Chapter 6 - Strategy

SOURCING AND SUPPLY CHAIN MANAGEMENT, 5e
Supply Management and

Commodity
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to edit Master title style
Development
Chapter 6
© 2012 Cengage Learning. All rights reserved. May

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a publically accessible website, in whole or in part. SOUTH-WESTERN CENGAGE LEARNING
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
2
a publically accessible website, in whole or in part. Sourcing and Supply Chain Management, 5e
Aligning Objectives
 What markets will firm compete in?

 On what basis?
 What are the long-term and short-term
business goals?
 What are budgetary and economic
resource constraints?
 How will these be allocated to functional
groups and business units?

3
How Companies Create
Shareholder Value
Raise prices
1. Increase revenues
Increase volume
Reduce cost of employees

(downsize)
Reduce cost of process and

2. Decrease costs
waste
Reduce cost of goods and

services

4
Integrative Strategy Development
Corporate strategies
Business unit strategies
Supply management strategies
Commodity/Category strategies

5
 Corporate strategies
 Definition of businesses in which to
participate
 Acquisition and allocation of resources to
these business units
 Business unit strategies
 Scope or boundaries of these businesses
 Basis of competitive advantage

6
 Supply management strategies

 Support desired competitive business-
level strategies
 How to complement other functional
strategies
 Commodity/Category strategies
 How to purchase commodities to support
higher-level strategies

7
Components of Integrative Strategy
Company objectives
Cross-functional
Continuous
business
improvement
objectives
Performance
Purchasing and
measurement
supply chain goals
review
Performance Purchasing and

measurement supply chain
system strategies

8
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

9
Enabling Effective Category Strategies
 Sustain initiative through presentations

to senior executives who support move
towards integrated supply management
function with other functional groups in
supply chain

10
Translating Objectives Goals
 Cost reduction objectives

 Be low-cost producer in industry
 Reduce material costs by 15% in 1 year
 Reduce levels of inventory required to
supply internal customers
 Reduce raw material inventory ≤ 20
days’ supply

11
 Technology/new product development

objectives
 Outsource non-core competency activities
 Qualify 2 new suppliers for all major
services by end of fiscal year
 Reduce product development time
 Develop formal supplier integration
process manual by 12/31

12
 Supply base reduction objectives

 Reduce number of suppliers used
 Reduce total 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

13
 Supply assurance objectives

 Assure uninterrupted supply from
identified suppliers
 Reduce cycle time on key parts to ≤ 1
week within 6 months
 Quality objectives
 Increase quality of services and products
 Reduce average defects by 200 ppm on
all material receipts within 1 year
14
Conducting a Spend Analysis
 What did the business spend its money

on over the past year?
 Did the business receive right amount
of products and services given what it
paid for them?
 Sarbanes/Oxley issue
 What suppliers received majority of
business?
15
 Did suppliers charge 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?

16
 Are there opportunities to …?

 Combine volumes of spending from
different businesses
 Standardize product requirements
 Reduce number of suppliers
 Exploit market conditions for better pricing

17
Challenges in Conducting
a Comprehensive Spend Analysis
 Difficulty in obtaining timely and
accurate information
 Impact of mergers and acquisitions
 Different recording procedures
 Different accounting systems
 Difficulty in translating data between
systems

18
Best Practices in Spend Analysis
%
Average Best-in-class
90
80
70
60
50
40
30
20
10
0
Spend under Current year % of % of supply % of
management cost spending that base suppliers
reductions is non- accounting electronically
compliant for 80% of enabled
spend

19
Spend Analysis Spreadsheet
 Sort data by commodity

 Find total spend by commodity
 Chart top 10 by descending $ spend
 Find number of suppliers by commodity
 Chart top 10 by descending number of
suppliers
 Find average spend/supplier/commodity
 Apply Pareto analysis for opportunities
20
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
© 2012 Cengage Learning. All
Consumer rights reserved. May
Company Consumer financing $14,833,333
a publically accessible
Energy website,
Company in whole or in part. Energy $14,087,177
Spend by Commodity
400 Total Annual Spend
350
300
Millions $
250
200
150
100
50
0

22
Suppliers by Commodity
3,000 # of Suppliers
2,500
2,000
1,500
1,000
500
0

23
Spend/Supplier by Commodity
$6,000 Spend/supplier (Million $)
$5,000
$4,000
$3,000
$2,000
$1,000
$0

24
Percent of Total Spend
16% Percent
14%
12%
10%
8%
6%
4%
2%
0%

25
The Strategic Sourcing Process
Step 1 Step 2 Step 3 Step 4 Step 5

Build the Team Market Research Strategy Development Contract Negotiation SRM
GOAL: GOAL: GOAL: GOAL: GOAL:

Develop a Understand the Classify suppliers Negotiate a win-win Continuously
statement of work supply market and define contract improve
and plan sourcing approach performance
INPUTS & TOOLS: INPUTS & TOOLS: INPUTS & TOOLS: INPUTS & TOOLS: INPUTS & TOOLS:
Project leader; Interviews; Market research; Negotiation plan; Contract;
Other team Online research; Portfolio matrix; Supplier evaluation Supplier scorecard
members Conferences Forecasted spend tool
OUTPUTS: OUTPUTS: OUTPUTS: OUTPUTS: OUTPUTS:

Baseline data; Report on supply Supplier evaluation Signed contract Supplier
Project charter; trends, changes, tool with desired development plan;
Work plan pricing, capacity, relationship Communication
etc.

26
Step 1: Build the Team
and the Project Charter
 Identify key cross-functional team
members and subject matter experts
 Assign knowledgeable project leader
 Define scope of category strategy
 Publish project charter
 Develop work and communication plan

27
 Project summary document
 What is prime motivation for project?
 What is scope of commodity?
 Who will be impacted by decision?
 What is process that will be followed?
 How much time and efforts will be required?
 What is nature of potential savings and
value created?

28
 Consider stakeholder needs
 Draw map of stakeholders and verify with
key stakeholders
 Identify success criteria for each
stakeholder
 Check perceptions of each stakeholder’s
success criteria
 Critically review all success criteria

29
 Consider stakeholder needs (cont.)
 Ensure success criteria are mutually
consistent and in line with what can be
delivered
 Work with stakeholders to reconcile gaps
and differences
 Check and amend success criteria on
ongoing basis

30
Steps in Identifying Stakeholders
 Identify and name each stakeholder

 Note degree to which they are ready for
change
 H, M, or L
 Note their capability for change
 H, M, or L

31
Steps in Identifying Stakeholders
 Note their power (formal or informal) to

make change happen
 H, M, or L
 Identify factors which will help or
inhibit change
 Identify stakeholders and factors you
need to work with to make change
happen
32
Sample Stakeholder Map
Stakeholder Example Needs
• Creation and capture of both current and future value
Senior Management
• Adherence to the corporate business strategy
• Assurance of supply and no discontinuity in deliveries
Operations
• Compliance to GMP quality standards
Supply Chain • Reduction of temperature control deviations
Management • Inventory visibility and control of expired product
• Product characteristics satisfying brand equity criteria
Strategic Marketing • Superb product quality
• Customizable product design
• Transactional service operational efficiency
Transactional Services
• Feasibility of planned information sharing arrangements
Non-Direct Material • Freedom to customize specifications
Internal Customers • Lowest achievable purchase price and ownership cost
• Absence of possible negative effects on other categories
Procurement (other)
and geographies
33
Stakeholder Needs Analysis Tool
Change
Stakeholders Example Needs
(H, M, L)
Conclusions
(Issues to Be Addressed)
34
Sample Change Summary
Readiness Capability Power

Stakeholder
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

35
Level of Commitment Analysis Steps
 Name individual or group stakeholders

 Mark current status
 Opposing the change
 Passively letting it happen
 Actively supporting it
 Forcefully making it happen
 Mark where stakeholder needs to be for
project to be successful
36
Sample Commitment Analysis Model
Let Make
Individual (or Group) Oppose Support
Happen Happen
CEO X √
Corporate Sourcing Council X √
J. Torrez X √
E. Alegria X √
J. Cox X √
J. Gramma √ X
Key:
X = current position
√ = where needs to be

37
Planning for the Team Meeting
 Understanding …
 Who needs to be part of team?
 Who may have challenges with change?
 Rationale for lack of willingness to change
 Who can you count on to commit and
support team?

38
The Meeting Agenda
 Define challenges and objectives of

team
 Identify sponsors at high level
 Maintain communication with sourcing
council and/or key stakeholders
 Meet with team members individually
and explain situation

39
Step 2: Conduct Market Research on
Suppliers
 Understand purchase requirement
relative to business unit objectives
 Conduct thorough spend analysis
 Each commodity and supplier
 Total expenditures as % of total spend
 Identify specific internal users
 Identify current suppliers
 Research supply marketplace
40
Suppliers
 Information required
 Total annual purchase volumes
 Interviews with stakeholders for forecasts
 External market research on …
Key Available Technology
suppliers capacity trends
Price data Cost data Technical
and trends and trends requirements
Environmental Regulatory Other
issues issues available data
41
Suppliers
 Triangulation – explore, compare, and
contrast data from multiple sources
Trade Annual
Internet Books
journals reports
Snowball Trade Category
Headlines
sampling consultants managers
Investment Industry Other
Suppliers
reports analysts sources

42
Suppliers
 Porter’s Five Forces Model
 SWOT analysis
 Supplier analysis
 Establish benchmarks through industry
databases
 Requests for information
 Value chain analysis
 Supplier research
43
Porter’s Five Forces Model
Threat of New
Entrants
Supplier Buyer
Market Internal
Bargaining Bargaining
Competition
Power Power
Other possible forces:

Source:
Competitive Strategy
Pressure from • Globalization
Michael E. Porter (1980)
Substitutes • Digitization
• Deregulation
44
Market Internal Competition
 Speed of industry growth

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

45
Threat of New Entrants
 Access to capital markets

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

46
Threat of New Entrants
 Brand equity and customer loyalty

 Government deregulation
 Risk of switching
 Economies of scale

47
Pressure from Substitutes
 Relative performance of substitute

products and services
 Relative price of substitutes
 Switching costs
 Buyer propensity to switch

48
Buyer Bargaining Power
 Buyer concentration
 Buyer volume
 Buyer switching costs
 Price sensitivity
 Product differences

49
Buyer Bargaining Power
 Brand identity
 Impact on quality or performance
 Buyer profits
 Availability of substitutes

50
Supplier Bargaining Power
 Price of major inputs
 Ability to pass on 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
51
Sample SWOT Analysis
• Broad • Low product
customer base innovation
• Established Internal Factors • Traditional,
product range unionized
• Established business
distribution Strengths Weaknesses processes
channels • Low patent
protection
• Emergence of • Emerging
other uses and overseas
markets Opportunities Threats suppliers
• Emerging • New product
overseas development
External Factors
markets costs are high
• High barriers to • Environmental
entry regulations

52
Benchmarks
 Identify critical performance criteria

 Identify relative competitive
performance
 Use of industry benchmarks
 CAPS
 Third party consulting firms
 Use of external benchmarks
 Not in same industry
53
Requests for Information (RFIs)
 Use before specific requisition is

issued
 Use to obtain general information about
services, products, or suppliers
 Does not constitute binding agreement
 Use when large or complicated
purchase is considered and when pool
of suppliers must be prequalified
54
Value Chain Analysis
 Help identify cost savings

opportunities
 Provide insights to …
 Origin of products
 Where products end up
 i.e., “cradle to grave” analysis

55
Supplier Research
 Cost structure  How 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
56
Step 3: Strategy Development
 Portfolio analysis
 Critical commodity – strategic supplier
 Routine commodity
 Leverage commodity – preferred supplier
 Bottleneck commodity – transactional
supplier
 Determine strategic importance of
commodity to buyer

57
Portfolio Analysis
High
Complexity or
Risk Impact
Bottleneck Critical
Routine Leverage
Low
Low High
Value Potential
58
Critical Commodity
 Critical to profitability and operations

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

59
Critical Commodity
 Strategy
 Form partnership with suppliers
 Tactics
 Increase role of selected supplier

60
Critical Commodity
 Actions
 Heavy negotiation
 Supplier process management
 Prepare contingency plans
 Analyze market and competition
 Use functional specifications

61
Routine Commodity
 Many alternative products and services

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

62
Routine Commodity
 Strategy
 Simplify acquisition process
 Tactics
 Increase role of systems
 Reduce buying effort

63
Routine Commodity
 Actions
 Rationalize supply base
 Automate requisitioning, e.g., EDI, p-cards
 Stockless procurement
 Minimize administrative costs
 Little negotiating

64
Leverage Commodity
 High expenditures, commodity items

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

65
Leverage Commodity
 Strategy
 Maximize commercial advantage
 Tactics
 Concentrate business
 Maintain competition

66
Leverage Commodity
 Actions
 Promote competitive bidding
 Exploit market cycles/trends
 Procurement coordination
 Use industry standards
 Active sourcing

67
Bottleneck Commodity
 Complex specifications requiring

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

68
 Strategy
 Ensure supply continuity
 Tactics
 Decrease uniqueness of suppliers
 Manage supply

69
 Actions
 Widen specifications
 Increase competition
 Develop new suppliers
 Medium-term contracts
 Attempt competitive bidding

70
Supplier Evaluation
 Capabilities
 Process and design capabilities
 Management capability
 Financial condition and cost structure
 Planning and control systems
 Environmental regulation compliance
 Longer-term relationship potential
 Supplier selection scorecards

71
Step 4: Contract Negotiation
 Establishing tasks and time lines

 Assigning accountabilities and process
ownership
 Ensuring adequate resources are made
availability
 Strategy communicated to all
stakeholders
 Market and price analysis
72
 Develop negotiation plan and ideal

contract
 Create contingency plan
 Conduct negotiation
 Sign contract

73
 Preferred supplier lists

 Preference in future contracts
 Proven performance and capabilities
 Types of final supplier selection
 Competitive bidding
 Negotiation

74
Price Analysis
 Define marketplace
 Best price
 Average price
 Business unit’s price
 Expected trends in pricing

75
Effective Competitive Bidding
 Buying firm can provide qualified

suppliers with clear descriptions of
items or services to be purchased
 Volume is high enough to justify cost
and effort
 Buying firm does not have preferred
supplier
 Price is usually dominant criterion
76
Effective Negotiation
 Item is new or technically complex,

with only vague specifications
 Purchase requires agreement on wide
range of performance factors
 Buyer requires supplier to participate in
development effort
 Supplier cannot determine risks and
costs without additional buyer input
77
Step 5: Supplier Relationship
Management
 Continuous monitoring of both strategy
and supplier
 Continuous monitoring of supplier’s
performance using predetermined
criteria on goals and objectives
 Supplier scorecard
 Update, usually quarterly
 Review results with supplier
78
Supplier Scorecards
 Typical categories
 Price
 Quality
 Delivery reliability
 Responsiveness
 May include feedback and input from
suppliers

79
Elements of the Monitoring Process
 Regular review meetings to ensure that
strategy is aligned with buyer’s
organizational objectives
 Share results with top management
 Assess internal customer and supplier
perceptions
 Determine if key goals have been
achieved
 Provide feedback to those involved
80
Types of Strategies
 Insourcing/outsourcing
 Supply base optimization
 Supply risk management
 Global sourcing
 Longer-term supplier relationships

81
Types of Strategies
 Early supplier design involvement

 Supplier development
 Total cost of ownership
 E-reverse auctions

82
Insourcing/Outsourcing
 Complex and strategic decision

 Long-term impact
 Factors
 Emerging technologies
 Business strategies on core competencies
 Poor performance levels
 Demand changes
 Geographical location of demand
83
Enterprise Risk Management
 Greater levels of outsourcing in low

cost countries
 Potential for operational disruption
 High cost impact
 Volatility of prices

84
Global Sourcing
 Provide immediate and dramatic

improvements in cost and quality
 Introduces competition to domestic
suppliers
 Gain exposure to product and process
technology
 Increase number of sources
 Establish presence in foreign markets
85
Facilitating E-Reverse Auctions
 Must have clearly defined specifications

 Buyers and suppliers are 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
86
Evolving Sourcing Strategies
Basic Moderate Limited Fully Integrated
Beginnings Development Integration Supply Chains
• Quality/cost • E-reverse • Global sourcing • Global supply
teams auctions • Strategic supplier chains with
• Longer-term • Ad hoc supplier alliances external
contracts alliances • Supplier TQM customer focus
• Volume • Cross-functional development • Cross-enterprise
leveraging sourcing teams • Total cost of decision making
• Supply base • Supply base ownership • Full-service
consolidation optimization • Nontraditional suppliers
• Supplier quality • International purchase focus • Early sourcing
focus sourcing • Parts/service • Insourcing/
• Cross-location standardization outsourcing to
sourcing teams • Early supplier maximize core
involvement competencies of
• Dock-to-stock firms throughout
pull systems supply chain
• E-systems
87
Phase 1: Basic Beginnings
 Supply management characterized as

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

88
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
 Supply base optimization
89
Phase 2: Moderate Development
 Some centralization of supply

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

90
Phase 2: Moderate Development
 Limited cross-functional integration

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

91
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
 2nd/3rd tier suppliers more involved
92
Phase 3: Limited Integration
 Supply management evaluated on

strategic contribution
 Extensive functional integration
 Focus on building competitive
advantage
 Strong external customer focus
 Global databases
 Total cost modeling
93
Phase 4: Fully Integrated
Supply Chains
 Supply management assumes strategic
orientation
 Automated non-value-adding activities
 Greater focus on strategic objectives
and activities
 Developing global supplier capabilities
 Demand higher performance from
suppliers
94
Phase 4: Fully Integrated
Supply Chains
 More aggressive development of
supplier capabilities
 Global suppliers
 Full-service suppliers
 Systems thinking approach over entire
supply chain
 World-class performance expectations

95
Observations on Supply Management
Strategy Evolution
 Few organizations have fully executed
complex Phase 3 and Phase 4
strategies
 Relative complexity
 Inadequate resources and commitment
 Lack of supply base optimization effort
 Personnel requiring higher level skills

96

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SOURCING AND SUPPLY CHAIN MANAGEMENT, 5e

Supply Management and

© 2012 Cengage Learning. All rights reserved. May

 Aligning supply management and

 What markets will firm compete in?

© 2012 Cengage Learning. All rights reserved. May

Reduce cost of employees

Reduce cost of process and

Reduce cost of goods and

© 2012 Cengage Learning. All rights reserved. May

Business unit strategies

Supply management strategies

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Supply management strategies

© 2012 Cengage Learning. All rights reserved. May

Performance Purchasing and

© 2012 Cengage Learning. All rights reserved. May

 Spend money on resources initially,

© 2012 Cengage Learning. All rights reserved. May

 Sustain initiative through presentations

© 2012 Cengage Learning. All rights reserved. May

 Cost reduction objectives

© 2012 Cengage Learning. All rights reserved. May

 Technology/new product development

© 2012 Cengage Learning. All rights reserved. May

 Supply base reduction objectives

© 2012 Cengage Learning. All rights reserved. May

 Supply assurance objectives

 What did the business spend its money

 Did suppliers charge accurate price

© 2012 Cengage Learning. All rights reserved. May

 Are there opportunities to …?

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Sort data by commodity

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© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

Step 1 Step 2 Step 3 Step 4 Step 5

GOAL: GOAL: GOAL: GOAL: GOAL:

OUTPUTS: OUTPUTS: OUTPUTS: OUTPUTS: OUTPUTS:

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

© 2012 Cengage Learning. All rights reserved. May

 Identify and name each stakeholder

© 2012 Cengage Learning. All rights reserved. May

 Note their power (formal or informal) to

Readiness Capability Power

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 Name individual or group stakeholders

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© 2012 Cengage Learning. All rights reserved. May

 Define challenges and objectives of

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© 2012 Cengage Learning. All rights reserved. May

Other possible forces:

 Speed of industry growth

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 Access to capital markets