category strategy development & implementation
DESCRIPTION
TRANSCRIPT
Author : Tahir Rafiq
Project Start Date:
ATR Consulting Limited
April 2013
Category Strategy Development & Implementation
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Tahir Rafiq
Applying automotive best practice in the Banking Industry.....
1 atr
Contents
Category strategies & supplier relationship management 1
Baseline :- Portfolio analysis 2
Ideal positioning (Using PFA) 3
Adopting a strategy based on power regimes (Hexagon Analysis) 4
Commodity strategy matrix using the hexagon analysis 5
Adopting a strategy based on power regimes 6
Developing the right commodity strategy 7
Assessing the gap between ideal sourcing strategy and current practices 8
Implementing strategy & action plans 9
Appendix A 10
Appendix B. Glossary 11
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Category strategies & supplier relationship management
Portfolio analysis workshop out put
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Out put of workshop
An analytical (excel) tool was used to Position the material groups on the Portfolio Matrix.
Based on the following weighted variables
Spend
Number of Suppliers
The level of competition
Number of Buyers
The Buyers Search Cost
The Buyers Switching Cost
The Suppliers Switching Cost
Product Complexity
Number of Substitutes
Buyers Spend as % of Suppliers T/O
The level of Importance to Supplier
A workshop was held with the Contracts Department & The Purchasing Department to determine the position of each material group
A workshop was held with the Contracts Department & The Purchasing Department to determine the position of each material group on the material
This is an iterative process and this exercise should be conducted on a regular basis i.e. The more times it is performed the more accurate the out put will be.
Value ($) of Spend
Supply Risk
Category positioning matrix ( tool)
3 atr 2
Baseline :- Portfolio analysis
Examining buyer – supplier power dynamics
Potential approaches to buyer supplier relationship management
2. B > S 3. B = S
Leverage – Focus on Short Term Relationship
Use competitive tendering to reduce cost and consolidate volume Strategic - Focus on Long Term Relationship
Ensure availability of supply, focus on relationship building, process integration and innovation Tactical – Focus on Short Term Quick Wins
Simplify and streamline purchasing process, reduce number of suppliers and simplify ordering Bottleneck - Focus on Long Term Security of Supply
Search for alternatives, seek new suppliers, reduce dependency on current supplier
B>S Buyer Dominance B=S Buyer Supplier Inter-
dependence
B0S Buyer Supplier
Independence
B<S Supplier Dominance
Supplier Power Low
High
Buyer Power
Low
High
Strategic Leverage
Tactical Bottleneck
4 atr 3
Ideal positioning
Adopting strategies to optimize power
Adopt following strategies.....
2. B > S 3. B = S
Supplier Power Low
High
Buyer Power
Low
High
L The best place to be
The second best place to be
T
Maintain position
Maintain position but shift Long term to leverage
Consolidate with other Material groups & shift up
B Reduce dependency on the current Supplier base .
changing the specification Finding alternative suppliers Encouraging new suppliers into the market Consolidating with other material groups
L
B T
S S
5 atr 4
Adopting a strategy based on power regimes (Hexagon Analysis)
Example of typical levers have been identified for the various sourcing approaches
Consolidation
• Supplier Rationalization • Consolidate volume across Business • Redistribute volume among suppliers • Combine volume from different
commodity group • Rationalize/standardise parts
Cost Leadership
• Benchmark prices regularly • Renegotiate/rollback prices • Un-bundle prices • Use competitive bidding • Use commodity hedging/trading • Compare total cost among potential suppliers • Base pricing on profitability
Global Sourcing
• Expand geographic supply base • Examine new suppliers • Capitalise on currency fluctuations • Take advantage of trade incentives • Low cost country sourcing
Specification
• Rationalise/standardise product(s) • Product Substitution • Apply product value analysis • Apply product value engineering • Use functional/ output specification • Examine life cycle costs
Exploit Buying Power
Create An Advantage
Joint Process Improvement
• Optimise physical material flow • Support supplier operations improvement • Develop long-term contracts • Share productivity gains • Integrate logistics • Cost reductions • Product Innovation / Development
Relationship Mgt
• Analyse core competencies • Employ strategic alliances/partnering • Co Investment • Vertical Integration
Specification Consolidation
Cost Leadership
Relationship Mgt
Global Sourcing
Strategy Joint Process Improvement
Exploit Buying Power Create An Advantage
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Commodity strategy matrix using the hexagon analysis
Category strategy matrix
Strategy
Core Activities
1 2 3 4 5
0-20 20-40 40-60 60-80 80-100 Consolidation a Purchasing is Coordinated through a central Point O √ √ √ √
b Percentage of Spend Negotiated by Volume Leverage O √ √ √ √ c Combining Volumes from Other Material Groups O O O √ √ d Redistributing Volumes Across Suppliers O O √ √ √ e Pooling Volumes Across Business O √ √ √ √ f Future Volumes through Demand Forecasting O O O √ √
Cost Leadership a Competitive Bidding √ √ √ √ √ b Total Life Costing O O O √ √ c Continuous Benchmark O √ √ √ √ d Renegotiate & Rollback Pricing O O √ √ √ e Unbundle Prices O O O √ √ f Commodity Hedging & Trading O O O O √
Global Sourcing a Multi Region Sourcing O √ √ √ √ b Taking Advantage of Trade Incentives O O O √ √ c Capitalising on Currency Fluctuations O O O O √ d Alternatives sourced from broad Gloabl Supply Markets O O O √ √ e Taking Advantage of Low Cost Country Sourcing O O √ √ √
Specification a Change or improve Specification O √ √ √ √ b Apply Product Value Analsysis O O O √ √ c Use of Out Put / Functional Specification O O √ √ √ d Standardise Specification O √ √ √ √ e Jointly Optimise Specification with suppliers O O O √ √
Joint Process Improvement a Level of Information Sharing O √ √ √ √ b Structured Improvement Process with 1/4 Reviews O O √ √ √ c Joint Process Teams working to reduce costs in SC O O O √ √ d Level of Support Given to Supplier Operations Improvement O √ √ √ √ e Integration of Processes & Systems O O √ √ √ f Integration of Losgistics O O O √ √ g Product Innovation & Development O O O O V
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Adopting a strategy based on power regimes
Typical levers identified for various sourcing approaches
Relationship Type 1 2 3 4 5
100 % 100 % 100 % 100 % 100 %
Transactional No Supply Arrangements No Contracts in Place Spot Purchasing Playing the Market √ O O O O
Short Term Opportunistic
Buying Power is leveraged to get Lowest Cost Short Term Supply Arrangements are in Place Exploit Market Competition O √ O O O
Collaborative Relationship Minimise Cost & Maximise Service Levels Medium Term Relationship Ensure Supply Continuity O O √ O O
Partnering Medium to Long Term Relationship Maximise Benefits to Both Supplier & Buyer O O O √ O Interdependent Strategic Alliance Long Term Relationship Risk Sharing Co Investment Committing Volumes O O O O √
Category Positioning
8 atr 7
Developing the right commodity strategy
Selection criteria ( matrix)
Exploit Buying Power Create an Advantage
Commodity Strategy
Scoring Matrix
5 = High value 1 = Low value
Tactical Leverage Bottleneck Strategic
3 Consolidation
Cost Leadership
Global Sourcing
Specification
Joint Process Improvement
5
3
1
2
5
5
5
2
2
1
2
2
5
4
2
2
2
4
5 Relationship Mgt 1 2 3
5
Best Fit
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Assessing the gap between ideal sourcing strategy and current practices
Gap analysis
Small Strategic Gap Ratio – All applicable approaches have been applied and have yielded considerable results already
Low gap
Very high gap
Commodity A Current Approach Target Approach Gap Analysis
Consolidation 3 5 2
Cost Leadership 2 5 3
Global Sourcing 2 5 3
Specification 2 2 0
Joint Process Improvement 1 2 1
Relationship Mgt 2 2 0
Overall Score 9 21
Rating 43 %
Category Scale 20-40%
0 % 0 – 20 %
20 % 20 – 40 %
40 % 40 – 60 %
60 % 60 – 80 %
80 % 80 – 100 %
Large Strategic Gap Ratio – There are a number of applicable approaches which have not been applied, or which have been applied without success
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Implementing strategy & action plans
Standardized tracking tool
Target Position Objective Achieved
Example . Electrical Category
Material Group Sub Material Group Consolidation Cost Leadership Global Sourcing Specification
Joint Process Improvement
Relationship Mgt
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
Electrical Hand Tools
A C T C T T C C T A
Electrical Automatic Hand Tools
C C T C T A C T A
Electrical Alkaline Batteries
C C T C T A C T A
Electrical Rechargeable Batteries
C C T A A C T C T A
Electrical Accessories
A T C T C T T C C T C T
Electrical LED Flash Light
T C A A C T C T C
Electrical Flashlight
C T C T C T T C C T C T
Electrical Standard Wires
T A C T C T T C C T A
Electrical Energy Savings Lighting
C T A A C T C T A
Electrical Switches
C T C T C T T C A C T
Electrical Diodes
C A C T C T T C C T A
Electrical Connectors
C T C T C T C T C T A
Current position
A Achieved T Target C Current Position
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Start Point
Conduct a Portfolio Analysis Exercise on a. The Material Group b. On The Sub Material Group
Step 1
For each Material Group / Sub Material Group determine the current approach against each of the six criteria in the Hexagon using “The Commodity Group Positioning Tool” This activity should be conducted jointly with SRS and Purchasing / Contracting
Step 2
Determine the type of Supplier Relationship (Consult the Portfolio Analysis to see where the commodity is positioned) that you need to have with the supplier of this particular Commodity Group / Sub Group. Use the “Supplier Relationship Tool” to establish this.
Step 3
Using “The Best Fit Strategy Tool” compare the current approach against each of the six criteria with Best Practice.
Step 4
Using “The Gap Analysis Tool” determine the size of the Strategic Gap, between the current approach and Best Practice.
Step 5
Using the “Commodity Tracking Tool” plot the current position, the target position and monitor the progress on a monthly basis.
Action Plan (How to use the tool)
Appendix A
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Term Explanation
Supplier Rationalization Reducing the number of suppliers
Consolidate volume across Business Add all the requirements together from different parts of the business i.e. Manufacturing, maintenance, IT etc to increase the volume of spend.
Redistribute volume among suppliers Change the level of spend with existing suppliers i.e. Split the business 75% to 25% between two suppliers to increase competition
Combine volume from different commodity groups
Adding together several related commodity groups to increase volume of spend, reduce the number of suppliers
Rationalize / Standardise Parts Reduce the number of parts , by using standard sizes / specs i.e. Use one standard bearing instead of several different bearings which may all be similar. This will help to consolidate volumes and increase leverage when negotiating with the supplier base.
Cost Leadership Is when price is the main focus for a particular commodity group
Benchmark Prices Regularly Compare the prices on an annual basis by going out to the market and getting other suppliers to quote for the business
Renegotiate / Rollback Prices Renegotiate with existing suppliers, if the market conditions are hard and the company’s profit margin is being reduced. i.e. ask for cost reductions. Rollback Prices, ask the supplier to reduce the costs so they are the same as two years ago for example.
Un-bundle Prices Ask the supplier to break the suppliers costs down into components i.e. raw material, logistics, manpower, admin, etc. This is so that you can determine the level of profit they are making, if it is too much then they are taking advantage, if it is too little then they could be making a loss.
Competitive Bidding Getting more than two suppliers to compete for the quote / business
Commodity Hedging / Trading Agreeing to buy from the supplier so much of a product, at an agreed price at a fixed point of time in the future. Trading is when you buy a commodity for your own needs plus some extra, that you can sell to other buyers for a profit
Compare total cost amongst suppliers Comparing prices between several suppliers, based on the cost of goods, the maintenance and after care support, the servicing costs, the replacement cost, the life and the usage of the product (i.e. How long will it last and how much use will get from it)
Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)
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Term Explanation
Base pricing on profitability
Set a limit for an acceptable profit margin for the supplier i.e. 10% and agree that the supplier will only make 10% and no more. You will have to be very careful and analyse the suppliers costs to make sure that he is making only the agreed profit margin and no more.
Expand Geographic Supply Base I.e. If you are only buying from one region, then you need to include other regions, i.e. From western province, increase to eastern province. If you are only buying from one country in Europe increase the area to the whole of Europe.
Examine new suppliers Look for other suppliers, examine their products etc
Capitalise on currency fluctuations Look out for the exchange rates going up or down, it is best to buy when the exchange rate is high and in your favour, this way you will have greater purchasing power (i.e. You can buy more things)
Take advantage of trade incentives Some countries have special arrangements with Saudi Arabia, i.e. They do not charge tax, or tariffs, they do not charge the manufacturers export duties if they export to KSA etc. Or some other benefit, you need to investigate these benefits .
Low cost country sourcing Countries that have cheap labour rates, or access to cheap resources, that can manufacture goods at lower rates than other countries.
Product Substitution Change one similar product with another one, could be based on Brand, specification, or a different product altogether that does the same job
Product value analysis Is looking at the function(s) of a product and the cost of achieving that function, the functions are broken down into primary and secondary, primary functions are the ones that the product must have and the secondary ones are the one that we can delete as they are not necessary , the ideas is that by deleting the secondary functions we will reduce also the cost.
Product value engineering Similar to the one above, but the emphasis here is on optimising the performance of the product, to increase its life, increase its quality and also to reduce its cost, through technical / engineering teams.
Functional / Output Specification Only concentrate on what the product is required to do and the job it should perform and not the make up of that material, leave that to the supplier, we are only interested in the use of the product.
Examine Life Cycle Costs Life Cycle Cost is the total cost of ownership over the life of the product, it includes, the acquisition cost, the logistics cost, maintenance, repair, the amount of usage, etc.
Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)
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Term Explanation
Optimise Physical Material Flow Improving the coordination of logistics between us and the buyer, looking at how the material is passed through the suppliers organisation and the transformation process (manufacturing process) then out to us and then how does it pass through our organisation
Support supplier operations improvement Looking at ways of working with the supplier to improve their systems and processes together as a team
Develop long-term contracts Long term contracts are typically more than three years
Share productivity gains By working as a team with the supplier to reduce costs, or improve quality, or knowledge , the benefits should be shared with the supplier.
Integrate Logistics Better coordination of transport of goods between us and the supplier
Cost Reductions Working with the supplier to reduce costs
Product Innovation / Development Working with the supplier to develop or design new products
Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)
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End of presentation
Tahir Rafiq Feedback would be greatly received and appreciated
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