PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e

Supply Management and

Commodity Strategy
Development
Chapter 6
From Organization
Strategy to Category
Strategy

2012 Cengage Learning. All rights reserved. May

not be scanned, copied or duplicated, or posted to
a publically accessible website, in whole or in part.

Chapter Overview
Aligning supply management and
enterprise objectives
Clarifying a spend category
What is a category strategy?
Developing a category strategy
Using the strategy matrix

Organizational Strategy
Supply management strategies seek to
support organizational goals
1. What are the goals of organizations?
2. What is strategy and why does it
exist?
3. Why should supply management care
about #1 and #2?
PS: Interesting Sourcing Snapshot, pg 203 of
text re global costs, country differences,
3
growth rates, etc
Purchasing & Supply Chain Management, 5e

Supply Chain Impact

ins Deepwater oil disaster on key suppliers

rig owner and drilling subcontractor for shared liability

ll Street Journal, Nov 2010

iPhone YoY sales drop 1st in 4 years

Phone sales down 14% in Q2
- Yahoo News, July 2016

Apple sweatshop problem;16 hr days,70c/hr

- Yahoo Finance, January 2012

Tesla battery fires

impact Model S sales
- Bloomberg News, May 2014

Japan Tsunami Disaster

disrupts Supply Chain
- The Wall Street Journal March 2011

Integrative Strategy Development

Corporate strategy
Define businesses
How acquire and allocate resources?

Business unit (BU) strategy

Scope of business
Basis of competitive advantage (key)

Supply management (SM) strategy

Support desired business-level strategies
How to complement other functional areas

Spend Category strategy

How to define & manage supply of a particular category to
support higher-level strategies

Strategic Mapping

Purchasing & Supply Chain Management, 5e

Generic View of SM Strategy Process

Feedback
is Continuous

Purchasing & Supply Chain Management, 5e

Material Cost impact is HUGE

Total purchasing spend as percentage of sales (2007)
70%
60

60%
56%

54% 53%
52%
49% 48%
47% 46%

Intel

Average: 43%

43% 42% 41%

38%

40

33%
27%
23%

20

17%

Semiconductor

Eng/
Const

Chemical

Industrial Aerospace/
Manuf.
Defense

Electronics

Metals &
Mining

Pharma

Diversified
Beverages
& Food

Other

Telecom
Srvcs

Retail

DOE/NNSA
Contractor

Health
Care Srvcs

Petroleum

Financial
Srvcs

Utilities

Note: Other includes Computer Hardware, Computer Software, Consumer Products, Media and Transportation Services
Source: CAPS Research Cross-Industry Report of Standard Benchmarks Published October 2008

1. SM Situation Assessment
Purpose
Simply & comprehensively capture current
situation aspects

Approach
Assess environment affecting strategy
External and internal scope changes

Frameworks for analysis (Video to explore)

SWOT
PEST
Porter 5-Forces Model (Comp,Buy,Supp,Threats,Subs)
Purchasing & Supply Chain Management, 5e

2. Analysis
Purpose
Explore situation to identify structure, courses of
action, and potential challenges / opportunities

Inputs
Known factors and structures
Uncertainties - current and future

Model situation
Quantitative: Spreadsheet & market research
Qualitative: Themes & diagrams

Output
Supply mgmt direction
Potential future contingencies
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3. Strategic Plan / Actions

Purpose
Outline a course of action to achieve goals while
accounting for uncertainties

Basic Plan
Timeline of activities & resources
Measurable objectives

Scenarios
What-if storylines based on uncertainties
Contingency plans to adapt plan

Maintenance
Governance to keep structure
Metrics (KPIs) to monitor & control
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4. Execution / Adaptation
Purpose
Drive direction/change while reacting to new
realities

Multiples tasks
Manage stakeholders / decision makers
Resource as needed
Monitoring process

Change management
Overcoming/understanding resistance
Unintended consequences
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What is a Spend Category?

Categorization has a long history
Aristotle began categorizing in 300s BC.
Linnaean taxonomy
Animal, vegetable, & mineral
Class, order, genus, species, & variety
Video on categorizing in biology

Science categorizes to structure, simplify,

relate, and ultimately understand entities

SM categorizes spend for similar reason,

but also to improve control
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What is a Spend Category?

A spend category is a convenient grouping
of like-spend items
Commodities are categories with limited
differentiation (ex; ofc supplies)

Group by inherent characteristics but also

Sourcing location (LCGs) or process
Volume or value
Use

Much depends on organization itself

Exercise: see category Exh 17.9, p. 671 re list
of Average Spend Items (next slide)
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Common Service Spend Items

Imagine a
clothing retailer

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Category Strategy Process

Goal:
Develop a
statement of work
and plan

Goal:
Understand the
supply market

Goal:
Classify suppliers
and define
sourcing approach

Goal:
Negotiate a win-win
contract

Goal:
Continuously
improve
performance

Inputs and Tools:

Project leader;
other team
members

Inputs and Tools:

Interviews; online
research;
conferences

Inputs and Tools:

Market research;
segmentation/
portfolio matrix;
forecasted spend

Inputs and Tools:

Negotiation plan;
supplier evaluation
tool

Inputs and Tools:

Contract; supplier
scorecard/metrics

Outputs:
Baseline data;
project charter;
work plan

Outputs:
Analyses on supply
trends; pricing;
portfolios; etc.

Outputs:
Category Strategy
Strategy Matrix
Supplier Eval. Tool

Outputs:
Signed contract

Outputs:
Supplier
development plan;
communication

16

Step 1: Team and Project Charter

Identify key cross-functional team
members
Define the scope of the category
strategy
Publish a team charter
Develop and communicate plan

17

Step 2: Conduct Research

Understand Focus
Purchase requirements relative to business unit objectives
Identify specific internal users / current suppliers

Collect Data
Research supply marketplace
Information required

Total annual purchases

Interviews with stakeholders re requirements
External market research
Triangulation data from multiple sources

Interpretation
Multiple analyses to understand reality (see next slide)
Use of frameworks or templates
Establish benchmarks through industry data, where
practical
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Step 2: Category Realities

Be able to describe how does/can this
category fit in the organizations direction
Spend analysis = importance / opportunity
Demand analysis = needs
Supply market analysis = capabilities
Price analysis = past / future
Portfolio (segmentn) analysis = category /
potential
Supplier analyses = current state

Summarize key factors enabling alignment of

category within the firm
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Step 3: Strategy Development

Category Strategy
Plans to achieve various supply elements
Contingency / Scenario Plans

Strategic plan for how to design supply structure

Organization: Managerial structure

Supply Base: Portfolio of suppliers
Quality: Meeting requirements
Cost: Pricing & total cost of ownership
Contracts: Exchange agreements
Processing: Procure-to-pay method

Use Strategy Matrix (next slide) to enable strategic

alignment
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Strategy Matrix (Example)

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Step 4: Contract Negotiation

Designing relationship to match strategy

Identify tasks and time lines

Assigning respbty and process ownership
Ensure adequate resources available
Strategy communicated to all stakeholders, buy in

Tools

Price quote analysis

Preferred supplier lists
Suppliers segmented (focus critical, leverage)
Competitive bidding
Negotiation
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Step 5: SRM
Assure purchasing efficacy ability
to achieve goals
Continuous monitoring of both the
strategy and the supplier
Continuous monitoring of the suppliers
performance on key goals and objectives

Supplier scorecard
Use quarterly and review results with
supplier
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Conclusion
Categories help simplify management
of supply
Align sourcing to corporate/BU
objectives
Category strategy is much of where SM
strategy happens
Understand strategy & processes to
assure category strategy success
Monitor and adapt as needs change
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Further Reading
Harvard Business Review
The secrets to successful strategy execution Neilson et al. 2008
What is strategy Porter 1996

Inside Supply Management

Operational Risk Management Event Scenario Planning CAPS
Research 2013
Turn a Commodity Strategy Into a Competitive Advantage
Reaume 2012
Drive Supply Chain Excellence Through Performance Metrics
Desai 2011

Supply Chain Management Review

How Unilever Aligned its Supply Chain and Business Strategies
Monahan et al. 2007
Strategic Planning: Now More Important Than Ever Shapiro 2004
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