breakdowns start with broad industry categories such as construction (23), manufacturing (31), retail trade (44), and so on (see Exhibit 6–8). Within each two-digit industry breakdown, much more detailed data may be available for three-digit industries (that is, subindustries of the two-digit industries). For example, within the two-digit manufacturing industry (code 31) there are manufacturers of food (311), leather (316), and others, including apparel manu- facturers (315). Then each three-digit group of firms is further subdivided into more detailed four-, five-, and six-digit classifications. For instance, within the three-digit (315) apparel manufacturers there are four-digit subgroups for knitting mills (3151), cut and sew A firm like Alcoa Aluminum is
likely to find that the majority of customers that use aluminum are concentrated within a few industries that it can identify by their North American Industry Classification System code number.
Left: Fotosearch/Getty Images; Top Right: Alejandro da Silva Farias/
Getty Images; Bottom Right:
Thomas Trustschel/Getty Images
Exhibit 6–8 Illustrative NAICS Code Breakdown for Apparel Manufacturers Retail
Construction (44)
(23) Manufacturing
(31)
Food(311) Apparel
(315)
Knitting mills
(3151) Cut and sew apparel
(3152) Apparel accessories
(3159) others…
others…
others…
Men’s & boys’
(31522) Women’s & girls’
(31523) Other cut & sew
(31529) others…
others…
Dresses (315233) Blouses
(315232) Lingerie
(315231)
Leather (316)
162
apparel (3152), and producers of apparel accessories (3159).
Exhibit 6–8 illustrates that breakdowns become more de- tailed as you move to codes with more digits. However, detailed data (say, broken down at the four-digit level) aren’t available for all industries in every geographic area. The government does not provide detail when only one or two plants are located in an area.
Many firms find their current customers’ NAICS codes and then look at NAICS-coded lists for similar companies that may need the same goods and services. Other compa- nies look at which NAICS categories are growing or declining to discover new opportunities.25
Producers of Services—Smaller and More Spread Out
The service side of the U.S. economy is large and has been growing fast. Service op- erations are also growing in some other countries. There are many good opportunities to provide these service companies with the products they need to support their opera- tions. But there are also challenges.
The United States has almost 6 million service firms—more than 17 times as many as it has manufacturers. Some of these are big companies with international operations.
Examples include AT&T, Hilton Hotels, Prudential Insurance, PricewaterhouseCoopers, Wells Fargo, and Accenture. These firms have purchasing departments that are like those in large manufacturing organizations. But as you might guess given the large number of service firms, most of them are small—Evans Dental Group, North Coast Maid Service, and Affordable Computer Repair. They’re also more spread out around the country than manufacturing concerns. Factories often locate where transportation facilities are good, raw materials are available, and it is less costly to produce goods in quantity. Service operations, in contrast, often have to be close to their customers.
Purchases by small service firms are often handled by whoever is in charge or their administrative assistant. This may be a doctor, lawyer, owner of a local insurance agency, hotel manager, or office manager.
Suppliers who usually deal with purchasing specialists in large organizations may have trouble adjusting to this market. Personal sell- ing is still an important part of promotion, but reaching these customers in the first place often requires more advertising. And small service firms may need much more help in buying than a large corporation.
Small service companies that don’t attract much personal attention from salespeople often rely on e-commerce for many of their pur- chases. Purchases by small customers can add up—so for many suppliers these customers are an important target market. Increasingly suppli- ers cater to the needs of these customers with specially designed websites. A well-designed website can be efficient for both customers and suppliers. Customers can get information, place orders, or follow up with a call or e-mail for personal attention from a salesperson or cus- tomer service rep when it’s needed.
LO 6.7
Buying may not be as formal
Small service customers like Internet buying
Online Toolkit
Comprehensive information about NAICS codes is available online (www.naics.com). At the website, select “Find Your NAICS Code” and when the search page appears submit a query for the keyword “laser welding.” If your firm was interested in selling its lasers to manufacturers of laser welding equipment, what is the NAICS code of the industry for which you would want to get a list of manufacturers?
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In a smaller service organization, purchases may be made by the person who is in charge rather than a person with full-time responsibility for purchasing.
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