PURCHASING & SUPPLY CHAIN MANAGEMENT, 6e

Category Strategy
Click to edit Master title style
Development
Chapter 6

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 Chapter Overview

 Aligning supply management and

enterprise objectives
 What is a category strategy?
 Category strategy development
 Category strategy outcomes
 E-reverse auctions
 Stages of supply management
transformation
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 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?

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 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

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 Integrative Strategy Development

Corporate strategies

Business unit strategies

Supply management strategies

Category/Sourcing strategies

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 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
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 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

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 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

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 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

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

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 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

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 Translating Objectives Goals

 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

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 Translating Objectives Goals

 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

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 Translating Objectives Goals

 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

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 What Is a Category Strategy?

 Activities
 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

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 What Is a Category Strategy?

 Activities (cont.)
 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
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 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

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 Categories Requiring a Strategy

 Complex projects
 Significant spend
 Amount may vary by company
 High risk categories that could impact
operations or customers

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 Important Outcomes

 Minimizing risk to the enterprise

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

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 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?
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 Conducting a Spend Analysis

 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?

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 Conducting a Spend Analysis

 Are there opportunities to …?

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

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 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

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 Best Practices in Spend Analysis
%
Average Best-in-class
90
80
70
60
50
40
30
20
10
0

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 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
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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
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Learning.Company
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not be scanned, copied or duplicated, or posted to
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 Spend by Category
400
Total Annual Spend
350
300
Millions $

250
200
150
100
50
0
t re ts r s s r s
en i ng i n g
a n p e rt
ce b o n
l l m t i s
act
d w m
e Pa pa rvi l a
at io
lf i
ver
n tr ar st
i ce se
a ct ic
u H e r n
e
f A d co In
v e rv gt n t u
t l m m
b a
e ra
S
& Co om
Re en es
s
le
c
G i n T e
u s
B

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 Suppliers by Category

3,000
# of Suppliers
2,500
2,000
1,500
1,000
500
0
r
i n g
l i e rgy rity i n g
ces i o n n s
n ce n ce
tr is p p n e c u
act rvi n it
a tio n a n a
su E e r se
ve S n t
t c og n ic n te
i n te
Ad l l$ c o g re u ai a
a al m & m m m
m e r & s o m g s
S n s d c in n d
e s r e d
G i ne w
a
T el u il rou
u s A B G
B
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 Spend/Supplier by Category
$6,000
Spend/supplier (Million $)
$5,000
$4,000
$3,000
$2,000
$1,000
$0
gir d s e s g s ts al
il n a n e i c e i n e a t
u e p f u
h in rv v ic a s vic m en
r e r r r r
ha m a sh ac r s se
e
le se
o o ar
ce uu c m te e cl n F l C
n c y g a i n i i o
l ia V a ett in W u s eh at
p P d o V t
p en m p re
A V i
L t er
In

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 Percent of Total Spend by Category
16%
Percent
14%
12%
10%
8%
6%
4%
2%
0%
t re ts r ts s r s
en i ng i n g
a n p e r ce b o n
l l m t i s
act
d w m
e P a pa rvi l a t io
l fi ve r tr ar st
i ce se
a ct i ca
fu d n H ve v s tr n
A co In
r s n u
ate l Se n e o m
b e ra si C o m
Re en B u
l ec
G T e

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 The Strategic Sourcing Process
Step 1 Step 2 Step 3 Step 4
Step 5
Build the Market Strategy Contract
SRM
Team Research Development Negotiation

GOAL: GOAL: GOAL: GOAL: GOAL:

Develop a scope of Understand the Classify suppliers Negotiate a win-win Continuously
work and plan supply market and define contract improve
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.

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 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

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 Step 1: Build the Team
and the Project Charter
 Project summary document
 What is “burning platform” for project?
 What is scope of category?
 Who will be impacted by decision?
 What is process that will be followed?
 How much time and effort will be required?
 What is nature of potential savings and
value to be created?

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 Step 1: Build the Team
and the Project Charter
 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

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 Step 1: Build the Team
and the Project Charter
 Consider stakeholder needs (cont.)
 Ensure success criteria are mutually
consistent and deliverable
 Work with stakeholders to reconcile gaps
and differences
 Check and amend success criteria on
ongoing basis

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 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

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 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 the change
 Identify stakeholders and factors you
need to work with to make change
happen
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 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
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 Stakeholder Needs Analysis Tool
Change
Stakeholders Example Needs
(H, M, L)

Conclusions
(Issues to Address)

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 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

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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
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Sample Commitment Analysis Model
Let Make
Individual (or Group) Oppose Support
Happen Happen
CEO X √
Sourcing Council X √
Quality X √
Manufacturing X √
Supply Management X √
Business √ X

Key:
X = current position
√ = where needs to be

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 Planning for the Team Meeting

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

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 The Meeting Agenda

 Define challenges and objectives of

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

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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
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Step 2: Conduct Market Intelligence
Research on Suppliers
 Information required
 Total annual purchase volumes
 Interviews with stakeholders for forecasts
 External market research on …
Key Technology
Available capacity
suppliers trends
Price data Cost data Technical
and trends and trends requirements
Environmental Other available
Regulatory issues
issues data
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Step 2: Conduct Market Intelligence
Research on Suppliers
 Triangulation – explore, compare, and
contrast data from multiple sources

Trade Annual
Internet Books
journals reports
Snowball Trade Category
Headlines
sampling consultants managers
Investment Analyst Other
Suppliers
reports Interviews sources

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Step 2: Conduct Market Intelligence
Research on Suppliers
 Porter’s Five Forces Model
 SWOT analysis
 Supplier 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 Buyer
Market Internal
Bargaining Bargaining
Competition
Power Power

Other possible forces:

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

 Speed of industry growth

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

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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 substitutes

 Relative price of substitutes
 Switching costs
 Buyer propensity to substitute

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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 substitutes

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 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
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 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

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 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
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 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
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 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

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 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
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 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

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 Portfolio Analysis
High
Complexity or

Bottleneck Critical
Risk Impact

Routine Leverage
Low
Low High
Value Potential
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 Critical Category

 Critical to profitability and operations

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

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 Critical Category

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

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 Critical Category

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

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 Routine Category

 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 Category

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

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 Routine Category

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

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 Leverage Category

 High expenditures, commodity items

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

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 Leverage Category

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

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 Leverage Category

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

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 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

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 Bottleneck Category

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

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 Bottleneck Category

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

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 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

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 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?

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 Supplier Segmentation

 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?

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 Process of Supplier Segmentation

 Understand how the supplier views the

buyer as a customer
 Does the buyer’s business in this category
align with the supplier’s long-term business
growth?

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 Process of Supplier Segmentation

 Does the supplier believe that the

category under review creates value for
its business?
 Does the buyer represent more than 5-10%
of the supplier’s business?
 Does the supplier have multiple locations?

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 Process of Supplier Segmentation

 Does the supplier believe that the

category under review creates value for
its business? (cont.)
 Does the supplier supply products or
services from other categories?
 Does the supplier consider the buyer’s
business important for marketing and brand
affiliation?

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 Process of Supplier Segmentation

 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
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 Segments

 Core
 Size of account is significant
 Account is important strategically
 Will invest
 Develop
 Attractiveness of buyer is important
 Historically low volume
 Potential to become core

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 Segments

 Exploit
 Significant proportion of buyer’s spend
 Customer not viewed as important
 Watch price
 Nuisance
 Buyer is viewed as unimportant
 Volume is insignificant
 Ignored

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 Supplier Preference Matrix
High
Attractiveness

Development Core
of Account

Nuisance Exploit

Low
Low High
Relative Spend
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 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

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 Supplier Selection Scorecards

 Decision support tool

 Weight various performance evaluation
categories
 Determine total score

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 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
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 Step 4: Contract Negotiation

 Develop negotiation plan and ideal

contract
 Create contingency plan
 Conduct negotiation
 Sign contract

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 Step 4: Contract Negotiation

 Preferred supplier lists

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

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 Price Analysis

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

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 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
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 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
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 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

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 Supplier Scorecards

 Similar to supplier selection scorecards

 Typical categories
 Price
 Quality
 Delivery reliability
 Responsiveness
 May include feedback and input from
suppliers
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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
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 Types of Strategies

 Insourcing/outsourcing
 Supply base optimization
 Supply risk management
 Low-cost country sourcing
 Longer-term supplier relationships

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 Types of Strategies

 Early supplier design involvement

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

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 Insourcing/Outsourcing

 Complex and strategic decision

 Long-term impact
 Factors
 Emerging new technologies and products
 Business strategies on core competencies
 Poor performance levels
 Demand changes
 Geographical location of demand

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 Supply Base Optimization

 Process of determining the appropriate

number and mix of suppliers to
maintain
 Usually refers to a smaller supply base
 Requires in-depth analysis of current
and future number of suppliers needed

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 Supply Risk Management

 Greater levels of outsourcing in low

cost countries
 Potential for operational disruption
 High cost impact
 Volatility of prices
 Growth of enterprise risk management
systems

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 Sources of Supply Risk

 War and terrorism  Weather

 Strikes and labor  Poor communication
disruptions of customer
 Increased regulatory requirements
and customs delays  Part shortages
 Fire and theft  Quality problems

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 Low-Cost Country Sourcing
 Local content rules
 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
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 Challenges in Low-Cost Country
Sourcing
 Inexperience with global business
processes and practices
 Lack of qualified personnel to develop,
negotiate, and manage long material
pipelines
 More complex logistics and currency
fluctuations
 Different cultural business practices
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Longer-Term Supplier Relationships

 Generally > 3 years

 Use with suppliers that have exceptional
performance or unique technological
expertise
 Could include joint product
development with shared development
costs and intellectual property

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 Early Supplier Design Involvement

 Key supplier participation at the

concept or predesign phase of NPD
 May be informal
 Cross-functional teams
 Simultaneous engineering approach

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 Supplier Development

 Inadequate supplier performance

 But still want to maintain supplier in the
supply base
 Work directly with supplier to facilitate
performance improvement
 Long-term benefits to both buyer and
supplier

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 Total Cost of Ownership

 Process of identifying cost

considerations beyond unit price,
transportation, and tooling
 Need to determine costs associated
with late delivery, poor quality, or other
supplier nonperformance
 Determine cause of variances

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 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
Internet-based 3rd-party software
 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
• 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

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 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 supply 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
 Supply base optimization
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 Phase 2: Moderate Development

 Some centralization of supply

management function
 Category management
 Company-wide databases
 Company-wide agreements to leverage
volumes
 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 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
 1st/2nd tier suppliers more involved
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 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
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 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
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 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

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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 require higher level skills

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