Chapter 9

Purchasing and business

strategy
Program

◼ Purchasing and competitive strategy

◼ Cost leadership and differentiation
◼ Lean manufacturing
◼ Integrating purchasing into business strategy
◼ Towards purchasing excellence
◼ Purchasing portfolio analysis
◼ Global sourcing
Purchasing and competitive strategies

Reasons for outsourcing those activities that

are not considered ‘core business’:

◼ Increased outsourcing and subcontracting, as a result of

make-or-buy studies
◼ Buying of finished products instead of components
◼ Turnkey delivery
◼ Technological development
Purchasing and competitive strategy

The competitive situation of West European

industry has changed over the past decade:

1. More competition from countries like Korea,

Singapore, China, Taiwan.
2. Industry in W-Europe seems to be under-represented
in areas of new technologies . Many industries seem to
be at the stage of saturation or decline:
Purchasing and competitive strategy
Introduction Growth Saturation Decline

Textiles
Chemicals
Food products Clothing
Rubber, plastics Leatherware/shoes
Automobile industry Steel
Machine construction Shipbuilding
Telecommunications
Computers

Pharmaceuticals
Medical equipment
Optical industry
Biochemistry
Cost leadership and differentiation

Porter (1980) defines three strategies leading to a

distinguishing market position:

1. Cost leadership main focus: continually reducing the cost price of the
final product.
2. Differentiation aims at marketing products which are perceived by the
customer as being unique
3. Focus strategy aims at serving a particular, clearly defined group of
customers in an optimal way

The consequence of not making a choice between the strategic

alternatives is that the company will be unable to build up a
sustainable competitive advantage in the end-user market.
Lean manufacturing

Fundamental to lean management is that:

It transfers the maximum number of tasks and

responsibilities to those workers actually
adding value to the car on the line, and it
has in place a system for detecting
defects that quickly traces every
problem, once discovered, to
its ultimate cause.

Womack et al. (1990)

Lean manufacturing

Important features of lean management:

◼ Teamwork among line workers, who are trained in a variety of
skills to conduct different jobs within their working group

◼ Simple but comprehensive information display systems that

make it possible for everyone in the plant to respond quickly to
problems and understand the plant’s overall situation.

◼ Total commitment to quality improvement on the shop floor.

Lean manufacturing

Differences between Japanese and European

new product development:

◼ Japanese manager in charge of new product development; greater

authority to make decisions than his Western counterpart.

◼ Product and process engineering are integrated responsibility

areas
◼ Engineering manager decides on who he wants to involve in his
engineering team and for what period.
Lean manufacturing

The Japanese way to manage supply base:

◼ Average supply base is much smaller than for Western

manufacturers.
◼ Most Japanese OEMs have a ‘layered’ structure, which is often
three or more tiers deep.
◼ Suppliers are usually involved in new product development at a
very early stage.
◼ Suppliers are confronted with well-defined targets in terms of
quality improvement, lead time reduction an cost reduction. They are
informed as to whether they meet contractual obligations
Strategic triangle
Customers

Marketing

Company

Competitive Make vs. Buy

benchmarking Strategic sourcing

Competitors Suppliers
Choices regarding the strategic triangle

1. Primary customer groups

◼ Match product and customer
◼ Focused marketing plan
◼ Choose between specific vs. standard solutions
2. Major competitors
◼ Sustainable competitive advantage
◼ Competitive benchmarking
3. Major suppliers
◼ Investigate core competences
◼ Subcontracting if activities can not be performed in a competitive
way
Towards purchasing excellence

Monczka as quoted by Purspective www.purspective.com

Towards purchasing excellence

◼ Insourcing/outsourcing
 Clear policy regarding make-or-buy

◼ Develop commodity strategies

 Spend analysis (spend cube)
 Structure and classify purchasing expenses (category tree)
 Determine strategy
◼ Number of suppliers geographical dispersal, relation, contract form
 Involvement of specialists and internal customers in execution
Towards purchasing excellence
◼ World class supply base management
 Intensify relations with suppliers
 Database with supplier information
 Detailed audits with important suppliers
◼ Develop and manage supplier relationships
 Continuous improvements
 Classification of suppliers:
◼ Commercial suppliers

◼ Preferred suppliers

◼ Supplier partners

◼ Integration of suppliers in product development

 Suppliers with proved competences
 Using specific knowledge
 Towards purchasing excellence
◼ Supplier integration into order fulfillment process
 Outsource logistic and administrative tasks
 Connect suppliers with information systems and production planning
 Develop plans to increase value for customer through purchasing
◼ Supplier development and quality management
 Suppliers are invited to participate in suggestions for improvement
 Suppliers are a source of new ideas
◼ Strategic cost management
 Detailed cost models
 Supply chain analysis and measures to decrease supply chain costs
together with suppliers
 Sharing of advantages is necessary
Enabling processes
Develop II
Organization and
Teaming strategies III
Deploy
Globalization

Establish globally I
integrated and aligned
purchasing and supply INTEGRATED,
chain Strategies + Plans ALIGNED AND
GLOBAL IV
Develop purchasing
and supply chain
Measurements
Establish HumanVI
Resource develop-
ment and training Develop and V
implement enabling
Source: Robert.M. Monczka, Ph.D. IS / IT systems
Purchasing portfolio analysis
In developing effective supplier strategies, the following
questions may be helpful:
◼ Does the present purchasing strategy support our business strategy and
does it meet our long term requirements?
◼ What is the balance of power between our company and our major
suppliers?
◼ Are the strategic products and services sourced from the best in class-
suppliers?
◼ What percentage of our purchasing requirements is covered by contracts?
◼ To what extent are internal operations benchmarked against specialist
suppliers?
◼ What opportunities exist for collaboration with suppliers with product
development, quality improvement, lead time reduction?

20-80 rule: 20% of the products and suppliers

represent 80% of purchasing turnover
Purchasing portfolio analysis

Kraljic’s (1983) product portfolio based on two variables:

1. Purchasing’s impact on the bottom line

the profit impact of a given supply item measured against criteria
such as cost of materials, total cost, volume purchased

2. Supply risk
measured against criteria such as short-term and long term
availability, number of potential suppliers, structure of supply
markets.
 Purchasing product portfolio
High
Leverage products Strategic products
◼ alternative sources of ◼ critical for product’s cost price
supply available ◼ dependence on supplier
◼ substitution possible

Purchasing’s Performance based

impact on partnership
Competitive bidding
financial
results Routine products Bottleneck products
◼ large product variety ◼ monopolistic market
◼ high logistics complexity ◼ large entry barriers
◼ labor intensive

Systems contracting + Secure supply + search

E-Procurement solutions for alternatives
Low
Low Supply risk High
 Supplier portfolio
High Leverage suppliers Strategic suppliers
◼ many competitors ◼ market leaders
◼ commodity products ◼ specific know-how

Supplier Buyer dominated segment Balance of power may differ

impact on among buyer-supplier
financial
Routine suppliers Bottleneck suppliers
results
◼ large supply ◼ technology leaders
◼ many suppliers with ◼ few, if any, alternative suppliers
dependent position

Reduce number of suppliers Supplier Dominated segment

Low

Low Supply risk High

Product categories
◼ Strategic products:
 Often high-tech, high-volume products
 Only one supply source available
 Significant share in cost price of end product

 Three situations possible:

◼ Buyer-dominated segment
◼ Supplier-dominated segment
◼ Balanced relationship → a partnership may develop over time
Product categories
◼ Bottleneck products:
 Relatively low value, vulnerable regarding supply
 Few alternatives available
 Supplier is often dominating the market
◼ Routine products:
 Large variety in products
 Low value per product
 High transaction costs
◼ Leverage products:
 Choice between different suppliers
 Low switching costs
 Relatively high share in end product price
Purchasing portfolio-analysis

Four basic supplier strategies:

1. Partnership
2. Competitive bidding
3. Secure supply
4. Category management and e-procurement solutions
Four basic supplier strategies
Partnership:
Objective create mutual commitment in long-term relationship

Suitable for strategic products (gearboxes, axles, optics, engines)

Activities: ◼ accurate forecast of future requirements
◼ supply risk analysis
◼ careful supplier selection
◼ ‘should cost’ analysis
◼ rolling materials schedules
◼ effective change order procedure
◼ vendor rating

Decision ◼ board level

level ◼ Cross- functional approach
Four basic supplier strategies
Competitive bidding
Objective ◼ obtain ‘best deal’ for short term
Suitable for ◼ leverage products (commodities, steel plate, wire)
Activities: ◼ improve product/market development
◼ search for alternative products/suppliers
◼ reallocate purchasing volumes over suppliers
◼ optimize order quantities
◼ ‘target pricing’

Decision ◼ board level

level ◼ purchasing
Four basic supplier strategies
Secure supply
Objective ◼ secure short- and long-term supply
◼ reduce supply risk

Suitable for ◼ bottleneck products (natural flavors, vitamins, pigments)

Activities: ◼ accurate forecast of future requirements

◼ supply risk analysis
◼ determine ranking in supplier’s client list
◼ develop preventative measures (buffer stock, consigned
stock, transportation)
◼ search for alternative products/ suppliers

Decision ◼ purchasing
level ◼ cross functional approach
Four basic supplier strategies
Category management and
e-procurement solutions
Objective ◼ reduce logistics complexity
◼ improve operational efficiency
◼ reduce number of suppliers

Suitable for ◼ routine products (consumables, supplies)

Activities: ◼ subcontract per product group/ product family
◼ standardize product assortment
◼ design effective internal order delivery and invoicing
procedures
◼ delegate order handling to internal user

Decision ◼ purchasing
level ◼ cross functional approach
Four basic supplier strategies
Partnership Competitive bidding Secure supply Category management
and e-procurement
solutions
Objective ◼ Create mutual ◼ Obtain ‘best deal’ for short ◼ Secure short and long ◼ Reduce logistic complexity
commitment in long term term term supply ◼ Improve operational
relationship ◼ Reduce supply risk efficiency
◼ Reduce number of
suppliers

Suitable for ◼ Strategic products (e.g. ◼ Leverage products (e.g. ◼ Bottleneck products (e.g. ◼ Routine products (e.g.
gearboxes, axles, engines) commodities, steelplate, wire) natural flavors, vitamins, consumables, office
pigments) supplies)

Activities ◼ Accurate forecast of future ◼ Improve product / market ◼ Accurate forecast of ◼ Subcontract per product
requirements knowledge future requirements group
◼ Supply risk analysis ◼ Search for alternative ◼ Supply risk analysis ◼ Standardize product
◼ Careful supplier selection products / suppliers ◼ Determine ranking in assortment
◼ ‘should cost’ analysis ◼ Reallocate purchasing supplier’s client list ◼ Design effective internal
◼ ‘rolling’ materials volumes over suppliers ◼ Develop preventative order delivery and invoicing
schedules ◼ Optimize order quantities measures (e.g. buffer procedures
◼ Effective change order ◼ ‘target’ pricing stock, consigned stock) ◼ Delegate order handling to
procedure ◼ Search for alternative internal user
◼ Vendor rating products / suppliers

Decision ◼ Board level ◼ Board level ◼ Purchasing ◼ Purchasing

level ◼ Cross functional approach ◼ Purchasing ◼ Cross functional ◼ Cross functional approach
approach
Purchasing portfolio

◼ Remarks:
 The use of a purchase portfolio alone is often not sufficient to
develop buying and supplier strategies.
 For a strategic relation acknowledgement from both sides is
necessary
 The Dutch windmill, analyzing buyer-seller interdependence
◼ combining both the buyers portfolio approach and the suppliers customers
portfolio approach, leads to more realistic expectations and plans with
regard to future buyer seller collaboration.
Purchasing Portfolio Management
Evaluate the impact of the supplier’s view within strategy development
EXPLOITABLE CORE EXPLOITABLE CORE
• Adversarial • Sound position • Great caution • Good match

Relative value
relationship • Improve own profit • Raise mutual • Potential long term
• Check power balance dependency relationship
• Consider other • Seek competition
sources
NUISANCE DEVELOPMENT NUISANCE DEVELOPMENT
• Mismatch • Supplier developm. • Very high risk • Potential match
• Accept short term opportunities • Seek competition • Work closely
• Change supplier • Encourage •Raise attraction together to develop
participation
Relative business

Our Company’s attractiveness

cost

EXPLOITABLE CORE EXPLOITABLE CORE

• Moderate risk • Strong position •Moderate • Good match
• Monitor price trend • Maintain cost risk • Intensify relationship
• Seek alternatives relationship Supply risk • Closely monitor • Maintain long term
• Offer other price and service relationship
opportunities • Change supplier
NUISANCE DEVELOPMENT NUISANCE DEVELOPMENT
• Possible mismatch • Good supplier • High service risk • Potential risk
• Passive relationship interest • Change supplier • Raise mutual
• Seek alternative • Offer incentives • Offer incentives dependency
supplier • Raise mutual • Offer inducements
dependency
Global sourcing
Definition:
Proactively integrating and coordinating common items and materials,
processes, designs, technologies and suppliers across worldwide
purchasing, engineering and operating locations.

◼ Advantages: Global sourcing may lower unit costs, benchmarking current

suppliers, accessing new markets, etc.
◼ Disadvantages: much more complicated distribution and logistics,
increasing handling costs, problems when dealing with different cultures,
contractual problems, higher uncertainty about on-time delivery and quality,
etc.
Conclusions

◼ Purchasing and supply management is getting a more prominent

position due to the strategic reorientation of many companies.
◼ The purchasing strategy cannot be separated from the corporate
policy or from competitive strategy.
◼ The framework developed by Monczke et al. (2005) consists of
strategic management processes on hand, and enabling processes
on the other hand.
◼ When developing specific supplier strategies purchasing product
portfolio of Kraljic (1983) may be very helpful.