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.