2Program Purchasing and competitive strategy Cost leadership and differentiationLean manufacturingIntegrating purchasing into business strategyTowards purchasing excellencePurchasing portfolio analysisGlobal sourcing
3Purchasing and competitive strategies Reasons for outsourcing those activities thatare not considered ‘core business’:Increased outsourcing and subcontracting, as a result of make-or-buy studiesBuying of finished products instead of componentsTurnkey deliveryTechnological development
4Purchasing and competitive strategy The competitive situation of West Europeanindustry has changed over the past decade:More competition from countries like Korea, Singapore, China, Taiwan.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:
6Cost leadership and differentiation Porter (1980) defines three strategies leading to adistinguishing market position:Cost leadership main focus: continually reducing the cost price of the final product.Differentiation aims at marketing products which are perceived by the customer as being uniqueFocus strategy aims at serving a particular, clearly defined group of customers in an optimal wayThe consequence of not making a choice between the strategicalternatives is that the company will be unable to build up asustainable competitive advantage in the end-user market.
7Lean 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)
8Lean 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 groupSimple 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.
9Lean manufacturingDifferences 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 areasEngineering manager decides on who he wants to involve in his engineering team and for what period.
10Lean 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
11Strategic triangle Customers Competitors Suppliers Marketing Company CompetitivebenchmarkingMake vs. BuyStrategic sourcingCompetitorsSuppliers
12Choices regarding the strategic triangle Primary customer groupsMatch product and customerFocused marketing planChoose between specific vs. standard solutionsMajor competitorsSustainable competitive advantageCompetitive benchmarkingMajor suppliersInvestigate core competencesSubcontracting if activities can not be performed in a competitive way
13Towards purchasing excellence Monczka as quoted by Purspective
14Towards purchasing excellence Insourcing/outsourcingClear policy regarding make-or-buyDevelop commodity strategiesSpend analysis (spend cube)Structure and classify purchasing expenses (category tree)Determine strategyNumber of suppliers geographical dispersal, relation, contract formInvolvement of specialists and internal customers in execution
15Towards purchasing excellence World class supply base managementIntensify relations with suppliersDatabase with supplier informationDetailed audits with important suppliersDevelop and manage supplier relationshipsContinuous improvementsClassification of suppliers:Commercial suppliersPreferred suppliersSupplier partnersIntegration of suppliers in product developmentSuppliers with proved competencesUsing specific knowledge
16Towards purchasing excellence Supplier integration into order fulfillment processOutsource logistic and administrative tasksConnect suppliers with information systems and production planningDevelop plans to increase value for customer through purchasingSupplier development and quality managementSuppliers are invited to participate in suggestions for improvementSuppliers are a source of new ideasStrategic cost managementDetailed cost modelsSupply chain analysis and measures to decrease supply chain costs together with suppliersSharing of advantages is necessary
18Purchasing portfolio analysis In developing effective supplier strategies, the followingquestions 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 suppliersrepresent 80% of purchasing turnover
19Purchasing portfolio analysis Kraljic’s (1983) product portfolio based on two variables:Purchasing’s impact on the bottom line the profit impact of a given supply item measured against criteria such as cost of materials, total cost, volume purchasedSupply risk measured against criteria such as short-term and long term availability, number of potential suppliers, structure of supply markets.
20Purchasing product portfolio HighLeverage productsalternative sources of supply availablesubstitution possibleCompetitive biddingStrategic productscritical for product’s cost pricedependence on supplierPerformance based partnershipRoutine productslarge product varietyhigh logistics complexitylabor intensiveSystems contracting +E-Procurement solutionsBottleneck productsmonopolistic marketlarge entry barriersSecure supply + searchfor alternativesPurchasing’simpact onfinancialresultsLowLowSupply riskHigh
21Supplier portfolio Leverage suppliers Strategic suppliers HighLeverage suppliersmany competitorscommodity productsBuyer dominated segmentStrategic suppliersmarket leadersspecific know-howBalance of power may differ among buyer-supplierRoutine supplierslarge supplymany suppliers with dependent positionReduce number of suppliersBottleneck supplierstechnology leadersfew, if any, alternative suppliersSupplier Dominated segmentSupplierimpact onfinancialresultsLowLowSupply riskHigh
22Product categories Strategic products: Often high-tech, high-volume productsOnly one supply source availableSignificant share in cost price of end productThree situations possible:Buyer-dominated segmentSupplier-dominated segmentBalanced relationship a partnership may develop over time
23Product categories Bottleneck products: Routine products: Relatively low value, vulnerable regarding supplyFew alternatives availableSupplier is often dominating the marketRoutine products:Large variety in productsLow value per productHigh transaction costsLeverage products:Choice between different suppliersLow switching costsRelatively high share in end product price
24Purchasing portfolio-analysis Four basic supplier strategies:PartnershipCompetitive biddingSecure supplyCategory management and e-procurement solutions
26Four basic supplier strategies Competitive biddingObjectiveobtain ‘best deal’ for short termSuitable forleverage products (commodities, steel plate, wire)Activities:improve product/market developmentsearch for alternative products/suppliersreallocate purchasing volumes over suppliersoptimize order quantities‘target pricing’Decision levelboard levelpurchasing
27Four basic supplier strategies Secure supplyObjectivesecure short- and long-term supplyreduce supply riskSuitable forbottleneck products (natural flavors, vitamins, pigments)Activities:accurate forecast of future requirementssupply risk analysisdetermine ranking in supplier’s client listdevelop preventative measures (buffer stock, consigned stock, transportation)search for alternative products/ suppliersDecision levelpurchasingcross functional approach
28Four basic supplier strategies Category management ande-procurement solutionsObjectivereduce logistics complexityimprove operational efficiencyreduce number of suppliersSuitable forroutine products (consumables, supplies)Activities:subcontract per product group/ product familystandardize product assortmentdesign effective internal order delivery and invoicingproceduresdelegate order handling to internal userDecision levelpurchasingcross functional approach
29Four basic supplier strategies PartnershipCompetitive biddingSecure supplyCategory management and e-procurement solutionsObjectiveCreate mutualcommitment in long termrelationshipObtain ‘best deal’ for shorttermSecure short and longterm supplyReduce supply riskReduce logistic complexityImprove operationalefficiencyReduce number ofsuppliersSuitable forStrategic 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, officesupplies)ActivitiesAccurate forecast of futurerequirementsSupply risk analysisCareful supplier selection‘should cost’ analysis‘rolling’ materialsschedulesEffective change orderprocedureVendor ratingImprove product / marketknowledgeSearch for alternativeproducts / suppliersReallocate purchasingvolumes over suppliersOptimize order quantities‘target’ pricingAccurate forecast offuture requirementsDetermine ranking insupplier’s client listDevelop preventativemeasures (e.g. bufferstock, consigned stock)Subcontract per productgroupStandardize productassortmentDesign effective internalorder delivery and invoicingproceduresDelegate order handling tointernal userDecision levelBoard levelCross functional approachPurchasingCross functionalapproach
30Purchasing 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 necessaryThe Dutch windmill, analyzing buyer-seller interdependencecombining 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.
31Purchasing Portfolio Management Evaluate the impact of the supplier’s view within strategy developmentEXPLOITABLEAdversarial relationshipCheck power balanceConsider other sourcesCORESound positionImprove own profitEXPLOITABLEGreat cautionRaise mutual dependencySeek competitionCOREGood matchPotential long term relationshipRelative valueNUISANCEMismatchAccept short termChange supplierDEVELOPMENTSupplier developm. opportunitiesEncourage participationNUISANCEVery high riskSeek competitionRaise attractionDEVELOPMENTPotential matchWork closely together to develop businessLEVERAGESTRATEGICROUTINEBOTTLENECKOur Company’s attractivenessRelativecostEXPLOITABLEModerate riskMonitor price trendSeek alternativesCOREStrong positionMaintain relationshipOffer other opportunitiesEXPLOITABLEModerate cost riskClosely monitor price and serviceChange supplierCOREGood matchIntensify relationshipMaintain long term relationshipSupply riskNUISANCEPossible mismatchPassive relationshipSeek alternative supplierDEVELOPMENTGood supplier interestOffer incentivesRaise mutual dependencyNUISANCEHigh service riskChange supplierOffer incentivesDEVELOPMENTPotential riskRaise mutual dependencyOffer inducements
32Global 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 worldwidepurchasing, engineering and operating locations.
33ConclusionsPurchasing 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.