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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 strategies part ii

Supply Chain StrategiesPart II

I-Ping Chou

Cristal Brun

Augusto Gamarra

Price versus cost in the segmentation arena

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

Supply Strategy Development Process


Risk or






Supply strategy applied to tactical and leverage items

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 to critical and strategic items

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

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 strategies1

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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