1. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Planning 8. Purchasing and Business strategy

2. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Program Purchasing and competitive strategy Cost leadership and differentiation: consequences for manufacturing and purchasing strategy Lean manufacturing Integrating purchasing into company policy Towards leveraged purchasing strategies Purchasing portfolio-analysis Four basic supplier strategies

3. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) 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:

4. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing and competitive strategy IntroductionGrowthSaturationDecline Biochemistry Optical industry Telecommunications Pharmaceuticals Medical equipment Computers Chemicals Food products Rubber, plastics Automobile industry Machine construction Textiles Clothing Leatherware/shoes Steel Shipbuilding

5. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing and competitive strategy Result: Long-term strategy of many companies focuses on ‘selective growth: a combination of enhancing the core activity and starting up new, promising activities. Consequence of this strategy: companies sell off activities that are not considered to belong to their core business

6. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing and competitive strategy Reasons underlying this trend: 1. Increased subcontracting, as a result of make-or- buy studies 2. Buying of finished products instead of components 3. Turnkey delivery 4. Technological development

7. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Cost leadership and differentiation: consequences for manufacturing and purchasing strategy Each company’s goal: … develop a distinctive,sustainable competitive advantage. Porter, 1980

8. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Cost leadership and differentiation: consequences for manufacturing and purchasing strategy 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 strategic alternatives is that the company will be unable to build up a sustainable competitive advantage in the end-user market

9. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Lean manufacturing Womack et al. (1990) 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

10. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) 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.

11. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Lean manufacturing Differences 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.

12. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Lean manufacturing Japanese way to manage supply base: Average supply base is much smaller than for Westernn 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

13. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Integrating purchasing into company policy In designing business strategy top management will have to make decisions about the company’s positioning vis-a vis its 3 major stakeholders: 1. Primary customer groups or target groups. Touches upon the issue of market positioning and segmentation. 2. Major competitors. Companies must not only be able to respond to customer needs; but also respond in such a way that they achieve ‘distinctive, sustainable competitive advantage. 3. Major suppliers. Developments in the supplier markets necessitate continuous review of the company’s core activities.

14. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Company Customers CompetitorsSuppliers Competitive benchmarking Marketing Make vs Buy Strategic sourcing The strategic triangle

15. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Towards leveraged purchasing strategies Stages 1.In sourcing / outsourcing. Decide what activities to handle inside and outside the company 2.Develop commodity strategies. Develop a clear and detailed picture of the purchasing spend and a commodity strategy. 3.Establish and leverage world class supply base management. Supply base management relates to how many suppliers will be dealt with for a certain commodity, what conditions the best in class supplier should meet and how suppliers are selected 4.Develop and manage supplier relationship Suppliers are grouped into distinctive categories. E.g. commercial suppliers, preferred suppliers, supplier partners.

16. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Towards leveraged purchasing strategies 1. Integration of suppliers in product development. Focus on building constructive relationships with suppliers in area of new product development 2. Supplier integration into the order fulfillment process. Idea is that manufacturer and supplier in the end have agreement on mutually shared objectives aimed at satisfying the final customer as best as they can. 3. Supplier development and quality management. At this stage suppliers are challenged actively to provide new ideas (related to product design, manufacturing technology, etc.) for improvement. 4. Strategic cost management. This concept includes the identification of all costs, cost drivers and strategies aimed at reducing costs throughout the supply chain. (see chap. 13)

17. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Towards leveraged purchasing strategies

18. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) 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 reduction? 20-80 rule: 20% of the products and suppliers represent 80% of purchasing turnover

19. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing portfolio-analysis Kraljic’s (1983) product portfolio based on two variables: 1.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 purchased 2.Supply risk measured against criteria such as short-term and long term availability, number of potential suppliers, structure of supply markets.

20. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) 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 on financial results Low High Supply risk Purchasing product portfolio

21. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) 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 Supplier impact on financial results High Low Supply risk Low High Supplier portfolio

22. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Purchasing portfolio-analysis Four basic supplier strategies: 1.Partnership 2.Competitive bidding 3.Secure supply 4.Category management and e-procurement solutions

23. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) 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:

24. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Four basic supplier strategies Objective obtain ‘best deal’ for short term Suitable for leverage products (commodities, steelplate, 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

25. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Four basic supplier strategies Objective secure short- and long-term supply reduce supply risk Suitable for bottleneck products (natural flavours, 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

26. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) 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 and e-procurement solutions

27. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Four basic supplier strategies PartnershipCompetitive biddingSecure supplyCategory 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 flavours, 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 Cross functional approach Purchasing Cross functional approach