1 Chapter 6 Purchasing And Commodity Strategy Development IDIS 424 Spring 2004

2 Commodity Strategy Development Process 1. Business Requirements Definition 2. Define Strategic Importance of Commodity 3. Determine Business Requirements and Supply Market Research 4. Goal Setting & Conduct Gap Analysis 5. Develop Sourcing Strategy and Objectives 6. Execute the Plan! 7. Results Monitoring and Review

3 Portfolio Analysis Approach Value to Buyer Number of Capable Suppliers Low High Few Many Strategic (Time & Effort) Leverage (Consolidate Purchases) Acquisition (Establish Purchasing Systems) Multiple (Bids)

4 Example of Goal Setting Increase volume and market share through pricing reduction Reduce cost of goods by 20% Reduce purchase prices (with redesign) by 25% in 12 months Develop lower cost production processes or modify design resulting in 25% lower prices Business Goals (SBU) Product Goals System / Component Goals

5 Stages of Strategy Evolution IV- Fully Integrated Supply Chains II - Moderate Development I - Basic Beginnings III - Limited Integration nQuality/cost teams nLonger -term contracts nVolume leveraging nSupply base consolidation nSupplier quality focus nAd hoc supplier alliances nCross- functional sourcing teams nSupply base optimization nInternational sourcing nCross-location sourcing teams nGlobal sourcing nStrategic supplier alliances nSupplier TQM development nTotal cost of ownership nNon-traditional purchase focus nParts/service standardization nEarly supplier involvement nDock to stock pull systems nGlobal supply chains with external customer focus nCross-enterprise decision making nFull service suppliers nEarly sourcing nInsourcing/ outsourcing to maximize core competencies of firms throughout the supply chain

6 Low Value Purchases Strategy emphasis: Acquisition Automate ordering/releasing systems Simplify processes and procedures Off-load ordering to users or suppliers through low value purchase systems Standardize and streamline where possible

7 Low Value Purchases Key Question-- How do organizations reduce the effort and transactions required to process low value purchases? (Acquisition quadrant) How do organizations reduce the effort and transactions required to process low value purchases? (Acquisition quadrant) Based on a 1998 research project conducted by Trent and Kolchin titled “Reducing the Cost of Processing Low Value Purchases”

8 Low Value Purchases Firms that have made greater progress in managing low value purchases…….. Emphasize certain methods, approaches, or activities when reducing the effort or transactions required to process low value purchases (in order of effect): 1 On-line ordering through the use of electronic catalogs 2 Procurement cards issued to users 3 Electronic commerce through the internet

9 Low Value Purchases 4 Purchasing process redesign efforts 5 Automated accounts payable systems 6 Allowing users to contact suppliers below some dollar threshold 7 Consolidation of purchase requirement between units 8 Auto fax with suppliers 9 Electronic data interchange with suppliers 10 Electronic funds transfer payments

10 Portfolio Analysis Portfolio Analysis Quadrant Characteristics: Acquisition Fewer capable suppliers within a region Low priority items Fewer total dollars spent May consume a disproportionate amount of time and dollars to acquire Developed quality and technology Able to move easily between suppliers--low switching costs Focus on removing effort and transactions through low dollar purchase systems

11 Portfolio Analysis Strategy emphasis: Acquisition Automate ordering/releasing systems Simplify processes and procedures Off-load ordering to users or suppliers through low value purchase systems Standardize and streamline where possible

12 Portfolio Analysis Portfolio Analysis Quadrant Characteristics: Multiple Greater number of suppliers Low to medium annual dollars Able to move easily between suppliers--low switching costs Developed quality and technology Focus on price analysis to gain benefit

13 Portfolio Analysis Strategy emphasis: Multiple Let market forces work Play the market--perform price analyses Periodically market test Apply pressure Short-term commitments (with the option to renew)

14 Portfolio Analysis Portfolio Analysis Quadrant Characteristics: Leverage Greater number of suppliers Medium to high annual dollars Win-win approach may work here Focused commodity families Combining contracts across units yields savings Developed quality and technology Able to move easily between suppliers Focus on cost and price analysis

15 Portfolio Analysis Strategy emphasis: Leverage Combine volumes for lower cost May use a longer-term agreement Use target costing Probe for efficiencies or improvements

16 Portfolio Analysis Portfolio Analysis Quadrant Characteristics: Strategic Few capable suppliers Items or services critical to success Unique or customized items Collaborative or interdependent relationships Unable to move between suppliers easily Cost analysis yields benefits Unproven or undeveloped technology Win-win environment

17 Portfolio Analysis Strategy emphasis: Strategic Joint ventures/alliances/partnerships Practice reverse marketing Develop collaborative relationships Pursue annual cost/price/quality/cycle time improvement goals Use of longer-term agreements

18 Commodity Strategy Development 1. Business Requirements Definition 2. Define Strategic Importance of Commodity - Short and long term - What is needed to compete - Define commodity categories - Form commodity team - Determine linkage of commodity to business units - Identify potential problems 3. Determine Business Requirements and Supply Market Research - Collect data from multiple sources of information - Determine trends - Identify market leaders

19 Commodity Strategy Development 4. Goal Setting & Gap Analysis 5. Develop Sourcing Strategy and Objectives - Determine measures - Select suppliers - In-depth knowledge base - Will vary by commodity 6. Strategy Evaluation and Selection - Systematic process - Assessing risk and reward - WHY is this the best strategy? - Benchmarking - Where are we now? - What do we need to do to compete - SWOT Analysis

20 Commodity Strategy Development 7. Strategy Implementation and Contingency Planning - Establish detailed plans with timeline - Assign ownership of tasks - Timing 8. Execute the Plan - Conduct negotiations - Inform suppliers of awards - Communicate outcomes to stakeholders 9. Results Monitoring and Review - Review progress - Monitor key metrics - Advise suppliers of changes and results

21 Data Collection Sources Internet Searches SS&S or Acquisition Files Discussions with users, SS&S colleagues and others

22 Are You Able to Answer the Following Questions? Who are current and potential suppliers? What are the characteristics of the marketplace (best price, average price, etc.) What are future trends in terms of supply continuity and expected pricing What are strengths and weaknesses of your suppliers, and who are the market leaders?

23 Are You Able to Answer the Following Questions? What are past expenditures by commodity and by supplier? What are expenditures as percent of total for business unit? What is the technology roadmap, and that of the supplier? What are current / future volumes and user location requirements? Are there opportunities to leverage commodity expenditures with similar commodities?

24 Key Commodity Strategy Questions Insource or outsource? Cost-vs. market-based approach Type of suppliers? High or low technology Full service Niche or distributor Local or global supplier? Single, dual or multiple source? Percentage of buy to each supplier?

25 Key Commodity Strategy Questions Long-term or short-term contract? Evergreen or escape clause? Degree of buyer/supplier risk taking? On-line or manual ordering? Supplier development - degree of commitment? Use full-service suppliers? “Black box” or traditional level of supplier involvement in design?

26 Measure and Evaluate Strategy Performance Ensure clear metrics with linkages to business unit strategies Use internal / external metrics to evaluate progress Hold “post-mortems” on successful and failed strategies Modify strategy as necessary Hold stakeholder meetings and provide feedback