Chapter 06 Category Strategy Development - M

ĐẠI HỌC FPT CẦN THƠ
Supply Chain Management

SCM201
Chapter 6
Category Strategy Development
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?
Chapter 6: Category Strategy Development 2

Chapter Overview
1
• Aligning Supply Management and Enterprise Objectives
2
• What Is a Category Strategy?
3
• Category Strategy Development (Strategic Sourcing)
4
• Types of Supply Management Strategies
5
• Evolving Sourcing Strategies

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

Integrative Strategy Development (1 of 3)
Corporate strategies
Business unit strategies
Supply management strategies
Commodity/Category strategies

Integrative Strategy Development
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 each business and links with corporate
strategy
Basis of competitive advantage

Integrative Strategy Development
Supply management strategies

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

Components of Integrative Strategy

Enabling Effective Category Strategies
Allocate 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
Sustain initiative through presentations to senior executives
who support the move towards an integrated supply
management function with other functional groups in supply
chain

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

Technology/new product development objectives

Outsource non-core competency activities
Qualify 2 new suppliers for all major services by end of fiscal year
Develop new products and services
Develop formal supplier integration process manual by 12/31

Supply base reduction objectives

Reduce number of suppliers used
Reduce total supply base by 30% in next 6 months
Reduce product complexity
Identify $300K in potential cost savings opportunities with 2 suppliers by
12/31

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

What Is a Category Strategy?
Understand business unit requirements

Conduct research on supply market characteristics
Evaluate specific suppliers and establish capabilities
Develop a strategy aligning supply capabilities and demand
requirements
Determine optimal relationship characteristics and price/cost issues
Develop business case
Develop negotiation and contract strategy
Execute the negotiation and develop contract
Establish basis for ongoing management and continuous improvement
Job of a Category Manager
Engage internal stakeholders and fully understand their

requirements
Scan the marketplace to understand market trends, cost
drivers, and risks
Build a strategy that aligns stakeholder requirements with
supply market realities

Categories Requiring a Strategy
Complex projects
Significant spend
Amount may vary by company
High risk categories that could impact operations or
customers

Important Outcomes
Minimizing risk to the enterprise

Reducing total cost of ownership for a category
Improving category performance along key dimensions

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 Act issue
What suppliers received majority of business?
Others

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

Best Practices in Spend Analysis

Spend Analysis Spreadsheet
Sort data by category

Find total spend by category
Chart top 10 by descending $ spend
Find number of suppliers by category
Chart top 10 by descending number of suppliers
Find average spend/supplier/category
Apply Pareto analysis for opportunities

Sample Spend Categories
Supplier Commodity Annual Spend Supplier Commodity Annual Spend

Rebate fulfillment Supply Company Paper $23,844,707
Rebate Company $329,873,663
call center Contract Company General contracting $22,579,113
Invest Company Investments $130,328,512 Office Company Paper $22,257,690
Advert Company Advertising $56,134,490 Graphics Company Graphic design $21,966,989
Repair Company Service repairs $49,339,218 Business
Payment Company management $20,380,275
Benefits Company Benefits $48,969,149 services
Hardware Freight Company Surface freight $19,369,010
Hardware $40,572,450
Company Paper Company Paper $15,603,682
Partco Service parts $39,910,372 Service Plan
Service plan $15,478,827
Telecom Telecommunications $31,055,599 Company
Service Company Service parts $14,868,023
Display Company Store displays $30,020.969
Consumer Consumer
Penpaper $14,833,333
Paper $29,175,843 Company financing
Company
Energy Company Energy $14,087,177
Labor Company Contract labor $27,880,363

Spend by Category

Suppliers by Category

Spend/Supplier by Category

Percent of Total Spend by Category

The Strategic Sourcing Process

Step 1: Build the Team and
the Project Charter
Identify key people and subject matter experts

Assign knowledgeable project leader
Define scope of category strategy
Publish project charter
Develop work and communication plan
Project summary document
Consider stakeholder needs

Steps in Identifying Stakeholders
Identify and name each stakeholder

Note degree to which they are ready for change
Note their capability for change
Note their power (formal or informal) to make change
happen
Identify factors which will help or inhibit the change
Identify stakeholders and factors you need to work with to
make change happen
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
• Reduction of temperature control deviations
• 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 Internal • Freedom to customize specifications
Customers • Lowest achievable purchase price and ownership cost
Procurement (other) • Absence of possible negative effects on other categories and geographies

Stakeholder Needs Analysis Tool

Sample Change Summary

Level of Commitment Analysis Steps
Name individual or groups of 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
Sample Commitment Analysis Model
Key:
X = current position
 where needs to be
Step 2: Conduct Market Intelligence
Research on Suppliers
Understand purchase requirement relative to business unit

objectives
Conduct thorough spend analysis
Each category and supplier
Total expenditures as % of total spend
Identify specific business units
Identify current suppliers
Research supply marketplace
Information required
Total annual purchase volumes
Interviews with stakeholders for forecasts
External market research on …
Key
Available capacity Technology trends
suppliers
Price data Cost data Technical

and trends and trends requirements
Environmental issues Regulatory issues Other available data

Triangulation – explore, compare, and contrast data from

multiple sources
Trade journals Annual reports Internet Books
Snowball Trade Category

Headlines
sampling consultants managers
Investment Analyst
Suppliers Other sources
reports Interviews

Porter’s Five Forces Model

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

Porter’s Five Forces Model
Other possible forces:

• Globalization
• Digitization
• Deregulation
Source: Competitive Strategy Michael E. Porter (19 80)

Market Internal Competition
Speed of industry growth

Capacity utilization
Exit barriers
Product differences
Switching costs
Diversity of competitors

Threat of New Entrants
Capital markets
Availability of skilled workers
Access to critical technologies,
inputs, or distribution
Product life cycles
B ra n d e q u i t y a n d c u s t o m e r
loyalty Risk of switching
Government deregulation Economies of scale
Pressure from Substitutes
Relative performance of substitutes

Relative price of substitutes
Switching costs
Buyer propensity to substitute

Buyer Bargaining Power
Buyer concentration
Buyer volume
Buyer switching costs
Price sensitivity
Product differences Brand identity
Impact on quality or performance
Buyer profits
Availability of substitutes
Supplier Bargaining Power
Price of major inputs

Ability to pass on price
increases
Availability of key
technologies or other
resources
T h re a t o f fo r w a rd o r Industry capacity utilization
backward integration Supplier concentration
Importance of volume to supplier
Sample SWOT Analysis

Benchmarks
Identify critical performance criteria

Identify relative competitive performance
Use of industry benchmarks
CAPS
Third party consulting firms
Use of external benchmarks
Not within same industry

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 potential pool of suppliers
must be prequalified

Value Chain Analysis
Help identify existing cost savings opportunities

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

Supplier Research
Cost structure
Financial status
Customer satisfaction
levels
Support capabilities Buyer’s fit with supplier
Relative strengths and How company is viewed
weaknesses Core capabilities
Strategy/future direction
Culture
Step 3: Strategy Development
Portfolio analysis
Critical category – strategic supplier
Routine category
Leverage category – preferred supplier
Bottleneck category – transactional supplier
Determine strategic importance of category to buyer

Portfolio Analysis

Critical Category
Critical to profitability and operations

Few qualified sources of supply
Large expenditures
Design and quality critical
Complex and/or rigid specifications
Strategy
Tactics
Actions
Routine Category
Many alternative products and services

Many sources of supply
Low value, small individual transactions
Everyday use, unspecified items
Anyone could buy it
Strategy
Tactics
Actions
Leverage Category
High expenditures, commodity items

Large marketplace capacity, ample inventories
Many alternative products and services
Many qualified sources of supply
Market /price sensitive
Strategy
Tactics
Actions
Bottleneck Category
Complex specifications requiring complex manufacturing or

service process
Few alternate productions/sources of supply
Big impact on operations/maintenance
New technology or untested processes
Strategy
Tactics
Actions
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

Supplier Segmentation
What is the current set of supplier relationships for this

category?
How do we communicate expectations for both buyer and
supplier about the long-term relationship?
Are there any suppliers that pose a risk to the buyer
including, but not limited to, assurance of supply, cost,
quality, and technology?
How should we deploy resources to develop and invest in
supplier relationships?
Process of Supplier Segmentation
Understand how the supplier views the buyer as a customer

Does the supplier believe that the category under review
creates value for its business?
Did the supplier offer new technology for this category in last
12 months?
Did supplier share future growth plans?
Has supplier been responsive to category needs?
Is category high margin business for supplier?
Reach consensus
Segments
Develop Core
Attractiveness of buyer is Size of account is significant
important Account is important strategically
Historically low volume Will invest
Potential to become core
Nuisance Exploit
Buyer is viewed as Significant proportion of buyer’s
unimportant spend
Volume is insignificant Customer not viewed as important
Ignored Watch price

Supplier Preference Matrix

Supplier Segment Rule
Strategic supplier
Substantial risk if it leaves
Preferred supplier
Commit to continuous joint transactional/ process improvements
Transaction supplier
Easily substituted by competitors

Supplier Selection Scorecards
Decision support tool

Weight various performance evaluation categories
Determine total score

Step 4: Contract Negotiation
Establishing tasks and time lines

Assigning accountabilities and process ownership
Ensuring adequate resources are made available to process
owners
Strategy communicated to all stakeholders
Market and price analysis

Develop negotiation plan and ideal contract

Create contingency plan
Conduct negotiation
Sign contract

Preferred supplier lists

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

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

Effective Competitive Bidding
Buyer 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

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

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

Supplier Scorecards
Similar to supplier selection scorecards

Typical categories
Price
Quality
Delivery reliability
Responsiveness
May include feedback and input from suppliers

Elements of the Monitoring Process
Regular review meetings to ensure that strategy is well-

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

Types of Strategies
Insourcing/outsourcing
Supply base optimization
Supply risk management
Low-cost country sourcing
Longer-term supplier Early supplier design
relationships involvement
Supplier development
Total cost of ownership
E-reverse auctions
Evolving Sourcing Strategies
Basic Beginnings Moderate Limited Integration Fully Integrated Supply

Development Chains
• Quality/cost teams • E-reverse auctions • Global sourcing • Global supply chains
• Longer-term • Ad hoc supplier • Strategic supplier with external customer
contracts alliances alliances focus
• Volume leveraging • Cross-functional • Supplier TQM • Cross-enterprise
• Supply-base sourcing teams development decision making
consolidation • Supply-base • Total cost of • Full-service suppliers
• Supplier quality focus optimization ownership • Early sourcing
• International sourcing • Nontraditional • Insourcing/outsourcing
• Cross-location purchase focus to maximize core
sourcing teams • Parts/service competencies of firms
standardization throughout supply
• Early supplier chain
involvement • E-systems
• Dock-to-stock pull
systems

SCM201 - Session 7 & 8

Chapter 06 Category Strategy Development - M

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ĐẠI HỌC FPT CẦN THƠ

Supply Chain Management

What markets will firm compete in?

Chapter 6: Category Strategy Development 2

Chapter 6: Category Strategy Development 3

Reduce cost of employees

Reduce cost of process and

Reduce cost of goods and

Chapter 6: Category Strategy Development 4

Business unit strategies

Supply management strategies

Chapter 6: Category Strategy Development 5

Chapter 6: Category Strategy Development 6

Supply management strategies

Chapter 6: Category Strategy Development 7

Chapter 6: Category Strategy Development 8

Allocate resources initially, including assessment of current

Chapter 6: Category Strategy Development 9

Cost reduction objectives

Chapter 6: Category Strategy Development 10

Technology/new product development objectives

Chapter 6: Category Strategy Development 11

Supply base reduction objectives

Chapter 6: Category Strategy Development 12

Supply assurance objectives

Chapter 6: Category Strategy Development 13

Understand business unit requirements

Engage internal stakeholders and fully understand their

Chapter 6: Category Strategy Development 15

Chapter 6: Category Strategy Development 16

Minimizing risk to the enterprise

Chapter 6: Category Strategy Development 17

Chapter 6: Category Strategy Development 18

Difficulty in obtaining timely and accurate information

Chapter 6: Category Strategy Development 19

Chapter 6: Category Strategy Development 20

Sort data by category

Chapter 6: Category Strategy Development 21

Supplier Commodity Annual Spend Supplier Commodity Annual Spend

Chapter 6: Category Strategy Development 22

Chapter 6: Category Strategy Development 23

Chapter 6: Category Strategy Development 24

Chapter 6: Category Strategy Development 25

Chapter 6: Category Strategy Development 26

Chapter 6: Category Strategy Development 27

Identify key people and subject matter experts

Chapter 6: Category Strategy Development 28

Identify and name each stakeholder

Stakeholder Example Needs

Chapter 6: Category Strategy Development 30

Chapter 6: Category Strategy Development 31

Chapter 6: Category Strategy Development 32

Name individual or groups of stakeholders

Understand purchase requirement relative to business unit

Price data Cost data Technical

Environmental issues Regulatory issues Other available data

Chapter 6: Category Strategy Development 36

Triangulation – explore, compare, and contrast data from

Trade journals Annual reports Internet Books

Snowball Trade Category

Chapter 6: Category Strategy Development 37

Porter’s Five Forces Model