Supply Market Analysis Assess

Opportunities

Category

Analysis

Develop

Strategy

ScreenSuppliers

& RFI

ConductAuctions &

RFXs

Negotiate

and

Award

Contract

2.0 3.0 4.0 5.0 6.0 7.01.0

Implement RelationshipMgt

9.08.0

Depth of AnalysisThin Deep

Category Profiling

• Detailed supply and demand analysis of small number of category groups.

• Historical usage and client requirements analyzed.

• Key suppliers profiled.• Total cost model developed.• Often initiated after opportunity assessment and

as preliminary step of a Strategic Procurement implementation.

Opportunity Assessment

• Review of small to medium number of category groups, with only minimal attention to organizational or information technology issues.

• Current buying effectiveness and sourcing flexibility evaluated to identify Strategic Procurement opportunities and to provide approximate potential savings estimates.

There are many sources and methods to gather the internal data for a usage analysis.

Collect volume data for purchasing category

• Access/obtain/extract/build databases• Contact current suppliers if information is not maintained internally

(be aware of potential adverse impact on relationship)• Summarize data in usable formats

Collect existing specifications and industry standards for each category

• Identify best source of information: engineering, maintenance, contracts, etc.

• Access specifications and verify current

Identify additional value-added services, both current and potential

• Examples include: vendor managed inventory, job-site delivery, etc.• Interview suppliers• Examine marketing literature

Identify basic purchasing process • Identify current category strategy• Interview buyers• Collect and understand existing flowcharts, etc.

Define current pricing • Use internal files and databases• Interview buyers and review contracts, etc. to understand

mechanics/components• Include all costs – taxes, transportation, etc.• Breakdown price into its components (including costing value-added

services)

Understand current purchasing constraints (regulatory, customer, self-imposed, others)

• Interview buyers• Review contracts to determine contractual constraints• Review trade journals• Interview trade associations

Conduct a Usage Analysis

Tasks Techniques

More detailed questions about cost and pricing information should be answered for each purchased category.

Conduct a Usage Analysis

Cost/Pricing Questions:

• What is the recent price history and trend?

• For what quantities is the current price valid?

• For what time frame is the current price valid?

• What is the pricing basis?

• What are price/cost drivers?

• Is the price an absolute or relative price? If a relative price, what is the formula?

• Does the price/formula vary by location? How? Why?

• What transportation cost is included in the price?

• Are there any other assumptions implicit in the price?

• Do financial instruments or currency fluctuations affect final prices?

Cost Reduction Information (CRI)Cost reduction information is gathered to identify opportunities for reducing your costs and understanding your category. There are three sections of questions: (1) price, (2) usage, and (3) administration.

Steps include:• Select collection method(s) (survey, brainstorming session, and/or

interviews)• Identify which locations and then which people to involve (e.g., high users)• Issue CRI• Follow-up CRI (receive?, Q&A?, due date)• Collect CRI• Analyze CRI

Size & Prioritize OpportunitiesThe cost reduction ideas / opportunities generated from the CRI need to be recapped then ranked to establish implementation priorities. Later, in total cost of ownership, additional factors (e.g., quality, technology) will also be considered in sourcing.

Range of Savings Estimate Implementation

CRI ID Source

Price, Usage, or Admin. Description Low ($K)

Average ($K)

High ($K)

Easy, Medium,

Hard

Time Frame

(Weeks)

Investment Required

($K)

Priority Ranking (1, 2, 3) (1=Top)

Potential Cost Reduction IllustrationIn this illustration, the potential MRO cost reduction is $605K to $2MM (7% to 24%) on a base of $8.5MM in yearly spend. Savings come from many sources - line item cost savings, repair and refurbishment, inventory, contract management, and eCommerce.

—MRO Material Cost Reduction Potential —

$6.0

$6.5

$7.0

$7.5

$8.0

$8.5

MROLine Item

ValveRepair

$8.5MM

$6.5MM

InventoryReduction

ContractManagement

MinimumAchievable

MaximumPotential

$1.4MM

$390

$425

$425

$160

$425

$140

$ 20

$7.9MM

• MRO Line Item Cost Savings– Obtained through implementation of

contract• Valve Repair and Refurbishment Program

– Establish supplier-managed program– Recondition and utilize reconditioned

valves– Maximum savings estimate assumes 50%

reuse rate• Inventory Reduction

– Utilize consignment, supplier managed inventories

• Contract Management– Consistent monitoring and implementation

of contract (e.g., volume discounts, pricing structure) - compliance

– Establish and monitor cost reduction and performance measure targets

• Electronic Commerce– Savings included in other Strategic

Procurement calculations

Exercise

Complete Exercise 2

The first step in conducting an external industry analysis is to understand industry trends and factors.

Technology Trends• Is this industry employing the most productive

technologies available?

• Are there technology leaders in this category’s industry?

• What has been the impact of technology on costs, pricing, quality and service for this category?

Customer Profiles• What effects do customers of this industry have on the

competitive environment of this category?

• Do a few large customers of this category dominate the industry’s supply?

• How high are switching costs for the customers of this category?

Buying Practice Trends• Are buying patterns steady throughout the year, or do

seasonal fluctuations occur?

• Do buyers and/or suppliers influence these pattern?

• What effect do these patterns have on costs (i.e. inventories, production capacity, economies of production, etc.)?

•Market Size and Growth• How large is the market for this category?

• What is the growth history and predicted growth of this category?

• Is this market regional, national, global?

•Product Substitution• Are there acceptable substitute products for this

category?

• Has client completed a formal “value analysis” of category substitutes?

•Industry Profitability• How profitable is the industry supplying this

category?

•Industry Structure• How concentrated or fragmented is this category’s

industry?

• Do a few leaders dominate the industry?

• Are there newcomers to the industry that are challenging the leaders?

• What are the forecasts for the structure of this industry?

Conduct Industry Analysis

Industry RivalryThe intensity of

competition among current participants

Five Forces (Porter Article)

Power of SuppliersPower of Suppliers

The ability of suppliers to control the industry

The ability of suppliers to control the industry

SubstitutesSubstitutes

Replacements for material and services

currently provided

Replacements for material and services

currently provided

Barriers to New EntrantsBarriers to New Entrants

Attractiveness of the market versus barriers to

entry

Attractiveness of the market versus barriers to

entry

Power of BuyersPower of Buyers

The relative supply/demand situations

existing and potential customers face

The relative supply/demand situations

existing and potential customers face

Industry RivalryThe intensity of

competition among current participants

Supplier Power

Market Rivalry

Suppliers

New Entrants

Substitutes

Buyers

• It is dominated by a few companies and is more concentrated than the industry it sells to

• It is not obliged to contend with other substitute products for sale to the industry

• The buyer’s industry is not an important customer of the supplier group

• The supplier’s product is an important input to the buyer’s business

• They have built up switching costs (product differentiation)

• They pose a credible threat of forward integration

A supplier group is powerful if

• It is concentrated or purchases large volumes relative to seller sales

•The products it purchases from the industry are standard or undifferentiated

• It faces few switching costs

• It earns low profits, and can use this to negotiate greater portion of the profits in the value chain

• It poses a credible threat of backward integration (make/buy)

• The industry’s product is not critical to the quality of the buyer’s products

• The buyer has full information about the supply market levers

A buyer group is powerful if

Market Rivalry

Suppliers

New Entrants

Substitutes

Buyers

Buyer Power

New Entrants

• Economies of scale (e.g., computer chip industry)

• Product differentiation (e.g., cosmetics)

• Capital requirement (e.g., oil extraction)

• Switching cost (e.g., chemical industry)

• Access to distribution channel (e.g., food industry)

• Cost advantage independent of scale

- Product know-how or design characteristic (e.g., fashion)

- Favorable access to raw materials (e.g., basic chemicals)

- Government subsidies (e.g., European agriculture products such as soybeans)

• Government policy (e.g., regulated industries)

Examples of Barrier to Entry

Market Rivalry

Suppliers

New Entrants

Substitutes

Buyers

Substitutes

• The relative value/price of a substitute compared to an industry’s product

• The cost of switching to the substitute

• The buyer’s willingness to switch

The threat of substitute products is a function of three factors

Market Rivalry

Suppliers

New Entrants

Substitutes

Buyers

Market Rivalry

• Numerous or balanced competitors

• Slow industry growth

• High fixed costs

• Lack of differentiation

• Low switching costs

• Economical capacity additions

• Diverse competitors

• High exit barriers

Market Rivalry

Market Rivalry

Suppliers

New Entrants

Substitutes

Buyers

Questions to AnswerWhen you are done with your industry analysis, you should be able to answer the majority of these questions.

• How large is the market for this category?• What is the growth history and predicted growth of this category?• Is this market regional, national, or global?• How profitable is the industry supplying this category?• How concentrated or fragmented is this category’s industry?• Who are the major players in the industry? What is their market share?• Do a few leaders dominate the industry?• Are there newcomers to the industry that are challenging the leaders?• What is the mergers and acquisition (M&A) history?• What are the barriers to new entrants?• What are the forecasts for the structure of this industry?• What is the industry capacity? What are the history and forecast?• What are the primary drivers of this category’s industry costs and pricing?• How are the margins characterized? What are the margin trends?• Does there appear to be a pattern to price changes (e.g. annually, quarterly, etc.)?• Is there any relationship between this pattern and the Producer Price Index (PPI) and/or Consumer Price Index (CPI)?

Questions to Answer (cont.)• Is this industry employing the most productive technologies available?• Are there technology leaders in this category’s industry?• What has been the impact of the technology on costs, pricing, quality, and

service for this category?• What effects do customers of this industry have on the competitive environment

of this category?• Do a few large customers of this category dominate the industry’s supply?• How does the demand compare to capacity (supply)? • Is there a tight supply situation?• How does the “power of suppliers” compare with the “power of buyers?”• How high are switching costs for the customers of this category?• Are buying patterns steady throughout the year, or do seasonal fluctuations

occur?• Do buyers and/or suppliers influence these patterns?• What effect do these patterns have on costs, i.e. inventories, production

capacity, economies of production / scale, etc.?• Overall, how would you characterize the industry trends?

Evaluation of Market Forces

Market Force Sample FactorsSpecific Issues

Favorable Favorable to to Buyer Seller

Market internal competition(Note: Higher rivalry = lower market complexity)

•Slow industry growth•High exit barriers

• •

Low Med High

Substitutes •Cost of switching to substitute•Relative price value ratio•Buyer’s propensity to switch

• •

Low Med High

Bargaining power of suppliers to our supply market

•Oligopolistic markets•Built-in switching costs•Importance of buyer’s business

• •

Low Med High

Bargaining power of buyers (client)(Note: Higher bargaining power = lower market complexity)

•Vertical integration possibilities•Low switching cost•Backward integration•Share of supplier’s output

• •

Low Med High

Entry barriers •Product differentiation•Capital requirements•Switching costs•Government policies

• •

Low Med High

The team’s goal is to assess the competitive forces, justify their assessment, and document their findings to enable fact-based negotiation.

Potential Competitive Forces Level Rationale

• Rivalry within the Industry

• Barriers to Entry

• Pressure from Substitute Products

• Bargaining Power of Suppliers

• Bargaining Power of Buyers

L H

L H

L H

L H

L H

• •

• •

• •

• •

• •

Five Forces Evaluation Template

After you understand the internal and external characteristics of each category, you can rank each category across 2 dimensions: Market Complexity and Resource Criticality. This analysis helps you differentiate the strategic and tactical categories.

• Strategic importance• Total item value• Impact on product/service

quality• Impact on business growth• Impact on qualitative factors

(e.g., safety, environment, etc.)

• Availability/volatility• Concentration• Number of suppliers• Lead time risks/geographic

scope• Substitution possibilities

Complexity of Supply

Criticality of Resource

High

Low

Low High

Resource Criticality

Market Complexity

Bottleneck

Non-Critical Leverage

Strategic

Segment Into Quadrants

2. Category Analysis / Deep DiveObjective:* Assess Project Feasibility

Actions:* Feasibility Study (internal/external SWOT)* Industry Analysis* Customer Requirements Analysis* Research “All” Potential Suppliers* Establish Project Team

Deliverables:* Current Baseline and Desired Baseline*Kraljic / Porter 5 Forces Model / TCO Model* Industry Trends, Best Practices, Costs* Minimum requirements (templates)* Long List of Suppliers* Project Team

Complete Exercise 3

Exercise