Identifying the key
steps to designing an effective supply strategy
by Jimmy Alyea
Developing a supply strategy is a process that when
integrated with a firm’s other business processes, contributes to a firm’s
overall goals of competitive advantage and profitability. A simple, but effective purchasing portfolio
model may be constructed using a supply segmentation technique that classifies
products or services to be sourced in order to formulate distinctive supply
strategies for each. Although the specific supply strategies, tactics, and
supply management approaches developed will be balanced and tailored to an individual firm’s needs, certain
basic steps are common to their development.
The first step is to categorize the types products and/or
services to be sourced. Products are
evaluated on the basis of the internal “risk” a company would encounter if the
item were no longer available or of low quality, followed by an assessment of each
item’s “value” (both monetary and intrinsic) to the company. The value of a relatively low-cost item might
be high when it adds significant value to the organization’s output. This could be because it makes up a high
proportion of the output (for example, raw fruit juice used by a fruit juice
maker) or because it has a high impact on quality (for example, the cloth used
by a high-end clothing manufacturer). A
detailed “spend analysis” that is aggregated across divisions, strategic business units, and
suppliers should also be developed for all sourced items. This helps define key spend categories and
assess impact on a firm’s profitability.
The next step is to graph each unit or group of units on a
chart on the basis of two dimensions:
supply market complexity and the cost/value of each unit. Each dimension has two possible values,
“high” and “low.” The horizontal (X) axis
represents cost/value (measured as the total annual dollar amount spent on
each) and the vertical (Y) axis represents market complexity. Market complexity is determined, in part, by
the number of suppliers, available capacity,
product specifications (unique or standard), and availability of
substitutes. An upscale specialty
jeweler such as Tiffany’s would face a highly “complex” market with few
suppliers, limited capacity, unique product specifications, and no available
substitute products, whereas a mall-environment jewelry store would deal in a simple
or low- complexity market with numerous suppliers and substitute products
available. Market analysis helps a firm assess the current supply market
structure and available purchasing options
and supply risks, as well as analyze trends and forecast future supply
problems.
After completing the market analysis, the previously
classified products/product groups can be segmented on a purchasing portfolio matrix
consisting of four quadrants that represent distinctively different supply
environments:
Quadrant I, “tactical” (low market complexity, low cost/value);
Quadrant II, “leverage” (low market complexity, high cost/value);
Quadrant III, “critical” (high market complexity, low
cost/value); and
Quadrant IV, “strategic” (high market complexity, high cost/value).
The items in each
quadrant require development of specific supply management goals and strategies
of varying complexity. For example, the
supply management focus on items in the strategic
quadrant is on increasing competitive advantage through strong
buyer-supplier relationships such as strategic alliances, joint ventures, and sole
sourcing and through medium- to long-term supply contracts. Mutual trust provides access to new technology
that is important for developing value-ads that increase customer satisfaction
and loyalty. In contrast, the
standardized, generic products in the high-volume leverage quadrant do not require long-term supply contracts or
supplier partnering strategies because products and suppliers are
interchangeable and supply risk is minimal.
With a goal of decreasing unit costs and increasing profit margins to
contribute to corporate profitability, managers can utilize traditional supply
strategies. These include aggressively
seeking lower-cost suppliers from a large supply base, finding substitute
products, and leveraging buying power to
obtain volume discounts and competitive bids.
Distinctive differences may also be found in the supply
market characteristics of the critical and
tactical quadrants, with a
corresponding adjustment of supply
management goals and supply strategies. To illustrate, the supply risk of items in the
low-value critical quadrant is high,
so management’s goal is to minimize supply disruptions even if additional cost is
required. Strategies to assure supply
may entail keeping extra stock and developing contingency plans to deal
with unexpected situations. When possible, ways should be found to move
critical items into the tactical quadrant to reduce their supply risk. In the tactical
quadrant, which consists of low-value, non-critical items, supply management’s
emphasis is on reducing acquisition costs that may consume up to 80 percent of a
purchasing department’s time. Strategies
include utilizing integrated supplier relationships such as electronic data
interchange and supplier-managed inventory systems to reduce transaction and
logistics costs in this category.
Each stage of the supply segmentation technique is an important
building block in the systematic process of constructing a purchasing portfolio
analysis model based on the relationship between market complexity and
cost/value. The portfolio matrix forms a
simple, but clearly focused framework for analyzing supply environments in
order to develop feasible supply strategies for the sourcing of products in
each quadrant. This model presents a
multi-stage process of developing supply strategies that minimize a firm’s supply
risk and highlight opportunities to improve a firm’s overall buying position
not only in the short term, but also in the long term. As such, it encourages CEO’s to look at the
“big picture,” and it changes the traditional operating perspective of “purchasing”
to one of strategic supply management.
For more information, please contact Jimmy Alyea:
