PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

Supply Management and

Commodity Strategy
Development
Chapter 6

CENGAGE LEARNING
Monczka – Handfield – Giunipero – Patterson
 Chapter Overview

 Aligning supply management and

enterprise objectives
 What is a category strategy?
 Category strategy development
 Types of supply management
strategies
 E-reverse auctions
 Evolving sourcing strategies
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 Aligning Objectives

 What markets will the firm compete in,

and on what basis?
 What are the long-term and short-term
business goals?
 What are the budgetary and economic
resource constraints, and how will
these be allocated to functional groups
and business units?
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 How Companies Make Money

Raise prices
1. Increase revenues
Increase volume

Reduce cost of employees

2. Decrease costs Reduce cost of processes/waste

Reduce cost of goods/services

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Integrative Strategy Development

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Integrative Strategy Development

 Corporate strategy
 Definition of businesses in which to
participate
 Acquisition and allocation of resources to
those businesses
 Business unit strategy
 Scope or boundaries of those businesses
 Basis of competitive advantage

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Integrative Strategy Development

 Supply management strategy

 Support the desired competitive business-
level strategies
 How to complement other functional areas
 Commodity strategy
 How to purchase commodities to support
higher-level strategies

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Components of Integrative Strategy

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 Translating Objectives Goals

 Cost reduction objectives  goals

 Be low-cost producer in industry
 Reduce material costs by 15%
 Reduce levels of inventory required to
supply internal customers
 Reduce raw material inventory ≥ 20
days’ supply

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 Translating Objectives Goals

 Technology/new product development

objectives  goals
 Outsource non-core competency activities
 Qualify 2 new suppliers by end of year
 Reduce product development time
 Develop a formal supplier integration
process manual by 12/31

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 Translating Objectives Goals

 Supply base reduction objectives 

goals
 Reduce the number of suppliers used
 Reduce the supply base by 30% in next
6 months
 Joint problem solving with remaining
suppliers
 Identify $300,000 in cost savings with 2
suppliers by end of fiscal year
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 Translating Objectives Goals

 Supply assurance objectives  goals

 Assure uninterrupted supply from
identified suppliers
 Reduce order cycle time on key parts ≥ 1
week
 Quality objectives  goals
 Increase quality of services and products
 Reduce average defects by 200 ppm on
all receipts in next fiscal year
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 Enabling Effective Category
Strategies
 Spend money on resources initially,
including assessment of current spend,
data collection, market research,
training, and people
 Validate savings or contribution to
other company objectives achieved by
supply management and drive them to
bottom line
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 Enabling Effective Category
Strategies
 Sustain the initiative through
presentations to senior executives who
support the move towards an
integrated supply management
function with other functional groups in
the supply chain

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 Conducting a Spend Analysis

 What did the business spend its money

on over the past year?
 Did the business receive the right
amount of products and services given
what was paid for them? (S/OX issue)
 What suppliers received the majority of
the business?

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 Conducting a Spend Analysis

 Did the suppliers charge an accurate

price across all divisions vs. P.O.
requirements, contracts, and SOWs?
 Which divisions spent their money on
products and services that were
correctly budgeted for?
 Are there opportunities to combine
volumes and standardize purchases?
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 Procurement KPIs Example
%

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 Spend Analysis Spreadsheet

 Sort by commodity
 Find total spend by commodity
 Chart top 10 in descending $ amount
 Sort by number of suppliers/commodity
 Chart top 10 by descending # of
suppliers
 Find average spend/supplier/commodity
 Apply Pareto analysis for opportunities
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 Sample Spend Categories
Supplier 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
Million $ Spend by Commodity

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Suppliers by Commodity

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Spend/Supplier by Commodity

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Percent of Total Spend

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 The Strategic Sourcing Process

Goal: Goal: Goal:

Goal: Goal:
Develop a Classify suppliers Continuously
Understand the Negotiate a win-win
statement of work and define improve
supply market contract
and plan sourcing approach performance

Inputs and Tools: Inputs and Tools: Inputs and Tools: Inputs and Tools:
Inputs and Tools:
Project leader; Interviews; online Market research; Negotiation plan;
Contract; supplier
other team research; portfolio matrix; supplier evaluation
scorecard
members conferences forecasted spend tool

Outputs:
Outputs: Outputs: Outputs:
Report on supply
Baseline data; Supplier evaluation Outputs: Supplier
trends; changes;
project charter; tool with desired Signed contract development plan;
pricing; capacity;
work plan relationship communication
etc.

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Step 1: Team and Project Charter

 Identify key cross-functional team

members
 Define the scope of the category
strategy
 Publish a team charter
 Develop a work plan and
communication plan

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Step 2: Conduct Market Research

 Understand the purchase requirement

relative to business unit objectives
 Conduct thorough spend analysis
 Identify specific internal users
 Identify current suppliers
 Research supply marketplace

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Step 2: Conduct Market Research

 Information required
 Total annual purchases
 Interviews with stakeholders
 External market research
Technology
Key suppliers Available capacity
trends
Price data and Cost data and Technical
trends trends requirements
Environmental Other available
Regulatory issues
issues data
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Step 2: Conduct Market Research

 Triangulation – explore, compare, and

contrast data from multiple sources

Trade Annual
Internet Books
journals reports
Snow-ball Trade Category
Headlines
sampling consultants managers
Investment
Suppliers
reports

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Step 2: Conduct Market Research

 Porter’s Five Forces Model

 SWOT analysis
 Establish benchmarks through industry
databases
 Requests for information
 Value chain analysis
 Supplier research

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 Porter’s Five Forces Model
Threat of New
Entrants

Supplier
Market Internal Buyer Bargaining
Bargaining
Competition Power
Power

Other possible forces:

Pressure from •Globalization
Source:
Competitive Strategy Substitutes •Digitization
Michael E. Porter (1980) •Deregulation
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 Market Internal Competition

 Speed of industry growth

 Capacity utilization
 Exit barriers
 Product differences
 Switching costs
 Diversity of suppliers

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 Threat of New Entrants

 Capital markets
 Availability of skilled workers
 Access to critical technologies, inputs,
or distribution
 Product life cycles

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 Threat of New Entrants

 Brand equity and customer loyalty

 Government deregulation
 Risk of switching
 Economies of scale

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 Pressure from Substitutes

 Relative performance of substitute

products and services
 Relative price
 Switching costs
 Buyer’s propensity to switch

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 Buyer Bargaining Power

 Buyer concentration
 Buyer volume
 Buyer switching costs
 Price sensitivity
 Product differences

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 Buyer Bargaining Power

 Brand identity
 Impact on quality or performance
 Buyer profits
 Availability of substituttes

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 Supplier Bargaining Power
 Price of major inputs
 Ability to pass along price increases
 Availability of key technologies or other
resources
 Threat of forward or backward integration
 Industry capacity utilization
 Supplier concentration
 Importance of volume to supplier
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 SWOT Analysis
• Low product
• Broad innovation
customer base • Traditional,
• Established unionized
product range
•
Strengths Weaknesses business
Established processes
distribution • Low patent
channels Internal Factors
protection
• Emergence of • Emerging
other uses and External Factors
overseas
markets suppliers
• Emerging Opportunities Threats • NPD costs are
overseas high
markets • Environmental
• High entry regulations
barriers

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 Benchmarks

 Identify critical performance criteria

 Identify relative competitive
performance
 Use of industry benchmarks
 CAPS
 Third party consulting firms

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 Requests for Information (RFIs)

 Use before a specific requisition is

issued
 Use to obtain general information about
services, products, or suppliers
 Does not constitute a binding document
 Use when a large or complicated
purchase is considered and when pool
of suppliers must be prequalified
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 Supplier Research

 Cost structure  How the company is

 Financial status viewed
 Customer  Core capabilities
satisfaction levels  Strategy/future
 Support capabilities direction
 Relative strengths  Culture
and weaknesses
 Buyer’s fit with
supplier
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 Step 3: Strategy Development

 Portfolio analysis
 Critical commodity – strategic supplier
 Routine commodity
 Leverage commodity – preferred supplier
 Bottleneck commodity – transactional
supplier
 Process and design capabilities
 Management capability
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 Step 3: Strategy Development

 Financial condition and cost structure

 Planning and control systems
 Environmental regulation compliance
 Longer-term relationship potential
 Weighted point supplier evaluation
systems

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 Portfolio Analysis
High

Bottleneck Critical
Complexity or
Risk Impact

Commodity Commodity

Routine Leverage
Commodity Commodity
Low
Low High
Value Potential

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 Critical Commodity

 Critical to profitability and operations

 Few qualified sources of supply
 Large expenditures
 Design and quality are critical
 Complex and/or rigid specifications

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 Critical Commodity

 Strategy
 Form partnership with suppliers
 Tactics
 Increase role of selected supplier

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 Critical Commodity

 Actions
 Heavy negotiation
 Supplier process management
 Prepare contingency plans
 Analyze market and competition
 Use functional specifications

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 Routine Commodity

 Many alternative products and services

 Many sources of supply
 Low value, small individual
transactions
 Everyday use, unspecified items
 Anyone could buy it

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 Routine Commodity

 Strategy
 Simplify acquisition process
 Tactics
 Increase role of systems
 Reduce buying effort

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 Routine Commodity

 Actions
 Rationalize supply base
 Automate requisitioning, e.g., EDI, credit
cards
 Stockless procurement
 Minimize administrative costs
 Little negotiations

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 Leverage Commodity

 High expenditures
 Large marketplace capacity with ample
inventories
 Many alternate products and services
 Many qualified sources of supply
 Market / price sensitive

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 Leverage Commodity

 Strategy
 Maximize commercial advantage
 Tactics
 Concentrate business
 Maintain competition

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 Leverage Commodity

 Actions
 Promote competitive bidding
 Exploit market cycles / trends
 Procurement coordination
 Use industry standards
 Active sourcing

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 Bottleneck Commodity

 Complex specifications requiring

complex manufacturing or service
process
 Few alternate productions / sources of
supply
 Big impact on operations / maintenance
 New technology or unleaded processes

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 Bottleneck Commodity

 Strategy
 Ensure supply continuity
 Tactics
 Decrease uniqueness of suppliers
 Manage supply

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 Bottleneck Commodity

 Actions
 Widen specifications
 Increase competition
 Develop new suppliers
 Medium-term contracts
 Attempt competitive bidding

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 Step 4: Contract Negotiation

 Establishing and tasks and time lines

 Assigning accountabilities and process
ownership
 Ensuring adequate resources are made
availability
 Strategy communicated to all
stakeholders
 Price analysis
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 Step 4: Contract Negotiation

 Preferred supplier lists

 Competitive bidding
 Negotiation

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 Price Analysis

 Defined marketplace
 Best price
 Average price
 Business unit’s price
 Expected trends in pricing

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 Effective Competitive Bidding

 Buying firm can provide qualified

suppliers with clear descriptions of the
items or services to be purchased
 Volume is high enough to justify the
cost and effort
 Buying firm does not have a preferred
supplier
 Price is dominant criterion
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 Effective Negotiation

 Item is new or technically complex item

with only vague specifications
 Purchase requires agreement about a
wide range of performance factors
 Buyer requires supplier to participate in
the development effort
 Supplier cannot determine risks and
costs without buyer’s input
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 Step 5: SRM

 Continuous monitoring of both the

strategy and the supplier
 Continuous monitoring of the
supplier’s performance on key goals
and objectives
 Supplier scorecard
 Use quarterly and review results with
supplier
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Elements of the Monitoring Process
 Regular review meetings to ensure that
the strategy is still congruent with
organizational objectives
 Share results with top management
 Assess internal customer and supplier
perceptions
 Determine if key goals have been
achieved
 Provide feedback
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 Types of Strategies

 Supply base optimization

 Supply risk management
 Global sourcing
 Longer-term supplier relationships
 Early supplier design involvement
 Supplier development
 Total cost of ownership
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 Facilitating E-Reverse Auctions

 Buyers and suppliers able to

communicate in real-time, worldwide,
via the Internet
 Development of robust, user-friendly,
third-party auction systems
 Significant improvements in goods and
service quality and cycle time reduction

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 Evolving Sourcing Strategies
Basic Moderate Limited Fully Integrated
Beginnings Development Integration Supply Chains
• Global sourcing • Global supply
• Strategic chains with
supplier external
alliances customer focus
• Supplier TQM • Cross-enterprise
• E-RAs development decision making
• Quality/cost • Ad hoc supplier • Total cost of • Full-service
teams alliances ownership suppliers
• Longer-term • Cross-functional • Nontraditional • Early sourcing
contracts sourcing teams purchase focus • Insourcing/
• Volume • Supply base • Parts/service outsourcing to
leveraging optimization standardization maximize core
• Supply base • International • Early supplier competencies of
consolidation sourcing involvement firms throughout
• Supplier quality • Cross-location • Dock-to-stock the supply chain
focus sourcing teams pull systems • E-systems
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 Phase 1: Basic Beginnings

 Supply management characterized as a

lower-level support function
 Short-term approaches
 Reactionary
 Impetus for change is driven by
management
 Ensure adequate capacity

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 Phase 1: Basic Beginnings

 Adversarial supplier relationships

 Limited resources for improvement
 Mid-level reporting
 Efficiency-related performance
measures
 Focus on price reduction
 Transaction-based information systems

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 Phase 2: Moderate Development

 Centralization of supply management

function
 Commodity management
 Company-wide databases
 Company-wide agreements
 Single sourcing with long-term
agreements

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 Phase 2: Moderate Development

 Limited cross-functional integration

 Recognition of strategic supplier
relationships
 Evaluated on achievement of
competitive objectives
 Supplier viewed as a resource
 Informal internal integration

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 Phase 3: Limited Integration

 Concurrent engineering
 Supplier development
 Lead time reduction
 Early supplier involvement
 Supply management strategies
integrated early in product and process
design activities

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 Phase 3: Limited Integration

 Evaluated on strategic contribution

 Extensive functional integration
 Focus on building competitive
advantage
 Strong external customer focus
 Global databases
 Total cost modeling

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 Phase 4: Full Integration

 Assumed a strategic orientation

 Automated non-value-adding activities
 Greater focus on strategic objectives
and activities
 Developing global supplier capabilities
 Systems thinking approach over entire
supply chain

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Observations on Strategic Sourcing

 Few organizations have fully executed

complex Phase 3 and Phase 4
strategies
 Relative complexity
 Inadequate resources and commitment
 Lack of supply base optimization
 Personnel requiring higher level skills

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