Supply chain strategies part ii
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Supply Chain Strategies Part II. I-Ping Chou Cristal Brun Augusto Gamarra. Price Versus Cost in the Segmentation Arena. Leverage items/services Freight costs, payment terms, and inventory costs Tactical items/services Transaction costs Critical items/services

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Supply Chain Strategies Part II

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Supply Chain StrategiesPart II

I-Ping Chou

Cristal Brun

Augusto Gamarra

Price Versus Cost in the Segmentation Arena

Leverage items/services

  • Freight costs, payment terms, and inventory costs

    Tactical items/services

  • Transaction costs

    Critical items/services

  • Cost of plant or equipment downtime and utilization costs

    Strategic items/services

  • Maintainability and reliability costs or avoidance costs

Supply Strategy Development Process


Risk or






Supply Strategy Applied toTactical and Leverage Items

Tactical Items

  • Tactical items are low-value activities which contribute little to the strategic direction of the firm

  • Implement Streamlining in the acquisition process

  • Purchasing Goal: Reduce the time spent by personnel in the firm on the acquisition, delivery, stock-keeping, and payment of these items

    Leverage Items

  • Leverage items are high-value activities

  • Focus on short-term contracts and pursue a proactive supply strategy to find new substitute products

  • Purchasing Goal: Increase profit margin, use competitive purchasing practices to increase profitability

Supply Strategy Applied toCritical and Strategic Items

Critical Items

  • Critical items are low-value activities and high exposure/risk

  • Strategic items are high-value activities and high risk/exposure

  • Purchasing Goal: Evaluate them for elimination

    Strategic Items

  • Require the highest level of purchasing competence, consider long-term contracts.

  • Total cost of acquisition must be monitored and controlled

  • Purchasing Goal: Maximize competitive advantage

    • Earlier time to market, Superior Product Quality,

      Rapid Innovations

Segmentation Quadrant Strategies

  • Tactical Items

    • Main driver: minimize number of transactions

      • Consolidation of number of orders

      • P cards

      • Use of integrated suppliers

      • Outsourcing strategies

  • Leverage items

    • Main driver: Minimize the total landed costs

      • Volume leverage when appropriate

      • Concentrate purchases across departments

      • JIT

      • Supplier quality assurance

Frequently ordered items

Segmentation Quadrant Strategies

  • Critical Items

    • Main driver: Decrease product variety

      • Develop standardization

      • Use of cross functional teams

      • Developefficient processes

  • Strategic items

    • Main driver: Gain competitive advantage through new technology access and foster high level of service from suppliers

      • Strengthen Buyer supplier relationship

      • Alliance partnering

      • Joint ventures

      • Negotiation should revolve around cost sharing discussions


  • Supply segmentation techniques display different characteristics of each item so as to provide the basis of different supply strategies.

  • ABC analysis has its limitation.

  • The spend analysis is the first step of supply segmentation analysis.

  • Items in different categories have different targets, which optimize underlying firms’ strategic goals.

  • Today’s price should include several other aspects of costs.

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