Supply Management and Commodity Strategy Development Chapter 6.

Supply Management and Supply Management and Commodity Strategy Commodity Strategy

DevelopmentDevelopment

Chapter 6Chapter 6

Aligning Objectives

What markets will firm compete in?What markets will firm compete in? On what basis?On what basis?

What are the long-term and short-term What are the long-term and short-term business goals?business goals?

What are budgetary and economic What are budgetary and economic resource constraints?resource constraints? How will these be allocated to functional How will these be allocated to functional

groups and business units?groups and business units?

22

How Companies CreateShareholder Value

33

Raise prices

Increase volume

Reduce cost of employees (downsize)

Reduce cost of process and waste

Reduce cost of goods and services

1. Increase revenues

2. Decrease costs

Integrative Strategy Development

44


Corporate strategiesCorporate strategies Definition of businesses in which to Definition of businesses in which to

participateparticipate Acquisition and allocation of resources to Acquisition and allocation of resources to

these business unitsthese business units

Business unit strategiesBusiness unit strategies Scope or boundaries of these businessesScope or boundaries of these businesses Basis of competitive advantageBasis of competitive advantage

55


Supply management strategiesSupply management strategies Support desired competitive business-Support desired competitive business-

level strategieslevel strategies How to complement other functional How to complement other functional

strategiesstrategies

Commodity/Category strategiesCommodity/Category strategies How to purchase commodities to support How to purchase commodities to support

higher-level strategieshigher-level strategies

66

Translating Objectives Goals

Cost reduction objectivesCost reduction objectives Be low-cost producer in industryBe low-cost producer in industry

Reduce material costs by 15% in 1 yearReduce material costs by 15% in 1 year Reduce levels of inventory required to Reduce levels of inventory required to

supply internal customerssupply internal customers Reduce raw material inventory ≤ 20 Reduce raw material inventory ≤ 20

days’ supplydays’ supply

77


Technology/new product development Technology/new product development objectivesobjectives Outsource non-core competency activitiesOutsource non-core competency activities

Qualify 2 new suppliers for all major Qualify 2 new suppliers for all major services by end of fiscal yearservices by end of fiscal year

Reduce product development timeReduce product development time Develop formal supplier integration Develop formal supplier integration

process manual by 12/31process manual by 12/31

88


Supply base reduction objectivesSupply base reduction objectives Reduce number of suppliers usedReduce number of suppliers used

Reduce total supply base by 30% in next Reduce total supply base by 30% in next 6 months6 months

Joint problem solving with remaining Joint problem solving with remaining supplierssuppliers Identify $300,000 in cost savings with 2 Identify $300,000 in cost savings with 2

suppliers by end of fiscal yearsuppliers by end of fiscal year

99


Supply assurance objectivesSupply assurance objectives Assure uninterrupted supply from Assure uninterrupted supply from

identified suppliersidentified suppliers Reduce cycle time on key parts to ≤ 1 Reduce cycle time on key parts to ≤ 1

week within 6 monthsweek within 6 months

Quality objectivesQuality objectives Increase quality of services and productsIncrease quality of services and products

Reduce average defects by 200 ppm on Reduce average defects by 200 ppm on all material receipts within 1 yearall material receipts within 1 year

1010

Conducting a Spend Analysis

What did the business spend its money What did the business spend its money on over the past year?on over the past year?

Did the business receive right amount Did the business receive right amount of products and services given what it of products and services given what it paid for them?paid for them?

What suppliers received majority of What suppliers received majority of business?business?

1111


Did suppliers charge accurate price Did suppliers charge accurate price across all divisions vs. P.O. across all divisions vs. P.O. requirements, contracts, and SOWs?requirements, contracts, and SOWs?

Which divisions spent their money on Which divisions spent their money on products and services that were products and services that were correctly budgeted for?correctly budgeted for?

1212


Are there opportunities to …?Are there opportunities to …? Combine volumes of spending from Combine volumes of spending from

different businessesdifferent businesses Standardize product requirementsStandardize product requirements Reduce number of suppliersReduce number of suppliers Exploit market conditions for better pricingExploit market conditions for better pricing

1313

Challenges in Conductinga Comprehensive Spend Analysis

Difficulty in obtaining timely and Difficulty in obtaining timely and accurate informationaccurate information

Impact of mergers and acquisitionsImpact of mergers and acquisitions Different recording proceduresDifferent recording procedures Different accounting systemsDifferent accounting systems Difficulty in translating data between Difficulty in translating data between

systemssystems

1414

Best Practices in Spend Analysis

1515

%%

Spend Analysis Spreadsheet

Sort data by commoditySort data by commodity Find total spend by commodityFind total spend by commodity Chart top 10 by descending $ spendChart top 10 by descending $ spend Find number of suppliers by commodityFind number of suppliers by commodity Chart top 10 by descending number of Chart top 10 by descending number of

supplierssuppliers Find average spend/supplier/commodityFind average spend/supplier/commodity Apply Pareto analysis for opportunitiesApply Pareto analysis for opportunities

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Sample Spend CategoriesSupplier Commodity Annual Spend

Rebate Company Rebate fulfillment & call center $329,873,663

Invest Company Investments $130,328,512

Advert Company Advertising $56,134,490

Repair Company Service repairs $49,339,218

Benefits Company Benefits $48,969,149

Hardware Company Hardware $40,572,450

Partco Service parts $39,910,372

Telecom Telecommunications $31,055,599

Display Company Store displays $30,020.969

Penpaper Company Paper $29,175,843

Labor Company Contract labor $27,880,363

Supply Company Paper $23,844,707

Contract Company General contracting $22,579,113

Office Company Paper $22,257,690

Graphics Company Graphic design $21,966,989

Payment Company Business & management services $20,380,275

Freight Company Surface freight $19,369,010

Paper Company Paper $15,603,682

Service Plan Company Service plan $15,478,827

Service Company Service parts $14,868,023

Consumer Company Consumer financing $14,833,333

Energy Company Energy $14,087,177

Spend by Commodity category

1818

Mil

lio

ns

$M

illi

on

s $

Percent of Total Spend by category

1919

Suppliers by Commodity

2020

Spend/Supplier by Commodity

2121

The Strategic Sourcing Process

2222

GOAL:

Develop a statement of work

and plan

GOAL:

Understand the supply market

GOAL:

Classify suppliers and define

sourcing approach

GOAL:GOAL:

Negotiate a win-win Negotiate a win-win contractcontract

GOAL:GOAL:

Continuously Continuously improve improve

performanceperformance

INPUTS & TOOLS:

Project leader; Other team members

INPUTS & TOOLS:

Interviews;Online research;

Conferences

INPUTS & TOOLS:

Market research; Portfolio matrix;

Forecasted spend

INPUTS & TOOLS:INPUTS & TOOLS:

Negotiation plan; Negotiation plan; Supplier evaluation Supplier evaluation

tooltool

INPUTS & TOOLS:INPUTS & TOOLS:

Contract;Contract;Supplier scorecardSupplier scorecard

OUTPUTS:

Baseline data; Project charter;

Work plan

OUTPUTS:

Report on supply trends, changes, pricing, capacity,

etc.

OUTPUTS:

Supplier evaluation tool with desired

relationship

OUTPUTS:OUTPUTS:

Signed contractSigned contract

OUTPUTS:OUTPUTS:

Supplier Supplier development plan; development plan;

CommunicationCommunication

Step 1: Build the Teamand the Project Charter

Identify key cross-functional team Identify key cross-functional team members and subject matter expertsmembers and subject matter experts

Assign knowledgeable project leaderAssign knowledgeable project leader Define scope of category strategyDefine scope of category strategy Publish project charterPublish project charter Develop work and communication planDevelop work and communication plan

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Project summary documentProject summary document What is prime motivation for project?What is prime motivation for project? What is scope of commodity?What is scope of commodity? Who will be impacted by decision?Who will be impacted by decision? What is process that will be followed?What is process that will be followed? How much time and efforts will be required?How much time and efforts will be required? What is nature of potential savings and What is nature of potential savings and

value created?value created?

2424


Consider stakeholder needsConsider stakeholder needs Draw map of stakeholders and verify with Draw map of stakeholders and verify with

key stakeholderskey stakeholders Identify success criteria for each Identify success criteria for each

stakeholderstakeholder Check perceptions of each stakeholder’s Check perceptions of each stakeholder’s

success criteriasuccess criteria Critically review all success criteriaCritically review all success criteria

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Consider stakeholder needs (cont.)Consider stakeholder needs (cont.) Ensure success criteria are mutually Ensure success criteria are mutually

consistent and in line with what can be consistent and in line with what can be delivereddelivered

Work with stakeholders to reconcile gaps Work with stakeholders to reconcile gaps and differencesand differences

Check and amend success criteria on Check and amend success criteria on ongoing basisongoing basis

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Steps in Identifying Stakeholders

Identify and name each stakeholderIdentify and name each stakeholder Note degree to which they are ready for Note degree to which they are ready for

changechange H, M, or LH, M, or L

Note their capability for changeNote their capability for change H, M, or LH, M, or L

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Steps in Identifying Stakeholders

Note their power (formal or informal) to Note their power (formal or informal) to make change happenmake change happen H, M, or LH, M, or L

Identify factors which will help or Identify factors which will help or inhibit changeinhibit change

Identify stakeholders and factors you Identify stakeholders and factors you need to work with to make change need to work with to make change happenhappen

2828

Sample Stakeholder MapStakeholderStakeholder Example NeedsExample Needs

Senior Management• Creation and capture of both current and future value• Adherence to the corporate business strategy

Operations• Assurance of supply and no discontinuity in deliveries• Compliance to GMP quality standards

Supply Chain Management

• Reduction of temperature control deviations• Inventory visibility and control of expired product

Strategic Marketing• Product characteristics satisfying brand equity criteria• Superb product quality• Customizable product design

Transactional Services• Transactional service operational efficiency• Feasibility of planned information sharing arrangements

Non-Direct Material Internal Customers

• Freedom to customize specifications• Lowest achievable purchase price and ownership cost

Procurement (other)• Absence of possible negative effects on other categories

and geographies

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Stakeholder Needs Analysis ToolStakeholdersStakeholders Example NeedsExample Needs ChangeChange

(H, M, L)(H, M, L)

Conclusions(Issues to Be Addressed)

3030

Sample Change Summary

StakeholderStakeholderReadinessReadiness CapabilityCapability PowerPower

H M L H M L H M L

President, Division A X X X

Vice President, Marketing X X X

Senior Vice President, Finance X X X

Regional Director, Europe X X X

Regional Director, East Asia X X X

Vice President, Global Logistics X X X

Vice President, Human Resources X X X

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Level of Commitment Analysis Steps

Name individual or group stakeholdersName individual or group stakeholders Mark current statusMark current status

Opposing the changeOpposing the change Passively letting it happenPassively letting it happen Actively supporting itActively supporting it Forcefully making it happenForcefully making it happen

Mark where stakeholder needs to be for Mark where stakeholder needs to be for project to be successfulproject to be successful

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Sample Commitment Analysis Model

Individual (or Group) OpposeLet

HappenSupport

Make Happen

CEO X √√

Corporate Sourcing Council X √√

J. Torrez X √√

E. Alegria X √√

J. Cox X √√

J. Gramma √√ X

3333

Key:Key:X = current positionX = current position√ √ = where needs to be= where needs to be

Step 2: Conduct Market Research on Suppliers

Understand purchase requirement Understand purchase requirement relative to business unit objectivesrelative to business unit objectives

Conduct thorough spend analysisConduct thorough spend analysis Each commodity and supplierEach commodity and supplier Total expenditures as % of total spendTotal expenditures as % of total spend

Identify specific internal usersIdentify specific internal users Identify current suppliersIdentify current suppliers Research supply marketplaceResearch supply marketplace

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Information requiredInformation required Total annual purchase volumesTotal annual purchase volumes Interviews with stakeholders for forecastsInterviews with stakeholders for forecasts External market research on …External market research on …

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KeyKeysupplierssuppliers

Available Available capacitycapacity

Technology Technology trendstrends

Price dataPrice dataand trendsand trends

Cost dataCost dataand trendsand trends

Technical Technical requirementsrequirements

Environmental Environmental issuesissues

Regulatory Regulatory issuesissues

Other available Other available datadata


Triangulation – explore, compare, and Triangulation – explore, compare, and contrast data from multiple sourcescontrast data from multiple sources

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Trade Trade journalsjournals

Annual Annual reportsreports InternetInternet BooksBooks

Snowball Snowball samplingsampling

Trade Trade consultantsconsultants

Category Category managersmanagers HeadlinesHeadlines

SuppliersSuppliers Investment Investment reportsreports

Industry Industry analystsanalysts

Other Other sourcessources


Porter’s Five Forces ModelPorter’s Five Forces Model SWOT analysisSWOT analysis Supplier analysisSupplier analysis

Establish benchmarks through industry Establish benchmarks through industry databasesdatabases

Requests for informationRequests for information Value chain analysisValue chain analysis Supplier researchSupplier research

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Porter’s Five Forces Model

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Market Internal Competition

Threat of New Entrants

Pressure from Substitutes

Supplier Bargaining

Power

BuyerBargaining

Power

Source:Source:Competitive StrategyCompetitive StrategyMichael E. Porter (1980)Michael E. Porter (1980)

Other possible forces:Other possible forces:•GlobalizationGlobalization•DigitizationDigitization•DeregulationDeregulation

Market Internal Competition

Speed of industry growthSpeed of industry growth Capacity utilizationCapacity utilization Exit barriersExit barriers Product differencesProduct differences Switching costsSwitching costs Diversity of suppliersDiversity of suppliers

3939


Access to capital marketsAccess to capital markets Availability of skilled workersAvailability of skilled workers Access to critical technologies, inputs, Access to critical technologies, inputs,

or distributionor distribution Product life cyclesProduct life cycles

4040


Brand equity and customer loyaltyBrand equity and customer loyalty Government deregulationGovernment deregulation Risk of switchingRisk of switching Economies of scaleEconomies of scale

4141

Pressure from Substitutes

Relative performance of substitute Relative performance of substitute products and servicesproducts and services

Relative price of substitutesRelative price of substitutes Switching costsSwitching costs Buyer propensity to switchBuyer propensity to switch

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Buyer Bargaining Power

Buyer concentrationBuyer concentration Buyer volumeBuyer volume Buyer switching costsBuyer switching costs Price sensitivityPrice sensitivity Product differencesProduct differences

4343

Buyer Bargaining Power

Brand identityBrand identity Impact on quality or performanceImpact on quality or performance Buyer profitsBuyer profits Availability of substitutesAvailability of substitutes

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Supplier Bargaining Power

Price of major inputsPrice of major inputs Ability to pass on price increasesAbility to pass on price increases Availability of key technologies or other Availability of key technologies or other

resourcesresources Threat of forward or backward integrationThreat of forward or backward integration Industry capacity utilizationIndustry capacity utilization Supplier concentrationSupplier concentration Importance of volume to supplierImportance of volume to supplier

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Sample SWOT Analysis

SStrengthstrengths WWeaknesseseaknesses

OOpportunitiespportunities TThreatshreats

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• Broad Broad customer basecustomer base

• Established Established product rangeproduct range

• Established Established distribution distribution channelschannels

• Emergence of Emergence of other uses and other uses and marketsmarkets

• Emerging Emerging overseas overseas marketsmarkets

• High barriers to High barriers to entryentry

• Low product Low product innovationinnovation

• Traditional, Traditional, unionized unionized business business processesprocesses

• Low patent Low patent protectionprotection

• Emerging Emerging overseas overseas supplierssuppliers

• New product New product development development costs are highcosts are high

• Environmental Environmental regulationsregulations

Internal Factors

External Factors

Benchmarks

Identify critical performance criteriaIdentify critical performance criteria Identify relative competitive Identify relative competitive

performanceperformance Use of industry benchmarksUse of industry benchmarks

Third party consulting firmsThird party consulting firms

Use of external benchmarksUse of external benchmarks Not in same industryNot in same industry

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Requests for Information (RFIs)

Use Use beforebefore specific requisition is specific requisition is issuedissued

Use to obtain general information about Use to obtain general information about services, products, or suppliersservices, products, or suppliers Does Does notnot constitute binding agreement constitute binding agreement

Use when large or complicated Use when large or complicated purchase is considered and when pool purchase is considered and when pool of suppliers must be prequalifiedof suppliers must be prequalified

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Value Chain Analysis

Help identify cost savings Help identify cost savings opportunitiesopportunities

Provide insights to …Provide insights to … Origin of productsOrigin of products Where products end upWhere products end up i.e., “cradle to grave” analysisi.e., “cradle to grave” analysis

4949

Supplier Research

Cost structureCost structure Financial statusFinancial status Customer Customer

satisfaction levelssatisfaction levels Support capabilitiesSupport capabilities Relative strengths Relative strengths

and weaknessesand weaknesses Buyer’s fit with Buyer’s fit with

suppliersupplier

How company is How company is viewedviewed

Core capabilitiesCore capabilities Strategy/future Strategy/future

directiondirection CultureCulture

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Step 3: Strategy Development

Portfolio analysisPortfolio analysis Critical commodity – strategic supplierCritical commodity – strategic supplier Routine commodityRoutine commodity Leverage commodity – preferred supplierLeverage commodity – preferred supplier Bottleneck commodity – transactional Bottleneck commodity – transactional

suppliersupplier

Determine strategic importance of Determine strategic importance of commodity to buyercommodity to buyer

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Portfolio Analysis

BottleneckBottleneck CriticalCritical

RoutineRoutine LeverageLeverage

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Co

mp

lexi

ty o

r C

om

ple

xity

or

Ris

k Im

pac

tR

isk

Imp

act

Value PotentialValue Potential

LowLowLowLow

HighHigh

HighHigh

Critical Commodity

Critical to profitability and operationsCritical to profitability and operations Few qualified sources of supplyFew qualified sources of supply Large expendituresLarge expenditures Design and quality criticalDesign and quality critical Complex and/or rigid specificationsComplex and/or rigid specifications

5353

Critical Commodity

StrategyStrategy Form partnership with suppliersForm partnership with suppliers

TacticsTactics Increase role of selected supplierIncrease role of selected supplier

5454

Critical Commodity

ActionsActions Heavy negotiationHeavy negotiation Supplier process managementSupplier process management Prepare contingency plansPrepare contingency plans Analyze market and competitionAnalyze market and competition Use functional specificationsUse functional specifications

5555

Routine Commodity

Many alternative products and servicesMany alternative products and services Many sources of supplyMany sources of supply Low value, small individual Low value, small individual

transactionstransactions Everyday use, unspecified itemsEveryday use, unspecified items Anyone could buy itAnyone could buy it

5656

Routine Commodity

StrategyStrategy Simplify acquisition processSimplify acquisition process

TacticsTactics Increase role of systemsIncrease role of systems Reduce buying effortReduce buying effort

5757

Routine Commodity

ActionsActions Rationalize supply baseRationalize supply base Automate requisitioning, e.g., EDI, p-cardsAutomate requisitioning, e.g., EDI, p-cards Stockless procurementStockless procurement Minimize administrative costsMinimize administrative costs Little negotiatingLittle negotiating

5858

Leverage Commodity

High expenditures, commodity itemsHigh expenditures, commodity items Large marketplace capacity with ample Large marketplace capacity with ample

inventoriesinventories Many alternate products and servicesMany alternate products and services Many source of supplyMany source of supply Market /price sensitiveMarket /price sensitive

5959

Leverage Commodity

StrategyStrategy Maximize commercial advantageMaximize commercial advantage

TacticsTactics Concentrate businessConcentrate business Maintain competitionMaintain competition

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Leverage Commodity

ActionsActions Promote competitive biddingPromote competitive bidding Exploit market cycles/trendsExploit market cycles/trends Procurement coordinationProcurement coordination Use industry standardsUse industry standards Active sourcingActive sourcing

6161

Bottleneck Commodity

Complex specifications requiring Complex specifications requiring complex manufacturing or service complex manufacturing or service processprocess

Few alternate productions/sources of Few alternate productions/sources of supplysupply

Big impact on operations/maintenanceBig impact on operations/maintenance New technology or untested processesNew technology or untested processes

6262


StrategyStrategy Ensure supply continuityEnsure supply continuity

TacticsTactics Decrease uniqueness of suppliersDecrease uniqueness of suppliers Manage supplyManage supply

6363


ActionsActions Widen specificationsWiden specifications Increase competitionIncrease competition Develop new suppliersDevelop new suppliers Medium-term contractsMedium-term contracts Attempt competitive biddingAttempt competitive bidding

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Supplier Evaluation

CapabilitiesCapabilities Process and design capabilitiesProcess and design capabilities Management capabilityManagement capability Financial condition and cost structureFinancial condition and cost structure Planning and control systemsPlanning and control systems Environmental regulation complianceEnvironmental regulation compliance Longer-term relationship potentialLonger-term relationship potential

Supplier selection scorecardsSupplier selection scorecards

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Step 4: Contract Negotiation

Establishing tasks and time linesEstablishing tasks and time lines Assigning accountabilities and process Assigning accountabilities and process

ownershipownership Ensuring adequate resources are made Ensuring adequate resources are made

availabilityavailability Strategy communicated to all Strategy communicated to all

stakeholdersstakeholders Market and price analysisMarket and price analysis

6666


Develop negotiation plan and ideal Develop negotiation plan and ideal contractcontract

Create contingency planCreate contingency plan Conduct negotiationConduct negotiation Sign contractSign contract

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Preferred supplier listsPreferred supplier lists Preference in future contractsPreference in future contracts Proven performance and capabilitiesProven performance and capabilities

Types of final supplier selectionTypes of final supplier selection Competitive biddingCompetitive bidding NegotiationNegotiation

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Price Analysis

Define marketplaceDefine marketplace Best priceBest price Average priceAverage price Business unit’s priceBusiness unit’s price Expected trends in pricingExpected trends in pricing

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Effective Competitive Bidding

Buying firm can provide qualified Buying firm can provide qualified suppliers with clear descriptions of suppliers with clear descriptions of items or services to be purchaseditems or services to be purchased

Volume is high enough to justify cost Volume is high enough to justify cost and effortand effort

Buying firm does not have preferred Buying firm does not have preferred suppliersupplier

Price is usually dominant criterionPrice is usually dominant criterion

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Effective Negotiation

Item is new or technically complex, Item is new or technically complex, with only vague specificationswith only vague specifications

Purchase requires agreement on wide Purchase requires agreement on wide range of performance factorsrange of performance factors

Buyer requires supplier to participate in Buyer requires supplier to participate in development effortdevelopment effort

Supplier cannot determine risks and Supplier cannot determine risks and costs without additional buyer inputcosts without additional buyer input

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Step 5: Supplier Relationship Management

Continuous monitoring of both strategy Continuous monitoring of both strategy and supplierand supplier

Continuous monitoring of supplier’s Continuous monitoring of supplier’s performance using predetermined performance using predetermined criteria on goals and objectivescriteria on goals and objectives

Supplier scorecardSupplier scorecard Update, usually quarterlyUpdate, usually quarterly Review results with supplierReview results with supplier

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Supplier Scorecards

Typical categoriesTypical categories PricePrice QualityQuality Delivery reliabilityDelivery reliability ResponsivenessResponsiveness

May include feedback and input from May include feedback and input from supplierssuppliers

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Types of Strategies

Insourcing/outsourcingInsourcing/outsourcing Supply base optimizationSupply base optimization Supply risk managementSupply risk management Global sourcingGlobal sourcing Longer-term supplier relationshipsLonger-term supplier relationships

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Types of Strategies

Early supplier design involvementEarly supplier design involvement Supplier developmentSupplier development Total cost of ownershipTotal cost of ownership E-reverse auctionsE-reverse auctions

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Supply Management and Commodity Strategy Development Chapter 6.

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