Customers’ Purchasing Philosophy

With regard to their purchasing philosophy, all customers are not the same. Some think purely in terms of price; their prime objective is to reduce the annual total spend of acquisitions. Others think in terms of all associated costs incurred during the lifetime of the product; their priority is to reduce the total cost of ownership (TCO). And there are those who focus on building a supply network that enables them to provide maximum value to their customer. Their objective is to build a lean enterprise, where “lean” means creating more value for customers with fewer resources. These three purchasing philosophies are called buying orientation, procurement orientation and sales management orientation (Anderson et al., 2009).

Buying orientation focusses narrowly on obtaining the best deal in terms of price, quality, and availability from suppliers. These customers try to maximize power over suppliers and steer clear of risks wherever possible. Negotiations with these customers can degenerate into a distributive win-lose agenda, where parties compete for the margins each can make from the transaction.

Procurement orientation broadens the domain and span of influence of purchasing. In cooperation with suppliers, these customers pursue quality improvements and cost savings, to reduce the TCO. The TCO includes all associated costs incurred during the lifetime of the product, i.e.:

$$ \begin{aligned} \text{Total Cost of} & \text{ Ownership (TCO)} & \\ & = \text{Purchase Price} \\ & + \text{Product's Lifetime Expenses} \\ & - \text{Salvage or Resale Price} \end{aligned} $$

The product’s lifetime expenses include acquisition costs, conversion costs and disposal costs.

Supply management orientation entails the harmonization of purchasing with the value network, comprising suppliers, suppliers’ suppliers, customers and customers’ customers, and so on. These companies focus on delivering maximum value to end-users by building a well-synchronized supply network that efficiently completes all processes pertaining to the supply of a product or service, from the development and production to sales and maintenance.

Only a few organizations have progressed as far as supply management orientation. Some organizations practice procurement orientation, yet the vast majority are still adhering to buying orientation.

Their purchasing philosophy clearly affects the manner in which suppliers are able to deliver value to customers, and how they craft their value proposition. Price drives customers with buying orientation, total lifetime costs are of prime importance to customers that adopt procurement orientation, and value is crucial to customers with a supply management orientation.