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Supply Management and Supply Management and Commodity Strategy Commodity Strategy
DevelopmentDevelopmentChapter 6Chapter 6
Chapter Overview
Aligning supply management and Aligning supply management and enterprise objectivesenterprise objectives
What is a category strategy?What is a category strategy? Category strategy developmentCategory strategy development Types of supply management Types of supply management
What markets will the firm compete in, What markets will the firm compete in, and on what basis?and on what basis?
What are the long-term and short-term What are the long-term and short-term business goals?business goals?
What are the budgetary and economic What are the budgetary and economic resource constraints, and how will resource constraints, and how will these be allocated to functional groups these be allocated to functional groups and business units?and business units?
Corporate strategyCorporate strategy Definition of businesses in which to Definition of businesses in which to
participateparticipate Acquisition and allocation of resources to Acquisition and allocation of resources to
those businessesthose businesses
Business unit strategyBusiness unit strategy Scope or boundaries of those businessesScope or boundaries of those businesses Basis of competitive advantageBasis of competitive advantage
Supply base reduction objectives Supply base reduction objectives goalsgoals Reduce the number of suppliers usedReduce the number of suppliers used
Reduce the supply base by 30% in next Reduce the supply base by 30% in next 6 months6 months
Joint problem solving with remaining Joint problem solving with remaining supplierssuppliers Identify $300,000 in cost savings with 2 Identify $300,000 in cost savings with 2
suppliers by end of fiscal yearsuppliers by end of fiscal yearPurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e
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Translating Objectives Goals
Supply assurance objectives Supply assurance objectives goals goals Assure uninterrupted supply from Assure uninterrupted supply from
identified suppliersidentified suppliers Reduce order cycle time on key parts ≥ 1 Reduce order cycle time on key parts ≥ 1
weekweek
Quality objectives Quality objectives goals goals Increase quality of services and productsIncrease quality of services and products
Reduce average defects by 200 ppm on Reduce average defects by 200 ppm on all receipts in next fiscal yearall receipts in next fiscal year
Spend money on resources initially, Spend money on resources initially, including assessment of current spend, including assessment of current spend, data collection, market research, data collection, market research, training, and peopletraining, and people
Validate savings or contribution to Validate savings or contribution to other company objectives achieved by other company objectives achieved by supply management and drive them to supply management and drive them to bottom linebottom line
Sustain the initiative through Sustain the initiative through presentations to senior executives who presentations to senior executives who support the move towards an support the move towards an integrated supply management integrated supply management function with other functional groups in function with other functional groups in the supply chainthe supply chain
What did the business spend its money What did the business spend its money on over the past year?on over the past year?
Did the business receive the right Did the business receive the right amount of products and services given amount of products and services given what was paid for them? (S/OX issue)what was paid for them? (S/OX issue)
What suppliers received the majority of What suppliers received the majority of the business?the business?
Did the suppliers charge an accurate Did the suppliers charge an accurate price across all divisions vs. P.O. price across all divisions vs. P.O. requirements, contracts, and SOWs?requirements, contracts, and SOWs?
Which divisions spent their money on Which divisions spent their money on products and services that were products and services that were correctly budgeted for?correctly budgeted for?
Are there opportunities to combine Are there opportunities to combine volumes and standardize purchases?volumes and standardize purchases?
Sort by commoditySort by commodity Find total spend by commodityFind total spend by commodity Chart top 10 in descending $ amountChart top 10 in descending $ amount Sort by number of suppliers/commoditySort by number of suppliers/commodity Chart top 10 by descending # of Chart top 10 by descending # of
supplierssuppliers Find average spend/supplier/commodityFind average spend/supplier/commodity Apply Pareto analysis for opportunitiesApply Pareto analysis for opportunities
Understand the purchase requirement Understand the purchase requirement relative to business unit objectivesrelative to business unit objectives
Conduct thorough spend analysisConduct thorough spend analysis Identify specific internal usersIdentify specific internal users Identify current suppliersIdentify current suppliers Research supply marketplaceResearch supply marketplace
Information requiredInformation required Total annual purchasesTotal annual purchases Interviews with stakeholdersInterviews with stakeholders External market researchExternal market research
Porter’s Five Forces ModelPorter’s Five Forces Model SWOT analysisSWOT analysis Establish benchmarks through industry Establish benchmarks through industry
databasesdatabases Requests for informationRequests for information Value chain analysisValue chain analysis Supplier researchSupplier research
Source:Source:Competitive StrategyCompetitive StrategyMichael E. Porter (1980)Michael E. Porter (1980)
Other possible forces:Other possible forces:•GlobalizationGlobalization•DigitizationDigitization•DeregulationDeregulation
Market Internal Competition
Speed of industry growthSpeed of industry growth Capacity utilizationCapacity utilization Exit barriersExit barriers Product differencesProduct differences Switching costsSwitching costs Diversity of suppliersDiversity of suppliers
Capital marketsCapital markets Availability of skilled workersAvailability of skilled workers Access to critical technologies, inputs, Access to critical technologies, inputs,
or distributionor distribution Product life cyclesProduct life cycles
Brand equity and customer loyaltyBrand equity and customer loyalty Government deregulationGovernment deregulation Risk of switchingRisk of switching Economies of scaleEconomies of scale
Brand identityBrand identity Impact on quality or performanceImpact on quality or performance Buyer profitsBuyer profits Availability of substituttesAvailability of substituttes
Price of major inputsPrice of major inputs Ability to pass along price increasesAbility to pass along price increases Availability of key technologies or other Availability of key technologies or other
resourcesresources Threat of forward or backward integrationThreat of forward or backward integration Industry capacity utilizationIndustry capacity utilization Supplier concentrationSupplier concentration Importance of volume to supplierImportance of volume to supplier
Use before a specific requisition is Use before a specific requisition is issuedissued
Use to obtain general information about Use to obtain general information about services, products, or suppliersservices, products, or suppliers Does not constitute a binding documentDoes not constitute a binding document
Use when a large or complicated Use when a large or complicated purchase is considered and when pool purchase is considered and when pool of suppliers must be prequalifiedof suppliers must be prequalified
Financial condition and cost structureFinancial condition and cost structure Planning and control systemsPlanning and control systems Environmental regulation complianceEnvironmental regulation compliance Longer-term relationship potentialLonger-term relationship potential Weighted point supplier evaluation Weighted point supplier evaluation
Critical to profitability and operationsCritical to profitability and operations Few qualified sources of supplyFew qualified sources of supply Large expendituresLarge expenditures Design and quality are criticalDesign and quality are critical Complex and/or rigid specificationsComplex and/or rigid specifications
ActionsActions Heavy negotiationHeavy negotiation Supplier process managementSupplier process management Prepare contingency plansPrepare contingency plans Analyze market and competitionAnalyze market and competition Use functional specificationsUse functional specifications
Many alternative products and servicesMany alternative products and services Many sources of supplyMany sources of supply Low value, small individual Low value, small individual
transactionstransactions Everyday use, unspecified itemsEveryday use, unspecified items Anyone could buy itAnyone could buy it
High expendituresHigh expenditures Large marketplace capacity with ample Large marketplace capacity with ample
inventoriesinventories Many alternate products and servicesMany alternate products and services Many qualified sources of supplyMany qualified sources of supply Market / price sensitiveMarket / price sensitive
Establishing and tasks and time linesEstablishing and tasks and time lines Assigning accountabilities and process Assigning accountabilities and process
ownershipownership Ensuring adequate resources are made Ensuring adequate resources are made
availabilityavailability Strategy communicated to all Strategy communicated to all
Defined marketplaceDefined marketplace Best priceBest price Average priceAverage price Business unit’s priceBusiness unit’s price Expected trends in pricingExpected trends in pricing
Buying firm can provide qualified Buying firm can provide qualified suppliers with clear descriptions of the suppliers with clear descriptions of the items or services to be purchaseditems or services to be purchased
Volume is high enough to justify the Volume is high enough to justify the cost and effortcost and effort
Buying firm does not have a preferred Buying firm does not have a preferred suppliersupplier
Price is dominant criterionPrice is dominant criterionPurchasing & Supply Chain Management, 4ePurchasing & Supply Chain Management, 4e
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Effective Negotiation
Item is new or technically complex item Item is new or technically complex item with only vague specificationswith only vague specifications
Purchase requires agreement about a Purchase requires agreement about a wide range of performance factorswide range of performance factors
Buyer requires supplier to participate in Buyer requires supplier to participate in the development effortthe development effort
Supplier cannot determine risks and Supplier cannot determine risks and costs without buyer’s inputcosts without buyer’s input
Continuous monitoring of both the Continuous monitoring of both the strategy and the supplierstrategy and the supplier
Continuous monitoring of the Continuous monitoring of the supplier’s performance on key goals supplier’s performance on key goals and objectivesand objectives
Supplier scorecardSupplier scorecard Use quarterly and review results with Use quarterly and review results with
Regular review meetings to ensure that Regular review meetings to ensure that the strategy is still congruent with the strategy is still congruent with organizational objectivesorganizational objectives
Share results with top managementShare results with top management Assess internal customer and supplier Assess internal customer and supplier
perceptionsperceptions Determine if key goals have been Determine if key goals have been
Supply base optimizationSupply base optimization Supply risk managementSupply risk management Global sourcingGlobal sourcing Longer-term supplier relationshipsLonger-term supplier relationships Early supplier design involvementEarly supplier design involvement Supplier developmentSupplier development Total cost of ownershipTotal cost of ownership
Buyers and suppliers able to Buyers and suppliers able to communicate in real-time, worldwide, communicate in real-time, worldwide, via the Internetvia the Internet
Development of robust, user-friendly, Development of robust, user-friendly, third-party auction systemsthird-party auction systems
Significant improvements in goods and Significant improvements in goods and service quality and cycle time reductionservice quality and cycle time reduction
Centralization of supply management Centralization of supply management functionfunction
Commodity managementCommodity management Company-wide databasesCompany-wide databases Company-wide agreementsCompany-wide agreements Single sourcing with long-term Single sourcing with long-term
Limited cross-functional integrationLimited cross-functional integration Recognition of strategic supplier Recognition of strategic supplier
relationshipsrelationships Evaluated on achievement of Evaluated on achievement of
competitive objectivescompetitive objectives Supplier viewed as a resourceSupplier viewed as a resource Informal internal integrationInformal internal integration
Concurrent engineeringConcurrent engineering Supplier developmentSupplier development Lead time reductionLead time reduction Early supplier involvementEarly supplier involvement Supply management strategies Supply management strategies
integrated early in product and process integrated early in product and process design activitiesdesign activities
Evaluated on strategic contributionEvaluated on strategic contribution Extensive functional integrationExtensive functional integration Focus on building competitive Focus on building competitive
advantageadvantage Strong external customer focusStrong external customer focus Global databasesGlobal databases Total cost modelingTotal cost modeling
Assumed a strategic orientationAssumed a strategic orientation Automated non-value-adding activitiesAutomated non-value-adding activities Greater focus on strategic objectives Greater focus on strategic objectives
and activitiesand activities Developing global supplier capabilitiesDeveloping global supplier capabilities Systems thinking approach over entire Systems thinking approach over entire
Few organizations have fully executed Few organizations have fully executed complex Phase 3 and Phase 4 complex Phase 3 and Phase 4 strategiesstrategies Relative complexityRelative complexity Inadequate resources and commitmentInadequate resources and commitment Lack of supply base optimizationLack of supply base optimization Personnel requiring higher level skillsPersonnel requiring higher level skills