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Chapter 9Purchasing and business strategy
Program
Purchasing and competitive strategy Cost leadership and differentiation Lean manufacturing Integrating purchasing into business strategy Towards purchasing excellence Purchasing portfolio analysis Global sourcing
Purchasing and competitive strategies
Reasons for outsourcing those activities that
are not considered ‘core business’:
Increased outsourcing and subcontracting, as a result of make-or-buy studies
Buying of finished products instead of components Turnkey delivery Technological development
Purchasing and competitive strategy
The competitive situation of West European
industry has changed over the past decade:
1. More competition from countries like Korea, Singapore, China, Taiwan.
2. Industry in W-Europe seems to be under-represented in areas of new technologies. Many industries seem to be at the stage of saturation or decline:
Purchasing and competitive strategy
Introduction Growth Saturation Decline
Biochemistry
Optical industry
Telecommunications
Pharmaceuticals
Medical equipment
Computers
ChemicalsFood productsRubber, plastics
Automobile industryMachine construction
Textiles
Clothing
Leatherware/shoes
SteelShipbuilding
Cost leadership and differentiation
Porter (1980) defines three strategies leading to a distinguishing market position:
1. Cost leadership main focus: continually reducing the cost price of the final product.
2. Differentiation aims at marketing products which are perceived by the customer as being unique
3. Focus strategy aims at serving a particular, clearly defined group of customers in an optimal way
The consequence of not making a choice between the strategicalternatives is that the company will be unable to build up a sustainable competitive advantage in the end-user market.
The consequence of not making a choice between the strategicalternatives is that the company will be unable to build up a sustainable competitive advantage in the end-user market.
Lean manufacturing
Fundamental to lean management is that:
It transfers the maximum number of tasks and responsibilities to those workers actually
adding value to the car on the line, and it has in place a system for detecting defects that quickly traces every problem, once discovered, to its ultimate cause.
Womack et al. (1990)
Lean manufacturing
Important features of lean management: Teamwork among line workers, who are trained in a variety of
skills to conduct different jobs within their working group
Simple but comprehensive information display systems that make it possible for everyone in the plant to respond quickly to problems and understand the plant’s overall situation.
Total commitment to quality improvement on the shop floor.
Lean manufacturing
Differences between Japanese and European new product development:
Japanese manager in charge of new product development; greater authority to make decisions than his Western counterpart.
Product and process engineering are integrated responsibility areas
Engineering manager decides on who he wants to involve in his
engineering team and for what period.
Lean manufacturing
The Japanese way to manage supply base:
Average supply base is much smaller than for Western manufacturers.
Most Japanese OEMs have a ‘layered’ structure, which is often three or more tiers deep.
Suppliers are usually involved in new product development at a very early stage.
Suppliers are confronted with well-defined targets in terms of quality improvement, lead time reduction an cost reduction. They are informed as to whether they meet contractual obligations
Strategic triangle
Company
Customers
Competitors Suppliers
Competitivebenchmarking
Marketing
Make vs. BuyStrategic sourcing
Choices regarding the strategic triangle
1. Primary customer groups Match product and customer Focused marketing plan Choose between specific vs. standard solutions
2. Major competitors Sustainable competitive advantage Competitive benchmarking
3. Major suppliers Investigate core competences Subcontracting if activities can not be performed in a competitive
way
Towards purchasing excellence
Monczka as quoted by Purspective www.purspective.com
Towards purchasing excellence
Insourcing/outsourcing Clear policy regarding make-or-buy
Develop commodity strategies Spend analysis (spend cube) Structure and classify purchasing expenses (category tree) Determine strategy
Number of suppliers geographical dispersal, relation, contract form Involvement of specialists and internal customers in execution
Towards purchasing excellence World class supply base management
Intensify relations with suppliers Database with supplier information Detailed audits with important suppliers
Develop and manage supplier relationships Continuous improvements Classification of suppliers:
Commercial suppliers Preferred suppliers Supplier partners
Integration of suppliers in product development Suppliers with proved competences Using specific knowledge
Towards purchasing excellence
Supplier integration into order fulfillment process Outsource logistic and administrative tasks Connect suppliers with information systems and production planning Develop plans to increase value for customer through purchasing
Supplier development and quality management Suppliers are invited to participate in suggestions for improvement Suppliers are a source of new ideas
Strategic cost management Detailed cost models Supply chain analysis and measures to decrease supply chain costs
together with suppliers Sharing of advantages is necessary
Enabling processes
DeployGlobalization
I I I
Establish globallyintegrated and alignedpurchasing and supply
chain Strategies + Plans
I
Develop Organization and
Teaming strategies
I I
Develop purchasing and supply chain Measurements
IV
Establish HumanResource develop-ment and training
VI
VDevelop andimplement enabling
IS / IT systems
I NTEGRATED,ALI GNED AND
GLOBAL
Source: Robert.M. Monczka, Ph.D.
Purchasing portfolio analysis
In developing effective supplier strategies, the following
questions may be helpful: Does the present purchasing strategy support our business strategy and
does it meet our long term requirements? What is the balance of power between our company and our major
suppliers? Are the strategic products and services sourced from the best in class-
suppliers? What percentage of our purchasing requirements is covered by contracts? To what extent are internal operations benchmarked against specialist
suppliers? What opportunities exist for collaboration with suppliers with product
development, quality improvement, lead time reduction?
20-80 rule: 20% of the products and suppliers represent 80% of purchasing turnover
Purchasing portfolio analysis
Kraljic’s (1983) product portfolio based on two variables:
1. Purchasing’s impact on the bottom linethe profit impact of a given supply item measured against criteria such as cost of materials, total cost, volume purchased
2. Supply risk measured against criteria such as short-term and long term availability, number of potential suppliers, structure of supply markets.
Leverage products alternative sources of supply available substitution possible
Competitive bidding
Strategic products critical for product’s cost price dependence on supplier
Performance based partnership
Routine products large product variety high logistics complexity labor intensive
Systems contracting +
E-Procurement solutions
Bottleneck products monopolistic market large entry barriers
Secure supply + search
for alternatives
Purchasing’s impact onfinancialresults
Low
Low
High
HighSupply risk
Purchasing product portfolio
Leverage suppliers many competitors commodity products
Buyer dominated segment
Strategic suppliers market leaders specific know-how
Balance of power may differ among buyer-supplier
Routine suppliers large supply many suppliers with dependent position
Reduce number of suppliers
Bottleneck suppliers technology leaders few, if any, alternative suppliers
Supplier Dominated segment
Supplierimpact on financial results
High
Low
Supply riskLow High
Supplier portfolio
Product categories
Strategic products: Often high-tech, high-volume products Only one supply source available Significant share in cost price of end product
Three situations possible: Buyer-dominated segment Supplier-dominated segment Balanced relationship a partnership may develop over time
Product categories
Bottleneck products: Relatively low value, vulnerable regarding supply Few alternatives available Supplier is often dominating the market
Routine products: Large variety in products Low value per product High transaction costs
Leverage products: Choice between different suppliers Low switching costs Relatively high share in end product price
Purchasing portfolio-analysis
Four basic supplier strategies:
1. Partnership
2. Competitive bidding
3. Secure supply
4. Category management and e-procurement solutions
Four basic supplier strategies
Objective create mutual commitment in long-term relationship
Suitable for strategic products (gearboxes, axles, optics, engines)
Activities: accurate forecast of future requirements supply risk analysis careful supplier selection ‘should cost’ analysis rolling materials schedules effective change order procedure vendor rating
Decision level
board level Cross- functional approach
Partnership:
Four basic supplier strategies
Objective obtain ‘best deal’ for short term
Suitable for leverage products (commodities, steel plate, wire)
Activities: improve product/market development search for alternative products/suppliers reallocate purchasing volumes over suppliers optimize order quantities ‘target pricing’
Decision level
board level purchasing
Competitive bidding
Four basic supplier strategies
Objective secure short- and long-term supply reduce supply risk
Suitable for bottleneck products (natural flavors, vitamins, pigments)
Activities: accurate forecast of future requirements supply risk analysis determine ranking in supplier’s client list develop preventative measures (buffer stock, consigned stock, transportation) search for alternative products/ suppliers
Decision level
purchasing cross functional approach
Secure supply
Four basic supplier strategies
Objective reduce logistics complexity improve operational efficiency reduce number of suppliers
Suitable for routine products (consumables, supplies)
Activities: subcontract per product group/ product family standardize product assortment design effective internal order delivery and invoicing
procedures delegate order handling to internal user
Decision level
purchasing cross functional approach
Category management ande-procurement solutions
Four basic supplier strategiesPartnership Competitive bidding Secure supply Category management
and e-procurement solutions
Objective Create mutual
commitment in long term
relationship
Obtain ‘best deal’ for short
term
Secure short and long
term supply Reduce supply risk
Reduce logistic complexity Improve operational
efficiency Reduce number of
suppliers
Suitable for Strategic products (e.g. gearboxes, axles, engines)
Leverage products (e.g. commodities, steelplate, wire)
Bottleneck products (e.g.
natural flavors, vitamins,
pigments)
Routine products (e.g.
consumables, office
supplies)
Activities Accurate forecast of future
requirements Supply risk analysis Careful supplier selection ‘should cost’ analysis ‘rolling’ materials
schedules Effective change order
procedure Vendor rating
Improve product / market
knowledge Search for alternative
products / suppliers Reallocate purchasing
volumes over suppliers Optimize order quantities ‘target’ pricing
Accurate forecast of
future requirements Supply risk analysis Determine ranking in
supplier’s client list Develop preventative
measures (e.g. buffer
stock, consigned stock) Search for alternative
products / suppliers
Subcontract per product
group Standardize product
assortment Design effective internal
order delivery and invoicing
procedures Delegate order handling to
internal user
Decision level
Board level Cross functional approach
Board level Purchasing
Purchasing Cross functional
approach
Purchasing Cross functional approach
Purchasing portfolio
Remarks: The use of a purchase portfolio alone is often not sufficient to
develop buying and supplier strategies. For a strategic relation acknowledgement from both sides is
necessary The Dutch windmill, analyzing buyer-seller interdependence
combining both the buyers portfolio approach and the suppliers customers portfolio approach, leads to more realistic expectations and plans with regard to future buyer seller collaboration.
Purchasing Portfolio Management
EXPLOITABLE•Moderate cost risk
•Closely monitor price and service
•Change supplier
NUISANCE•High service risk•Change supplier•Offer incentives
DEVELOPMENT•Potential risk•Raise mutual
dependency•Offer inducements
CORE•Good match•Intensify relationship•Maintain long term
relationship
EXPLOITABLE•Adversarial
relationship•Check power balance•Consider other
sources
NUISANCE•Mismatch•Accept short term•Change supplier
DEVELOPMENT•Supplier developm.
opportunities•Encourage
participation
CORE•Sound position•Improve own profit
EXPLOITABLE•Moderate risk•Monitor price trend•Seek alternatives
NUISANCE•Possible mismatch•Passive relationship•Seek alternative
supplier
DEVELOPMENT•Good supplier
interest•Offer incentives•Raise mutual
dependency
CORE•Strong position•Maintain
relationship•Offer other
opportunities
EXPLOITABLE•Great caution•Raise mutual
dependency•Seek competition
NUISANCE•Very high risk•Seek competition
•Raise attraction
DEVELOPMENT•Potential match•Work closely
together to develop business
CORE•Good match•Potential long term
relationship
Re
lativ
e v
alu
e
Our Company’s attractiveness
LEVERAGE STRATEGIC
ROUTINE
BOTTLENECK
Supply risk
Re
lativ
eco
st
Evaluate the impact of the supplier’s view within strategy development
Global sourcing
Definition:
Advantages: Global sourcing may lower unit costs, benchmarking current suppliers, accessing new markets, etc. Disadvantages: much more complicated distribution and logistics, increasing handling costs, problems when dealing with different cultures, contractual problems, higher uncertainty about on-time delivery and quality, etc.
Proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering and operating locations.
Proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering and operating locations.
Conclusions
Purchasing and supply management is getting a more prominent position due to the strategic reorientation of many companies.
The purchasing strategy cannot be separated from the corporate policy or from competitive strategy.
The framework developed by Monczke et al. (2005) consists of strategic management processes on hand, and enabling processes
on the other hand. When developing specific supplier strategies purchasing product
portfolio of Kraljic (1983) may be very helpful.