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Assess Opportunities
1.0 2.0
Category Analysis
3.0
Develop Strategy
4.0
Contract
7.0
Award
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.
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.
Thin
Depth of Analysis
Deep
Tasks
Collect volume data for purchasing category Collect existing specifications and industry standards for each category Identify additional value-added services, both current and potential Identify basic purchasing process Define current pricing
Techniques
Access/obtain/extract/build databases Contact current suppliers if information is not maintained internally Summarize data in usable formats
contracts, etc. (be aware of potential adverse impact on relationship)
Identify best source of information: engineering, maintenance, Access specifications and verify current Examples include: vendor managed inventory, job-site delivery, etc. Interview suppliers Examine marketing literature Identify current category strategy Interview buyers Collect and understand existing flowcharts, etc. Use internal files and databases Interview buyers and review contracts, etc. to understand Include all costs taxes, transportation, etc. Breakdown price into its components (including costing value-added
services) mechanics/components
Interview buyers Review contracts to determine contractual constraints Review trade journals Interview trade associations
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?
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
The 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 Price, Usage, or Admin. Implementation Priority Easy, Time Investment Ranking Medium, Frame Required (1, 2, 3) (1=Top) Hard (Weeks) ($K)
CRI ID
Source
Description
High ($K)
In 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.
$8.5
$8.5MM
Valve Repair
$160
$8.0
$425
Inventory Reduction
$ 20
$7.9MM
$7.5
$390 $140
Contract Management
$425
Inventory Reduction
$1.4 MM
$7.0
$6.5MM
Contract Management
$6.5
$6.0
Electronic Commerce
Exercise
Complete Exercise 2
Technology Trends
Is this industry employing the most productive technologies available? Are there technology leaders in this categorys industry? What has been the impact of technology on costs, pricing, quality and service for this category?
Product Substitution
Are there acceptable substitute products for this category? Has client completed a formal value analysis of category substitutes?
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 industrys supply? How high are switching costs for the customers of this category?
Industry Profitability
How profitable is the industry supplying this category?
Industry Structure
How concentrated or fragmented is this categorys 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?
Power of Buyers The relative supply/demand situations existing and potential customers face
Supplier Power
A supplier group is powerful if
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 buyers industry is not an important customer of the supplier group The suppliers product is an important input to the buyers business They have built up switching costs (product differentiation) They pose a credible threat of forward integration
New Entrants
Suppliers
Market Rivalry
Substitutes
Buyers
Buyer Power
A buyer 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 Buyers 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 industrys product is not critical to the quality of the buyers products The buyer has full information about the supply market levers
Market Rivalry
Substitutes
New Entrants
Examples of Barrier to Entry
Economies of scale (e.g., computer chip industry) Product differentiation (e.g., cosmetics) New Entrants Suppliers Capital requirement (e.g., oil extraction) Switching cost (e.g., chemical industry) Buyers Access to distribution channel (e.g., food industry) Cost advantage independent of scale Substitutes - 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)
Market Rivalry
Substitutes
Market Rivalry
Substitutes
Market Rivalry
Market Rivalry
Numerous or balanced competitors New Entrants Suppliers Slow industry growth High fixed costs Buyers Lack of differentiation Low switching costs Economical capacity additions Diverse competitors High exit barriers
Market Rivalry
Substitutes
Questions to Answer
When 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 categorys 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 categorys 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)?
Low
Med
High
Cost of switching to substitute Relative price value ratio Buyers propensity to switch Oligopolistic markets Built-in switching costs Importance of buyers business Vertical integration possibilities Low switching cost Backward integration Share of suppliers output Product differentiation Capital requirements Switching costs Government policies
Low
Med
High
Bargaining power of suppliers to our supply market Bargaining power of buyers (client) (Note: Higher bargaining power = lower market complexity) Entry barriers
Low
Med
High
Low
Med
High
Level
Rationale
Barriers to Entry
L H
Resource Criticality
Strategic importance Total item value Impact on product/service quality Impact on business growth Impact on qualitative factors (e.g., safety, environment, etc.)
Exercise
Complete Exercise 3