bw2 conducting procuremnet and markets-2

Bill Wright - Lecture 2

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BPMA706 Project Finance and Procurement

Conducting the Procurement Process

© Bill Wright 2013. All Rights Reserved. 2

Workshop Objectives

The objective of this workshop is to be able to evaluate different Market and supply options as part of the project procurement strategy

Content: Identifying the supply market Gathering market intelligence Analysing the commercial environment (Five Forces

model) Extent of competition & ability to leverage on price Sourcing options


Why ‘Market Intelligence’?

Market analysis is the precursor to procurement strategy development

Must be used to create added value and innovative solutions

An essential part of being ‘proactive’

Commercial Market Analysis

OUTPUTS:Business &Customer solutionsAdded-valueinnovationOptions & Strategies

INPUTS:Market dataBusiness driversCustomer needsLegislative &Regulatory pressures


Reasons for a ‘wide’ search

More suppliers = greater competition and more choice

Competition drives efficiency and innovation Eliminates complacency Opportunity to find alternative products /

solutions Opportunity to benchmark existing supply options Building win-win relationships with the best

suppliers

You don’t know what you don’t know…!


Gathering Market Intelligence

Annual report2007

Annual reports

Market Experience

Market Research

Press search

Market Profile

020406080

100

Supplier Quotes

Phone interviews

- Logistics (DHL, ..)- Supplier stores- ...

Open sources

“Looking at

Europe, the..”

“The current trends are..”

“We believe the market

will..”


Strategic Analysis

Procurement requires planning Market dynamics will impact the success of your

outcomes Environmental analysis:

External influences Key product/market information Key supplier information Power / dependency

Best practice requires us to use this information effectively to our advantage


Competitive Analysis of Markets (Porter’s 5 Forces)

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THREAT OFNEW ENTRANTS

THREAT OFSUBSTITUTES

BARGAININGPOWER

OF BUYERS

RIVALRY IN MARKET

BARGAININGPOWER

OF SUPPLIERS

Simple formula:

More competition = Less potential profit in the market= Lower prices


Defining the Market

Role of the specification: Documents our requirements Determines what the supplier will provide and which

suppliers can supply …defines the market

Watch out for: Over-specifying the requirements Limiting the market size and number of suppliers who

can compete for your business Geographic limitations within each market.

o We will cover this further in module CM8: ‘Writing a Specification’


Market Rivalry

Relates to the level of competitive rivalry within the market (i.e. between market players). Rivalry is intense when:

Numerous market players, few dominant

Industry growth is slow

Exit barriers are high

Little differentiation other than price

Rivalry extends beyond normal bounds of business.

Price competition occurs when:

Broadly similar products and low switching costs for buyers

Price is sensitive to volume [elasticity]

Low marginal costs

Short product life / perishability.

Adapted from: Porter (1980)


MARKET RIVALRYKey Questions

1. Is there evidence of competition or collaboration within the market? (e.g. ready-mix concrete)

2. How similar or differentiated are market products?

3. Can the market easily find other buyers? What level of sales & marketing activity is there?

4. Is there an excess or shortage of market capacity?

5. What are typical profit and liquidity levels within the market?

6. To what extent does the market compete on price?


Threat of New Entrants

Relates to the likelihood of new players setting up in the market as competitors to the existing market players. The threat of new entrants to the market is lower when:

Products in the market enjoy scale economies

Demand benefits from scale in the market

Customers would incur switching costs

High capital investment is required to set up

Incumbent in the market have advantages

The market depends on defined channels of distribution

Operation in the market has specific regulatory requirements



Possible Substitutes

Relates to the likelihood of alternative products and services fulfilling the same function as those within the market.

The threat of substitutes is high if:

The alternatives offer an attractive trade-off in terms of price vs.

performance

Customers have relatively low switching costs

Customers are price-sensitive

Customers are open to new ideas or ways of working.



Bargaining Power of Buyers

Relates to the relative bargaining power of all buyers to the market in question (i.e. not just us as a buyer, but others too).

Buyers have leverage when:

Fewer buyers [concentrated]

Market’s products are undifferentiated

Low switching costs

Threats of backward integration to the supply market.

Buyers are price sensitive when:

Margins are tight

Large cost item

Direct impact on buyer’s products

Market products are believed to be non-critical.



Bargaining Power of Suppliers

Relates to the relative bargaining power of the suppliers to the market in question.

Suppliers are powerful when:

Fewer suppliers competing with one another

Low dependency on revenue from your market

High switching costs between suppliers

Suppliers’ products are differentiated

No credible substitutes



How do we use the analysis ?

Remember: The purpose of analysis is to identify future opportunities for enhancing value

…this is part of your procurement strategy.

Possible outputs of competitive analysis include: An overall assessment of the structures of power within the

market An assessment of your potential leverage on the market (as-is) Identification of ‘levers of power’ within the supply market An assessment of the switching costs associated with

changing supply An understanding of how the market dynamics could be

changed with alternative sourcing opportunities.


Key things suppliers want …

Mutual respecto Focus on what the supplier is delivering, not how they do it

Client commitmentso Clients need to deliver their side of the bargain, and commit

resource needed Client Management

o Need a professional relationship Communication

o Share the vision, let the supplier know what is happening, so they can react to change

Plus being paid on time!!

Source: CIPS – Chartered Institute of Purchasing & Supply


Portfolio Analysis (the Kraljic matrix)

Bottleneck Strategic

LeverageAcquisition

High Value

Low Value

Low Market

Difficulty

High Market

Difficulty

Adapted from: Kraljic (1983)


Portfolio analysis - tactics

LeverageDrive Profit

Short/medium term relationshipsStandardise inputs/switch suppliers

Use purchasing leverageMarket/price intelligenceMinimise switching costs

Consortia buy

StrategicCompetitive Advantage

Long term relationshipShare risks and benefits

Cost transparencyTotal cost of ownership focus

Cross functional teamsPlan for the worst!

Non-criticalMinimise Effort

Reduce processing costAutomate process

Purchasing cards, e-procureCall-off contracts

End user make purchaseOne stop shopping

BottleneckReduce Risk

Medium/long term relationshipsKnow supplier’s business

Seek alternativesContingency plans

Encourage new suppliersHold stock