category strategy/sourcing strategy
TRANSCRIPT
ISM India Strategic Sourcing Webinar Series
Apr 18, 2015
Category Strategy, Supply Market Analysis
www.bcubeglobal.com
Agenda
2 2
How to analyze your supply base, create
corresponding strategies to maximize
savings opportunities
Supply Market Analysis
A model that was developed in 1983 – still
has relevance now
Kraljic Portfolio Model
What are the key elements of a category
strategy? Understand how to create unique
strategies for different categories
Category Strategy & Sourcing Strategy
Understand what you buy, how are
purchases related, identifying trends
Building Category Profiles
Raise your hand or post a comment
Quick Recap, Q&A Session
CATEGORY STRATEGY &
SUPPLY MARKET ANALYSIS
Category Profiles & Supply Market Analysis
Learn about creating profiles for your various categories and performing a thorough analysis of your supply
base.
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Remember Spend Cube?
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S E C T I O N 1
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Which supplier are we buying from?
Which category is being purchased?
What are we buying?
What is the cost center to which the purchase can be attributed to?
For who are we buying?
From who are we buying?
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Category Profile
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S E C T I O N O N E
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A Category Profile is just an extension of the Spend Cube
Suppliers
Understand who the top suppliers are
in terms of purchased volume, # sub-
categories, units purchased
Supplier Performance
Quality, Delivery, Value Addition,
Customer Support
Specifications
If you are purchasing a book:
Paper weight and grade
Finish and Quality
Size & Number of pages
Colors
Graphics
Volumes Understand the volumes purchased by
using historical information up to 3
years. Use appropriate forecasting
techniques
Pricing Compare pricing across suppliers
supplying similar products/services.
Consolidate contract information.
Spend Perform comprehensive analytics and
try to make sense of all purchases
within category
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Supply Market Analysis
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S E C T I O N O N E
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Remember Porter’s Five Forces Analysis?
Supply Market Rivalry
Insights to Develop
What forces are at work?
What drivers most
influence supplier
competitiveness?
What is the profile of a
successful competitor?
How can we use the
supply market dynamics
to our advantage?
New Entrants
Buyers
Suppliers
Substitutes
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Supply Market Analysis – Sample (Electrical Components)
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S E C T I O N O N E
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Barriers to Entry
Supplier’s Power Internal Competition Threats to Substitution Buyer’s Power
Relatively low barriers of entry to produce standard electrical equipment
Injection molded tooling costs and dies; large number of dies due to complexity and high volume
Economies of scale play an important role
Global presence becoming critical
Low supplier bargaining power due to high competition and fragmentation
Low due to the fact that primary inputs are commodities: metals, resins, semiconductors.
Higher for wire harnesses manufacturer due to buying of finished components (e.g. connectors, switches, sensors)
Components manufacturers moving to LCC (Asia, Eastern Europe)
Markets dominated by few big players but a very large number of small manufacturers
Trend to consolidate facilities and increase capacity utilization
Low: Virtually no alternative in terms of moving away from electrical components used in equipment (in fact rather the opposite)
Construction products becoming more reliant on increasingly complex electrical systems; no substitution but product improvement
High bargaining power since standard relatively undifferentiated products
Easy to switch due to standards for drawings and devices across the industry
Limited for controllers due to design and engineering dependence
In some cases impacted by performance concerns (durability, reliability), e.g. for connectors
Strategy
Creating a Dynamic Category Strategy. Developing an appropriate sourcing strategy
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What is a Category Strategy?
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S E C T I O N T W O
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It is a Document
A strategy cannot exist until you put it in writing. While some companies use ‘strategy’ as a thought process, the best-in class
companies put it in writing.
It is Dynamic
A Category Strategy should constantly evolve – remain static at your own peril. However, it is important that the fundamentals
of the strategy should remain the same else it will lead to muddled thinking and loss of efficiency. The strategy document
should be reviewed at least every quarter
Alignment
A Category strategy should align with the goals and objectives of the Procurement Function as well as the Organization as a
whole. Misalignment will lead to lack of support and strained relationships
Stakeholder Involvement
A Strategy should be created after having consulted all involved functions and stakeholders for it to be effective. Engineering,
Sales & Marketing, Finance, Operations, Quality – sometimes even key suppliers.
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Elements of a Category Strategy
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S E C T I O N T W O
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Spend Information See Spend Cube. Slice and dice
the data in multiple ways
Market Information A comprehensive picture of the
market – including (but not
limited to) major players, size,
geography, capabilities and
drivers
Supplier SWOT Analysis One of the more important
aspects – A SWOT Analysis of
the Top suppliers is a must (80%
spend)
Strategy: Long-term & Short-term
A Strategy should list out the
roadmap for the next 5 years.
Include targets and goals,
milestones and success metrics
Future Trends
It is important to understand the
cost drivers and trends of all
associated components and
commodities
Value Stream Analysis
Understand the entire value
stream of the purchased category
– break down into as many
processes as possible
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Various Sourcing Strategies
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S E C T I O N T W O
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Product Specs Improvement
Product VA/VE, Optimize life cycle
costs by using substitute materials
and exploring alternatives
Joint Process Improvement
Re-engineer joint processes with key
suppliers and share productivity gains,
Integrate logistics and support supplier
operations improvement
Relationship Restructuring
Develop integrated supply chain by
identifying key suppliers and
developing strategic
alliances/partnerships. Strategic Make
vs Buy?
Volume Concentration
Consolidate number of suppliers by
combining and pooling volumes and
redistributing among existing supply
base
Best Price Evaluation
Compare total costs by comparing
‘should-costs’ and renegotiate pricing.
Unbundle pricing
Global Sourcing
Expand supply base by moving to lower
cost counties. Profit from global supply
demand imbalances
Exploit Buying Power Create Advantage
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Choosing the Right Sourcing Event Type
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S E C T I O N T W O
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eAuction
Mixed Mode
Traditional RFP
Part Detail Information
Drawings, Specifications Simple and Clear Complex
Bidding
Allowable time for suppliers to
submit bids
Minutes to bid/rebid Weeks to bid/rebid
Pricing Components
Number of cost element/ detail
required
Few Multiple and complex
Pricing Analyses
Level of detail, manual pricing
calculations
Simple, real time and fully automated Sophisticated reports, manual inputs allowed
Information
Information given to suppliers Auction price posting on web Human contact and control of feedback
Kraljic’s Portfolio Purchasing Model
Creating a Dynamic Category Strategy. Developing an appropriate sourcing strategy
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The Model Explained
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S E C T I O N T H R E E
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CLASSIFICATION MARKET POSITIONING PLANNING
For a particular category, if a graph is drawn by plotting
Supply Risk vs Profit Impact, all suppliers will fall within 4
quadrants
Supply Risk
Low High
Pro
fit
Imp
ac
t
Lo
w
Hig
h
Non-Critical
Leverage
Bottleneck
Strategic
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The Model Explained
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S E C T I O N T H R E E
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CLASSIFICATION MARKET POSITIONING PLANNING
Understand market forces that affect the category purchased. Perform Porter’s Five Forces
Analysis
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The Model Explained
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S E C T I O N T H R E E
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CLASSIFICATION MARKET POSITIONING PLANNING
Adopt individual strategies per quadrant classification in the
first step
Exploit
Balance
Diversify
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The Model Explained
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S E C T I O N T H R E E
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CLASSIFICATION MARKET POSITIONING PLANNING
The Purchasing Strategies should evolve into clear action
plans
EXPLOIT
Make the most of your high buying power to secure good prices and long-term contracts from a number of suppliers, so that you can reduce the supply risk involved in these important items. You may also be able to make "spot purchases" of individual batches of the item, if a particular supplier offers you a good deal.
BALANCE
Take the middle ground between both the Exploit approach and the Diversify approach – each category is different, plan on a case by case basis
DIVERSIFY
Reduce the supply risks by seeking alternative suppliers or alternative products. You can also increase your buying power by consolidating to a single supplier. And, in other situations, you could bring the production of the item in-house.
ISM India Strategic Sourcing Webinar Series
Apr 18, 2015
Ram Raghuraman Founder, BCube Global Solutions
Director, ISM India
www.bcubeglobal.com
Mobile: (91) 9500017385