MTH6

Sourcing Strategy Development

BUS 416W

FALL 2002

Purchasing and Supply Chain Management

Purchasing Strategy

The strategy of an organization, or of a subunit of a larger organization, is a conceptualization of: Long-term objectives and purposes of the

organization Broad constraints and policies that restrict

activities Current set of action plans and near-term goals

expected to help achieve an organization’s objectives

Defining Strategy

Strategy Levels

Departmental Strategies

Functional Strategies

Business Unit Strategies

Strategies require horizontal

and vertical alignment!

Corporate Level Strategies

Data Collection Sources

Internet Searcheswww.transportlink.comwww.thomasregister.comwww.stats.bls.gov/ppihome.htm

Prior Purchase Files

Discussions with users, customers, purchasing colleagues and others

Purchasing and Supply Chain Management

Portfolio Analysis

Portfolio Analysis

Strategic Leverage

Acquisition Multiple

Number of Capable Suppliers

Value toBuyer

Few Many

Low

High

A Tool for Developing Supply Strategies!

Portfolio Analysis

Portfolio Analysis Quadrant Characteristics: Acquisition Fewer capable suppliers within a region Low priority items Fewer total dollars spent May consume a disproportionate amount of time and

dollars to acquire Developed quality and technology Able to move easily between suppliers--low switching

costs Focus on removing effort and transactions through low

dollar purchase systems

Portfolio Analysis

Strategy emphasis: Acquisition Automate ordering/releasing systems Simplify processes and procedures Off-load ordering to users or suppliers

through low value purchase systems Standardize and streamline where possible

Low Value Purchases

Strategic Leverage



Value toBuyer

Few Many

Low

High

Low Value Purchases

Key Question--

How do organizationsreduce the effort and transactions

required to process low value purchases?

(Acquisition quadrant)

How do organizationsreduce the effort and transactions

required to process low value purchases?

(Acquisition quadrant)

Based on a 1998 research project

conducted by Trent and Kolchin titled “Reducing

the Cost of Processing Low Value Purchases”

Low Value Purchases

Firms that have made greater progress in managing low value purchases…….. Emphasize certain methods, approaches, or

activities when reducing the effort or transactions required to process low value purchases (in order of effect):

1 On-line ordering through the use of electronic catalogs

2 Procurement cards issued to users

3 Electronic commerce through the internet

Low Value Purchases

4 Purchasing process redesign efforts

5 Automated accounts payable systems

6 Allowing users to contact suppliers below some dollar threshold

7 Consolidation of purchase requirement between units

8 Auto fax with suppliers

9 Electronic data interchange with suppliers

10 Electronic funds transfer payments

Portfolio Analysis

Portfolio Analysis Quadrant Characteristics: Multiple Greater number of suppliers Low to medium annual dollars Able to move easily between suppliers--low

switching costs Developed quality and technology Focus on price analysis to gain benefit

Portfolio Analysis

Strategy emphasis: Multiple Let market forces work Play the market--perform price analyses Periodically market test Apply pressure Short-term commitments (with the option to

renew)

Portfolio Analysis

Portfolio Analysis Quadrant Characteristics: Leverage Greater number of suppliers Medium to high annual dollars Win-win approach may work here Focused commodity families Combining contracts across units yields savings Developed quality and technology Able to move easily between suppliers Focus on cost and price analysis

Portfolio Analysis

Strategy emphasis: Leverage Combine volumes for lower cost May use a longer-term agreement Use target costing Probe for efficiencies or improvements

Portfolio Analysis

Portfolio Analysis Quadrant Characteristics: Strategic Few capable suppliers Items or services critical to success Unique or customized items Collaborative or interdependent relationships Unable to move between suppliers easily Cost analysis yields benefits Unproven or undeveloped technology Win-win environment

Portfolio Analysis

Strategy emphasis: Strategic Joint ventures/alliances/partnerships Practice reverse marketing Develop collaborative relationships Pursue annual cost/price/quality/cycle time

improvement goals Use of longer-term agreements

Commodity Study Guidelines

Pages 191-193 in Textbook

Supply Management Strategy Formulation

Discussion questionWhat can purchasing contribute

within an integrated strategy formulation process?

What are past expenditures by commodity and by supplier?

What are expenditures as percent of total for business unit?

What is the technology roadmap, and that of the supplier?

What are current / future volumes and user location requirements?

Are there opportunities to leverage commodity expenditures with similar commodities?

Are You Able to Answer the Following Questions?

Who are current and potential suppliers? What are the characteristics of the

marketplace (best price, average price, etc.) What are future trends in terms of supply

continuity and expected pricing What are strengths and weaknesses of your

suppliers, and who are the market leaders?

Are You Able to Answer the Following Questions?

Insource or outsource? Cost-vs. market-based approach Type of suppliers?

High or low technology Full service Niche or distributor

Local or global supplier? Single, dual or multiple source? Percentage of buy to each supplier?

Key Commodity Strategy Questions

Long-term or short-term contract? Evergreen or escape clause? Degree of buyer/supplier risk taking? On-line or manual ordering? Supplier development - degree of

commitment? Use full-service suppliers? “Black box” or traditional level of supplier

involvement in design?

Key Commodity Strategy Questions

Ensure clear metrics with linkages to business unit strategies

Use internal / external metrics to evaluate progress

Hold “post-mortems” on successful and failed strategies

Modify strategy as necessary Hold stakeholder meetings and provide

feedback

Measure and Evaluate Strategy Performance

Translating Objectives into Purchasing Goals

CompanyObjectives

CompanyObjectives

PerformanceMeasurement

Review


Review

ContinuousImprovement

ContinuousImprovement

Purchasing & Supply Chain

Goals

Purchasing & Supply Chain

Goals

Cross-FunctionalBusiness Objectives

Cross-FunctionalBusiness Objectives

Purchasing &Supply Chain

Strategies

Purchasing &Supply Chain

Strategies


System


System

Commodity Strategy Development Process

1. Business Requirements

Definition

2. Define Strategic Importance of Commodity

3. Determine Business Requirements and Supply

Market Research

4. Goal Setting & Conduct Gap Analysis

5. Develop Sourcing Strategy and Objectives

6. Execute the Plan!

7. Results Monitoring and Review

Portfolio Analysis Approach

Value to

Buyer


Low

High

Few Many

Strategic Leverage


Example of Goal Setting

Increase volume and market share through pricing reduction

Reduce cost of goods by 20%

Reduce purchase prices (with redesign) by 25% in 12 months

Develop lower cost production processes or modify design resulting in 25% lower prices

Business Goals (SBU)

Product Goals

System / Component

Goals

System / Component

Goals

31

Stages of Strategy Evolution

IV- Fully Integrated Supply Chains

II - Moderate Development

I - Basic Beginnings

III - Limited Integration

Quality/cost teams

Longer -term contracts

Volume leveraging

Supply base

consolidation Supplier

quality focus

Ad hoc supplier alliances

Cross-functional sourcing teams

Supply base optimization

International sourcing

Cross-location sourcing teams

Global sourcing Strategic supplier

alliances Supplier TQM

development Total cost of

ownership Non-traditional

purchase focus Parts/service

standardization Early supplier

involvement Dock to stock pull

systems

Global supply chains with external customer focus

Cross-enterprise decision making

Full service suppliers

Early sourcing Insourcing/

outsourcing to maximize core competencies of firms throughout the supply chain

MTH6

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