The Purchasing

Chessboard®
In turbulent times, markets become more volatile and
differentiated. What does this mean for companies and
industries worldwide? That a “one size fits all” supply
strategy no longer applies.

The Purchasing Chessboard® 1

Market turbulence in recent months has caught many buyers off guard. Their procurement
strategies are often geared toward specific market conditions, and lack the flexibility to adapt to
radical changes, such as those we are experiencing today.

Past procurement strategies were largely focused on ways to counter rising raw materials prices
and scarce resources, but the current economic crisis has forced a shift toward cost
containment. Although market volatility is likely to continue over the next year, one trend is
destined to remain: Supplier markets will become more differentiated. What does this mean for
companies and industries worldwide? That a “one size fits all” strategy no longer applies.

For years, most procurement organisations have operated in supply markets that could be
addressed using relatively simple tools and techniques—RFIs (requests for information) and
RFPs (requests for proposals), bundled products and services and multi-year contracts, among
others. Today’s supply markets, however, are heterogeneous and require vastly different
methods in order to yield benefits from material costs.

In turbulent times, buyers must adopt

new tools and strategies to compete
effectively on a new playing field.
To cope with these challenges, A.T. Kearney developed The Purchasing Chessboard®, a frame-
work to address every supply and demand market condition (see sidebar: Applying The
Purchasing Chessboard: Five Steps to Success on page 4).

Differentiated Approaches for Differentiated Markets

The “old” purchasing strategies of pitting suppliers against each other, or simply requesting
price reductions, are no longer sufficient to address today’s often consolidating and more
volatile supply markets. In a recent A.T. Kearney survey, we discussed the impact of differen-
tiated markets with more than 200 CPOs and managing directors of major companies. One of
the most frequent remarks among survey participants was that procurement departments are
not up to the challenge. “We have a deficit in know-how among our procurement professionals,”
explains one survey respondent. “There is also a lack of knowledge about how to use analytic
tools to improve the process.”

The A.T. Kearney Purchasing Chessboard

To help procurement professionals master the tools of their trade, we developed The
Purchasing Chessboard— a compilation of insights and experience from more than 500
purchasing projects performed worldwide over the past three years, and thousands performed
over the past three decades. The Purchasing Chessboard constitutes 64 methods, each repre-
senting a stand-alone, differentiating way to work with suppliers to reduce costs and increase
value. These methods are derived from 16 approaches and four purchasing strategies (see
figure 1 on page 3). The following offers a brief discussion of the four major strategies.

The Purchasing Chessboard® 2

Figure 1
The Purchasing Chessboard®

Leverage competition among suppliers. The most celebrated and perhaps most frequently
employed procurement strategy is competitive tendering or commercial negotiations with a
strong focus on price. This is particularly popular when buying in a high-demand, low-supply
market, for example component parts. There are four main procurement levers: tendering,
leveraging global supplier markets, reviewing suppliers’ prices, and enforcing target prices.
Experience shows that most procurement organizations readily employ the first two levers,
but only a few companies focus on pricing and enforcing target prices.

With this in mind, we have included a cost regression analysis as a key component of The
Purchasing Chessboard. The analysis is performed via a statistical methodology that deter-
mines target prices based on the technical characteristics of a module. Once identified, the
target price becomes the fact base for renegotiating with existing suppliers. In the past three

The Purchasing Chessboard® 3

Applying the Purchasing Chessboard: Five Steps to Success

1. Place specific categories on
the Purchasing Chessboard
depending on their unique
demand or supply conditions.
2. Make sure you are applying
relevant purchasing strategies to
ca-tegories. Are you conducting
cost regression analysis to
identify the target price of
packaging material? Have you
considered a supplier fitness
program for molded plastic parts?
Would it be financially beneficial
to outsource purchasing of
indirect materials? When
performing a specification
assessment wouldn’t it make
sense to also perform a function-
ality assessment?
3. Review the competencies of
the purchasing function. Can your
team play on all relevant fields of
the Purchasing Chessboard? In
what areas should you broaden
your skill sets?
4. Do you have the right composi-
tion of cross-functional team
members involved when working
with categories? Purchasing
strategies that fall in the left top
corner of the chessboard
(innovation breakthroughs) will
require deep involvement of
engineers whereas the right top
corner of the chessboard (value
partnership) will require
corporate strategy experts.
5. Review and update the position
of categories on the Purchasing
Chessboard regularly and adjust
purchasing strategies accord-
ingly. The world is not static. For
example, the supply power of key
raw materials such as steel,
metals and chemicals has
significantly decreased in the
past year.

years, this analysis has proved successful for procurement professionals in the automotive
industry (OEMs and suppliers), mechanical engineering firms, financial institutions and
consumer goods, especially for commodities such as castings, hydraulic components,
forgings, and also for indirect categories such as IT equipment.

Seek joint advantage with suppliers. When buyers and suppliers in a transaction have equal
market power, the first strategy will not be sufficient to achieve sustainable cost or value advan-
tages. For example, the automotive industry procures numerous unique modules (for example,
engine controls) so simply putting suppliers into competition will not suffice.

In these situations, companies must strive to find common advantages with their suppliers. The
goal is to build joint cost-value partnerships, an integrated and transparent operations planning
process, and joint management along the entire value chain.

Such partnerships can reduce costs while also generating value. Suppliers and buyers work
together to spawn ideas for optimizing costs and then agree to share in the respective benefits.
What begins as an ad-hoc program could eventually turn into a longer-term strategic alliance
between buyer and supplier.

Change the nature of demand. In low-demand, high-supply markets—where suppliers are in

monopolistic or quasi-monopolistic positions due to their technical expertise—companies
must change the nature of demand. Low-demand markets stem from companies developing
long-term partnerships with key suppliers; these suppliers soon become indispensable, particu-
larly in terms of research and development (R&D) or technological expertise. Companies can
make the problem worse by not wanting to endure the time and costs associated with shifting
to new suppliers.

In such markets, the objective is to change the nature of demand. This is done by re-specifica-
tions of components, data mining, developing new technical options, and risk management.

The Purchasing Chessboard® 4

 Figure 1
The Chessboard constitutes 64 stand-alone methods

High
Invention Leverage Function- Specificat- Valuechain
Revenue Profit Strategic
8 on innovation ality ion reconfigur-
sharing sharing alliance
demand network assessment assessment ation

Core Design for Sustainab- Project Value

Design Product Supplier
7 cost manufac- ility based based
for sourcing teardown tiering
Analyslis ture management partnership sourcing

Intelligent Collaborative Virtual Total life Collabrative

Vertical Composite Process
6 deal capacity inventory cycle cost
integration benchmark benchmark
structure management management concept reduction

Political
Visible proces Vendor Supplier Supplier
Bottleneck framework Product Complexity
Supply power

5 organiza- managed develop- fitness

management manage- benchmark reduction
tion Inventory ment program
ment

Total Leverage
Sourcing Buying Cost data Standardi- RFI/RFP Expressive
4 costof market
community consortia mining zation process bidding
ownership imbalances

Mega Master Spend Supplier

Procurement Reverse Price Unbundled
3 supplier data transpar- market
outsourcing auctions benchmark prices
strategy management ency intelligence

Complia- Closed loop Supplier Bundling Cost

Make Best Factor cost
2 nce spend consolida- across regression
or buy shoring analysis
management management tion generations analysis

Bundling Cost
Contract Bundling Linear
Demand across Global LCC based
1 manag- across performance
reduction product Sourcing sourcing price
ement sites pricing
lines modeling
Low
A B C D E F G H

Low Demand power High

Source: A.T. Kearney analysis

In The Purchasing Chessboard, we call this “invention on demand” (see figure 2 on page 5),
whereby a company systematically challenges the basic elements of a technical system and
searches for alternatives throughout the field of science—essentially replacing technical
options for modules delivered by suppliers. This approach is particularly relevant for industries
where patent-protected components or systems are already successfully employed, for
instance, in aviation, engineering and automotive.

The Purchasing Chessboard® 5

Manage spend. Managing spend is particularly useful in low-demand, low-supply markets, for
example, in most indirect material categories such as maintenance, repair and operations. In
these situations, the focus should be on volume bundling, commercial data mining, co-sourcing
and demand management. Apart from transparency in spend behavior (for example, through
IT-based spend-cube solutions) it is a concrete approach to reducing costs and increasing
value.

A New Purchasing Era

The Purchasing Chessboard is a holistic framework that maps each market situation for different
purchasing organizations, allowing each to adapt to changing market conditions. The
Chessboard is designed to address the challenges in a new age of procurement—where
purchasing becomes a key contributor to a company's success.

Authors

Christian Schuh, partner, Vienna Michael Strohmer, principal, Vienna

christian.schuh@atkearney.com michael.strohmer@atkearney.com

Robert Kromoser, principal, Vienna Federico Mariscotti, director, Middle East

robert.kromoser@atkearney.com federico.mariscotti@atkearney.com

The Purchasing Chessboard® 6

The Purchasing Chessboard® 7
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