Chapter 9 Purchasing and business strategy

1. Chapter 9Purchasing and business strategy

2. Program Purchasing and competitive strategy Cost leadership and differentiation Lean manufacturing Integrating purchasing into business strategy Towards purchasing excellence Purchasing portfolio analysis Global sourcing

3. Purchasing and competitive strategies Reasons for outsourcing those activities that are not considered ‘core business’: Increased outsourcing and subcontracting, as a result of make-or-buy studies Buying of finished products instead of components Turnkey delivery Technological development

4. Purchasing and competitive strategy The competitive situation of West European industry 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:

5. Purchasing and competitive strategy Textiles Chemicals Clothing Food products Leatherware/shoes Rubber, plastics Steel Automobile industry Machine construction Shipbuilding Telecommunications Computers Pharmaceuticals Medical equipment Optical industry Biochemistry

6. Cost leadership and differentiation 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. Porter (1980) defines three strategies leading to a distinguishing market position: • Cost leadershipmain focus:continually reducing the cost price of the final product. • Differentiationaims at marketing products which are perceived by the customer as being unique • Focus strategyaims at serving a particular, clearly defined group of customers in an optimal way

7. Lean 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)

8. 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 systemsthat 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.

9. Lean manufacturing Differences between Japanese and European new product development: • Japanese manager in charge of new product development; greater authority to make decisionsthan his Western counterpart. • Product and process engineering are integrated responsibility areas • Engineering managerdecides on who he wants to involve in his engineering team and for what period.

10. Lean 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

11. Strategic triangle Customers Marketing Company Competitive benchmarking Make vs. Buy Strategic sourcing Competitors Suppliers

12. Choices regarding the strategic triangle • Primary customer groups • Match product and customer • Focused marketing plan • Choose between specific vs. standard solutions • Major competitors • Sustainable competitive advantage • Competitive benchmarking • Major suppliers • Investigate core competences • Subcontracting if activities can not be performed in a competitive way

13. Towards purchasing excellence Monczka as quoted by Purspective www.purspective.com

14. Towards purchasing excellence • Insourcing/outsourcing • Clear policy regarding make-or-buy • Develop commodity strategies • Spend analysis (spend cube) • Structure and classify purchasing expenses (category tree) • Determine strategy • Number of suppliers geographical dispersal, relation, contract form • Involvement of specialists and internal customers in execution

15. Towards purchasing excellence • World class supply base management • Intensify relations with suppliers • Database with supplier information • Detailed audits with important suppliers • Develop and manage supplier relationships • Continuous improvements • Classification of suppliers: • Commercial suppliers • Preferred suppliers • Supplier partners • Integration of suppliers in product development • Suppliers with proved competences • Using specific knowledge

16. Towards purchasing excellence • Supplier integration into order fulfillment process • Outsource logistic and administrative tasks • Connect suppliers with information systems and production planning • Develop plans to increase value for customer through purchasing • Supplier development and quality management • Suppliers are invited to participate in suggestions for improvement • Suppliers are a source of new ideas • Strategic cost management • Detailed cost models • Supply chain analysis and measures to decrease supply chain costs together with suppliers • Sharing of advantages is necessary

17. Enabling processes

18. 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? 20-80 rule: 20% of the products and suppliers represent 80% of purchasing turnover

19. Purchasing portfolio analysis Kraljic’s (1983) product portfolio based on two variables: • 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 • Supply riskmeasured against criteria such as short-term and long term availability, number of potential suppliers, structure of supply markets.

20. Purchasing product portfolio High Purchasing’s impact on financial results Low Low Supply risk High

21. Supplier portfolio High Supplier impact on financial results Low Low Supply risk High

22. Product categories • Strategic products: • Often high-tech, high-volume products • Only one supply source available • Significant share in cost price of end product • Three situations possible: • Buyer-dominated segment • Supplier-dominated segment • Balanced relationship  a partnership may develop over time

23. Product categories • Bottleneck products: • Relatively low value, vulnerable regarding supply • Few alternatives available • Supplier is often dominating the market • Routine products: • Large variety in products • Low value per product • High transaction costs • Leverage products: • Choice between different suppliers • Low switching costs • Relatively high share in end product price

24. Purchasing portfolio-analysis Four basic supplier strategies: • Partnership • Competitive bidding • Secure supply • Category management and e-procurement solutions

25. Four basic supplier strategies Partnership:

26. Four basic supplier strategies Competitive bidding

27. Four basic supplier strategies Secure supply

28. Four basic supplier strategies Category management and e-procurement solutions

29. Four basic supplier strategies

30. Purchasing 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 necessary • The Dutch windmill, analyzing buyer-seller interdependence • combining 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.

31. STRATEGIC LEVERAGE ROUTINE BOTTLENECK Purchasing Portfolio Management Evaluate the impact of the supplier’s view within strategy development • CORE • Sound position • Improve own profit • EXPLOITABLE • Adversarial relationship • Check power balance • Consider other sources • EXPLOITABLE • Great caution • Raise mutual dependency • Seek competition • CORE • Good match • Potential long term relationship Relative value • NUISANCE • Mismatch • Accept short term • Change supplier • DEVELOPMENT • Supplier developm. opportunities • Encourage participation • NUISANCE • Very high risk • Seek competition • Raise attraction • DEVELOPMENT • Potential match • Work closely together to develop business Our Company’s attractiveness Relative cost • CORE • Good match • Intensify relationship • Maintain long term relationship • EXPLOITABLE • Moderate cost risk • Closely monitor price and service • Change supplier • CORE • Strong position • Maintain relationship • Offer other opportunities • EXPLOITABLE • Moderate risk • Monitor price trend • Seek alternatives Supply risk • NUISANCE • Possible mismatch • Passive relationship • Seek alternative supplier • NUISANCE • High service risk • Change supplier • Offer incentives • DEVELOPMENT • Good supplier interest • Offer incentives • Raise mutual dependency • DEVELOPMENT • Potential risk • Raise mutual dependency • Offer inducements

32. Global sourcing Proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering and operating locations. 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.

33. Conclusions Purchasing 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.