Profit Commodity Strategies

							Chapter 6

Developing a Supply Strategy


Chapter 4                      1
Fundamentals
   Corporate Strategy: An action plan
    designed to achieve specific long-term goals
    and objectives
   Organizations approach strategic planning
    on three levels:
       Corporate
       Business Unit
       Function

                                               2
Fundamentals, cont
        Mission Statement

            Objectives

       Corporate Strategies

      Business Unit Strategies




                                 3
      Fundamentals, cont
                        Mission Statement

                             Objectives

                       Corporate Strategies

                     Business Unit Strategies


Marketing Strategies Operations Strategies Purchasing Strategies, etc.



                                                                         4
   Fundamentals, cont.
       Developing purchasing strategy involves translating
        purchasing objectives into purchasing goals

           OBJECTIVES:        - Open-ended
                               - Portrayed in relative terms
                               - Usually an external focus
           GOALS:    - Time-anchored
                      - Quantitatively specific
                      - Usually an internal focus

EXAMPLE: Objective is to be the industry’s low-cost producer. The
associated goal might be to reduce costs by 10% within the next twelve
months                                                                   5
    Purchasing Strategies:
    Two General Categories

   Strategic Purchasing Processes

   Detailed Commodity Strategies



                                     6
Major Supply Strategy Areas:
   Assurance of Supply Strategies
   Cost Reduction Strategies
   Supply Base Strategies
   Technology/New Product Development
    Strategies
   Quality Management Strategies
   E-procurement Strategies
   Global Sourcing Strategies
   Insourcing/Outsourcing Strategy

                                         7
A Major focus area today is
Cost Reduction Strategies
   Long-term success of a firm depends
    upon its ability to differentiate itself
    from the competition AND make a profit
   Profit = Revenue - Cost




                                           8
A Major focus area today is
Cost Reduction Strategies
   Long-term success of a firm depends
    upon its ability to differentiate itself
    from the competition AND make a profit
   Profit = Revenue - Cost

        Increasing P X Q is more
        difficult than           reducing cost




                                                 9
Purchasing Strategies often
involve Commodity Strategies
   Commodity Teams
       Consolidation of requirements
       Supplier quality certification
       Supply base reduction & award contracts
       Management of supplier relations
   Commodity Portfolio Analysis


                                                  10
Developing a commodity
strategy with Portfolio Analysis

     HIGH




  Annual
  spend


     LOW

            LOW   Supply risk   HIGH




                                       11
Summary points on the
Quadrants
   Transactions Quadrant
       Price is important; competitive bidding
       Don’t want to focus primary attention here!
   Bottleneck Quadrant
       Get out of here with specification changes,
        standardization, or develop new sources
   Leverage Quadrant
       Consolidate requirements
   Strategic Quadrant
       Build alliances or at least partnerships

                                                      12
In which quadrants are the greatest
opportunities for performance
improvement?


      HIGH




   Annual
   spend


      LOW

             LOW   Supply risk   HIGH




                                        13
Commodity Teams Develop a
Sourcing Strategy based upon:

   Portfolio Analysis
   Requirements
   Market research
   Supplier Analysis




                                14
The Sourcing Strategy presented
to management

   Number of suppliers and the amount of
    business to award to each
   Recommended suppliers
   Method of placement
   Nature of the relationship
   Type of contract and length of contract

                                              15
Summary of the commodity
strategy process

1.   Organize a commodity team
2.   Portfolio Analysis
3.   Develop the strategy for the
     commodity or commodity group
4.   Execute the strategy by negotiation
     and contract award
5.   Review the strategy at least annually
                                             16
The complex and critical issue of
insourcing/outsourcing strategy

   Make-or-Buy versus
    Insourcing/Outsourcing
   Applies to services as well as materials
   Two primary areas of focus
   Why decisions are consequential


                                           17
Formal Decision Process for
insourcing/outsourcing strategy
   Step 1: What are our core
    competencies? Where is the strategic
    “fit”?
   Step 2: Cost Analysis
   Step 3: Consider the risks associated
    with outsourcing
   Step 4: Decision and
    implementation
                                            18
Cost Analysis
   Difficult and somewhat subjective
   What factory costs beyond direct
    should be included?

Insourcing Costs    Outsourcing Costs
 ٠Direct Labor          ٠Quote or
٠Direct Materials   negotiated value for
   ٠Overhead          FOB Destination
    ٠(Other)             ٠(Other)
                                           19
Summary reasons for
insourcing
   Lower Cost
   Buyer firm has superior processes
   Greater assurance of supply
   Necessary for design secrecy
   Allows company to absorb
    overcapacity
   Quantities too small, no supplier
    interested
                                        20
Summary reasons to buy
outside
   Lower cost
   Superior capabilities available in the supplier
    community
   Firm lacks production capacity
   Customers demand this supplier component
   Challenge of maintaining long-term
    technology road maps in a certain area
   Assures cost accuracy

                                                  21
The Phases of Developing
a Supply Strategy
   I. Basic Beginnings
   II. Moderate Development
   III. Limited Integration
   IV. Full Integration: Purchasing is
    now “Strategic Sourcing”



                                          22
What is happening in
purchasing today
   Nontraditional people as Directors of Purchasing
   Technical entry route into purchasing
   Emphasis on the process of purchasing rather than
    the transactions—a new way of thinking
   Strategic cost management
   Reformulation of the supplier base
   Web-based fulfillment processes
   MRO items handled by a third party
   Purchasing-engineering-supplier synergy
   Dichotomizing the strategic and the routine

                                                        23
Let’s move on




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