Category strategy development & implementation

Author : Tahir Rafiq

Project Start Date:

ATR Consulting Limited

April 2013

Category Strategy Development & Implementation

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Tahir Rafiq

Applying automotive best practice in the Banking Industry.....

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Contents

Category strategies & supplier relationship management 1

Baseline :- Portfolio analysis 2

Ideal positioning (Using PFA) 3

Adopting a strategy based on power regimes (Hexagon Analysis) 4

Commodity strategy matrix using the hexagon analysis 5

Adopting a strategy based on power regimes 6

Developing the right commodity strategy 7

Assessing the gap between ideal sourcing strategy and current practices 8

Implementing strategy & action plans 9

Appendix A 10

Appendix B. Glossary 11

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Category strategies & supplier relationship management

Portfolio analysis workshop out put

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Out put of workshop

An analytical (excel) tool was used to Position the material groups on the Portfolio Matrix.

Based on the following weighted variables

Spend

Number of Suppliers

The level of competition

Number of Buyers

The Buyers Search Cost

The Buyers Switching Cost

The Suppliers Switching Cost

Product Complexity

Number of Substitutes

Buyers Spend as % of Suppliers T/O

The level of Importance to Supplier

A workshop was held with the Contracts Department & The Purchasing Department to determine the position of each material group

A workshop was held with the Contracts Department & The Purchasing Department to determine the position of each material group on the material

This is an iterative process and this exercise should be conducted on a regular basis i.e. The more times it is performed the more accurate the out put will be.

Value ($) of Spend

Supply Risk

Category positioning matrix ( tool)

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Baseline :- Portfolio analysis

Examining buyer – supplier power dynamics

Potential approaches to buyer supplier relationship management

2. B > S 3. B = S

Leverage – Focus on Short Term Relationship

Use competitive tendering to reduce cost and consolidate volume Strategic - Focus on Long Term Relationship

Ensure availability of supply, focus on relationship building, process integration and innovation Tactical – Focus on Short Term Quick Wins

Simplify and streamline purchasing process, reduce number of suppliers and simplify ordering Bottleneck - Focus on Long Term Security of Supply

Search for alternatives, seek new suppliers, reduce dependency on current supplier

B>S Buyer Dominance B=S Buyer Supplier Inter-

dependence

B0S Buyer Supplier

Independence

B<S Supplier Dominance

Supplier Power Low

High

Buyer Power

Low

High

Strategic Leverage

Tactical Bottleneck

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Ideal positioning

Adopting strategies to optimize power

Adopt following strategies.....

2. B > S 3. B = S

Supplier Power Low

High

Buyer Power

Low

High

L The best place to be

The second best place to be

T

Maintain position

Maintain position but shift Long term to leverage

Consolidate with other Material groups & shift up

B Reduce dependency on the current Supplier base .

changing the specification Finding alternative suppliers Encouraging new suppliers into the market Consolidating with other material groups

L

B T

S S

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Adopting a strategy based on power regimes (Hexagon Analysis)

Example of typical levers have been identified for the various sourcing approaches

Consolidation

• Supplier Rationalization • Consolidate volume across Business • Redistribute volume among suppliers • Combine volume from different

commodity group • Rationalize/standardise parts

Cost Leadership

• Benchmark prices regularly • Renegotiate/rollback prices • Un-bundle prices • Use competitive bidding • Use commodity hedging/trading • Compare total cost among potential suppliers • Base pricing on profitability

Global Sourcing

• Expand geographic supply base • Examine new suppliers • Capitalise on currency fluctuations • Take advantage of trade incentives • Low cost country sourcing

Specification

• Rationalise/standardise product(s) • Product Substitution • Apply product value analysis • Apply product value engineering • Use functional/ output specification • Examine life cycle costs

Exploit Buying Power

Create An Advantage

Joint Process Improvement

• Optimise physical material flow • Support supplier operations improvement • Develop long-term contracts • Share productivity gains • Integrate logistics • Cost reductions • Product Innovation / Development

Relationship Mgt

• Analyse core competencies • Employ strategic alliances/partnering • Co Investment • Vertical Integration

Specification Consolidation

Cost Leadership

Relationship Mgt

Global Sourcing

Strategy Joint Process Improvement

Exploit Buying Power Create An Advantage

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Commodity strategy matrix using the hexagon analysis

Category strategy matrix

Strategy

Core Activities

1 2 3 4 5

0-20 20-40 40-60 60-80 80-100 Consolidation a Purchasing is Coordinated through a central Point O √ √ √ √

b Percentage of Spend Negotiated by Volume Leverage O √ √ √ √ c Combining Volumes from Other Material Groups O O O √ √ d Redistributing Volumes Across Suppliers O O √ √ √ e Pooling Volumes Across Business O √ √ √ √ f Future Volumes through Demand Forecasting O O O √ √

Cost Leadership a Competitive Bidding √ √ √ √ √ b Total Life Costing O O O √ √ c Continuous Benchmark O √ √ √ √ d Renegotiate & Rollback Pricing O O √ √ √ e Unbundle Prices O O O √ √ f Commodity Hedging & Trading O O O O √

Global Sourcing a Multi Region Sourcing O √ √ √ √ b Taking Advantage of Trade Incentives O O O √ √ c Capitalising on Currency Fluctuations O O O O √ d Alternatives sourced from broad Gloabl Supply Markets O O O √ √ e Taking Advantage of Low Cost Country Sourcing O O √ √ √

Specification a Change or improve Specification O √ √ √ √ b Apply Product Value Analsysis O O O √ √ c Use of Out Put / Functional Specification O O √ √ √ d Standardise Specification O √ √ √ √ e Jointly Optimise Specification with suppliers O O O √ √

Joint Process Improvement a Level of Information Sharing O √ √ √ √ b Structured Improvement Process with 1/4 Reviews O O √ √ √ c Joint Process Teams working to reduce costs in SC O O O √ √ d Level of Support Given to Supplier Operations Improvement O √ √ √ √ e Integration of Processes & Systems O O √ √ √ f Integration of Losgistics O O O √ √ g Product Innovation & Development O O O O V

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Adopting a strategy based on power regimes

Typical levers identified for various sourcing approaches

Relationship Type 1 2 3 4 5

100 % 100 % 100 % 100 % 100 %

Transactional No Supply Arrangements No Contracts in Place Spot Purchasing Playing the Market √ O O O O

Short Term Opportunistic

Buying Power is leveraged to get Lowest Cost Short Term Supply Arrangements are in Place Exploit Market Competition O √ O O O

Collaborative Relationship Minimise Cost & Maximise Service Levels Medium Term Relationship Ensure Supply Continuity O O √ O O

Partnering Medium to Long Term Relationship Maximise Benefits to Both Supplier & Buyer O O O √ O Interdependent Strategic Alliance Long Term Relationship Risk Sharing Co Investment Committing Volumes O O O O √

Category Positioning

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Developing the right commodity strategy

Selection criteria ( matrix)

Exploit Buying Power Create an Advantage

Commodity Strategy

Scoring Matrix

5 = High value 1 = Low value

Tactical Leverage Bottleneck Strategic

3 Consolidation

Cost Leadership

Global Sourcing

Specification


5

3

1

2

5

5

5

2

2

1

2

2

5

4

2

2

2

4

5 Relationship Mgt 1 2 3

5

Best Fit

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Assessing the gap between ideal sourcing strategy and current practices

Gap analysis

Small Strategic Gap Ratio – All applicable approaches have been applied and have yielded considerable results already

Low gap

Very high gap

Commodity A Current Approach Target Approach Gap Analysis

Consolidation 3 5 2

Cost Leadership 2 5 3

Global Sourcing 2 5 3

Specification 2 2 0

Joint Process Improvement 1 2 1

Relationship Mgt 2 2 0

Overall Score 9 21

Rating 43 %

Category Scale 20-40%

0 % 0 – 20 %

20 % 20 – 40 %

40 % 40 – 60 %

60 % 60 – 80 %

80 % 80 – 100 %

Large Strategic Gap Ratio – There are a number of applicable approaches which have not been applied, or which have been applied without success

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Implementing strategy & action plans

Standardized tracking tool

Target Position Objective Achieved

Example . Electrical Category

Material Group Sub Material Group Consolidation Cost Leadership Global Sourcing Specification


Relationship Mgt

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

Electrical Hand Tools

A C T C T T C C T A

Electrical Automatic Hand Tools

C C T C T A C T A

Electrical Alkaline Batteries

C C T C T A C T A

Electrical Rechargeable Batteries

C C T A A C T C T A

Electrical Accessories

A T C T C T T C C T C T

Electrical LED Flash Light

T C A A C T C T C

Electrical Flashlight

C T C T C T T C C T C T

Electrical Standard Wires

T A C T C T T C C T A

Electrical Energy Savings Lighting

C T A A C T C T A

Electrical Switches

C T C T C T T C A C T

Electrical Diodes

C A C T C T T C C T A

Electrical Connectors

C T C T C T C T C T A

Current position

A Achieved T Target C Current Position

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Start Point

Conduct a Portfolio Analysis Exercise on a. The Material Group b. On The Sub Material Group

Step 1

For each Material Group / Sub Material Group determine the current approach against each of the six criteria in the Hexagon using “The Commodity Group Positioning Tool” This activity should be conducted jointly with SRS and Purchasing / Contracting

Step 2

Determine the type of Supplier Relationship (Consult the Portfolio Analysis to see where the commodity is positioned) that you need to have with the supplier of this particular Commodity Group / Sub Group. Use the “Supplier Relationship Tool” to establish this.

Step 3

Using “The Best Fit Strategy Tool” compare the current approach against each of the six criteria with Best Practice.

Step 4

Using “The Gap Analysis Tool” determine the size of the Strategic Gap, between the current approach and Best Practice.

Step 5

Using the “Commodity Tracking Tool” plot the current position, the target position and monitor the progress on a monthly basis.

Action Plan (How to use the tool)

Appendix A

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Term Explanation

Supplier Rationalization Reducing the number of suppliers

Consolidate volume across Business Add all the requirements together from different parts of the business i.e. Manufacturing, maintenance, IT etc to increase the volume of spend.

Redistribute volume among suppliers Change the level of spend with existing suppliers i.e. Split the business 75% to 25% between two suppliers to increase competition

Combine volume from different commodity groups

Adding together several related commodity groups to increase volume of spend, reduce the number of suppliers

Rationalize / Standardise Parts Reduce the number of parts , by using standard sizes / specs i.e. Use one standard bearing instead of several different bearings which may all be similar. This will help to consolidate volumes and increase leverage when negotiating with the supplier base.

Cost Leadership Is when price is the main focus for a particular commodity group

Benchmark Prices Regularly Compare the prices on an annual basis by going out to the market and getting other suppliers to quote for the business

Renegotiate / Rollback Prices Renegotiate with existing suppliers, if the market conditions are hard and the company’s profit margin is being reduced. i.e. ask for cost reductions. Rollback Prices, ask the supplier to reduce the costs so they are the same as two years ago for example.

Un-bundle Prices Ask the supplier to break the suppliers costs down into components i.e. raw material, logistics, manpower, admin, etc. This is so that you can determine the level of profit they are making, if it is too much then they are taking advantage, if it is too little then they could be making a loss.

Competitive Bidding Getting more than two suppliers to compete for the quote / business

Commodity Hedging / Trading Agreeing to buy from the supplier so much of a product, at an agreed price at a fixed point of time in the future. Trading is when you buy a commodity for your own needs plus some extra, that you can sell to other buyers for a profit

Compare total cost amongst suppliers Comparing prices between several suppliers, based on the cost of goods, the maintenance and after care support, the servicing costs, the replacement cost, the life and the usage of the product (i.e. How long will it last and how much use will get from it)

Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)

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Term Explanation

Base pricing on profitability

Set a limit for an acceptable profit margin for the supplier i.e. 10% and agree that the supplier will only make 10% and no more. You will have to be very careful and analyse the suppliers costs to make sure that he is making only the agreed profit margin and no more.

Expand Geographic Supply Base I.e. If you are only buying from one region, then you need to include other regions, i.e. From western province, increase to eastern province. If you are only buying from one country in Europe increase the area to the whole of Europe.

Examine new suppliers Look for other suppliers, examine their products etc

Capitalise on currency fluctuations Look out for the exchange rates going up or down, it is best to buy when the exchange rate is high and in your favour, this way you will have greater purchasing power (i.e. You can buy more things)

Take advantage of trade incentives Some countries have special arrangements with Saudi Arabia, i.e. They do not charge tax, or tariffs, they do not charge the manufacturers export duties if they export to KSA etc. Or some other benefit, you need to investigate these benefits .

Low cost country sourcing Countries that have cheap labour rates, or access to cheap resources, that can manufacture goods at lower rates than other countries.

Product Substitution Change one similar product with another one, could be based on Brand, specification, or a different product altogether that does the same job

Product value analysis Is looking at the function(s) of a product and the cost of achieving that function, the functions are broken down into primary and secondary, primary functions are the ones that the product must have and the secondary ones are the one that we can delete as they are not necessary , the ideas is that by deleting the secondary functions we will reduce also the cost.

Product value engineering Similar to the one above, but the emphasis here is on optimising the performance of the product, to increase its life, increase its quality and also to reduce its cost, through technical / engineering teams.

Functional / Output Specification Only concentrate on what the product is required to do and the job it should perform and not the make up of that material, leave that to the supplier, we are only interested in the use of the product.

Examine Life Cycle Costs Life Cycle Cost is the total cost of ownership over the life of the product, it includes, the acquisition cost, the logistics cost, maintenance, repair, the amount of usage, etc.


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Term Explanation

Optimise Physical Material Flow Improving the coordination of logistics between us and the buyer, looking at how the material is passed through the suppliers organisation and the transformation process (manufacturing process) then out to us and then how does it pass through our organisation

Support supplier operations improvement Looking at ways of working with the supplier to improve their systems and processes together as a team

Develop long-term contracts Long term contracts are typically more than three years

Share productivity gains By working as a team with the supplier to reduce costs, or improve quality, or knowledge , the benefits should be shared with the supplier.

Integrate Logistics Better coordination of transport of goods between us and the supplier

Cost Reductions Working with the supplier to reduce costs

Product Innovation / Development Working with the supplier to develop or design new products


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End of presentation

Tahir Rafiq Feedback would be greatly received and appreciated

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