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

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

Planning

8. Purchasing and Business strategy


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


Purchasing and competitive strategyThe competitive situation of West European industry haschanged 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:


Purchasing and competitive strategy

Introduction Growth Saturation Decline

Biochemistry

Optical industry

Telecommunications

Pharmaceuticals

Medical equipment

Computers

ChemicalsFood productsRubber, plastics

Automobile industryMachine construction

Textiles

Clothing

Leatherware/shoes

SteelShipbuilding


Purchasing and competitive strategyResult: 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


Purchasing and competitive strategyReasons underlying this trend:1. Increased subcontracting, as a result of make-or- buy

studies2. Buying of finished products instead of components3. Turnkey delivery4. Technological development


Cost leadership and differentiation: consequences for manufacturing and purchasing strategy

Each company’s goal:

…develop a distinctive,sustainable competitive advantage.

Porter, 1980


Cost leadership and differentiation: consequences for manufacturing and purchasing strategyPorter (1980) defines three strategies leading to a distinguishing marketposition:

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


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


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.


Lean manufacturing

Differences Japanese and European new productdevelopment

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.


Lean manufacturingJapanese 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


Integrating purchasing into company policyIn 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.


Company

Customers

Competitors Suppliers

Competitivebenchmarking

Marketing

Make vs BuyStrategic sourcing

The strategic triangle


Towards leveraged purchasing strategies

Stages1. 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.



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)




Purchasing portfolio-analysisIn developing effective supplier strategies, the following questionsmay 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


Purchasing portfolio-analysis

Kraljic’s (1983) product portfolio based on two variables:

1. Purchasing’s impact on the bottom linethe 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.


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 + searchfor alternatives

Purchasing’s impact onfinancialresults

Low

Low

High

HighSupply risk

Purchasing product portfolio


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

Supplierimpact on financial results

High

Low

Supply riskLow High

Supplier portfolio


Purchasing portfolio-analysis

Four basic supplier strategies:

1. Partnership2. Competitive bidding3. Secure supply4. Category management and e-procurement

solutions


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:



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



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



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 ande-procurement solutions


Four basic supplier strategiesPartnership Competitive bidding Secure supply Category 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

Purchasing Cross functional approach

Purchasing Cross functional approach

Documents

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