Developing a Supply Management Strategy

Author(s):

Wayne L. Douchkoff
Wayne L. Douchkoff, Executive Vice President, Professionals for Technology Associates, Inc. 2273 Palm Beach Lakes Blvd., West Palm Beach, FL 33409, 407/687-0455.

80th Annual International Conference Proceedings - 1995 - Anaheim, California

ABSTRACT.
Introduction and explanation of the Material Positioning Grid and how to use it in the formulation of successful Supply Management strategies. Description of the process successfully used by companies from varied industries to develop and monitor their strategies and tactics. Thorough demonstration of the relationship between material and marketplace conditions.

AN ANECDOTE.
At a recent in-house training session for a client, we were covering the material in the second chapter of our book, Supply Management Toolbox (ISBN: 0-945456-11-5; PT Publications, West Palm Beach, FL), as a way to demonstrate how they could achieve improved customer satisfaction. We were going over how to develop commodity teams which would be responsible for supplier relations when a buyer interrupted us and said, "All this stuff about supplier certification, improved quality and reduced cycle times is great, but you don't understand our business. Our customers always want something special. Maybe if we made a standard product, we could do what you are telling us. Otherwise, it's going to be extremely difficult, if not impossible."

My reply was this: "Yes, it's going to be very difficult to develop a supply management strategy in your company, but it's not impossible. We are here to help you mold a supply strategy that matches your corporate strategy. If your market strategy is to offer the market exactly what it wants, then our job is to help you find suppliers capable of meeting that high mix. If the strategy is to make custom products, then we need to link the supply strategy to those goals."

Unknowingly, the buyer had anticipated the section we were about to teach next. Let me show you how I responded.

KEYS TO SUCCESS.
The key to devising a successful supply strategy is to align it with your overall company strategy. Companies must select a supply base which allows them to meet their market requirements. All too often today, companies jump right into sourcing suppliers, services or materials without a strategic plan. To rectify that situation, we have provided our clients with some simple tools which require their companies to develop a proactive process. The Material Positioning tools described below make Supply Management useful on a day-to-day basis as they aid companies in the choice of an effective supply strategy.

The Material Positioning tools were developed based upon the recognition that two of the most important factors which determine supply strategy are: 1) influence on company results and 2) procurement risks. We feel that it is extremely important to understand your market and the level of procurement risk.

Briefly, these are the steps a company needs to take to develop a supply management strategy:

• Determine the influences and their relative weight on company results.
  • Determine market success elements.
  • Weight elements relative to market success.
  • Calculate index of influence on company result.
• Calculate procurement risk.
  • Determine relative strength of competitive forces.
  • Bargaining power.
  • Rivalry.
  • Substitution.
  • Entry barriers.
• Position material on matrix.
• Select appropriate strategy.

TOOL #1. Use the first tool, Influence on Company Results, as a way to determine on a scale of 0-5 what degree of influence the selected material/commodity has on your competitiveness. For each of the categories, describe the factors which affect it and rate their degree of influence. These factors and their weights may be different for different end-products. This tool helps you identify the pressures we sometimes don't see and consequently don't address.

TOOL #1: Influence on Company Results

MATERIAL/COMMODITY

COST

• World Pricing
• Domestic Pricing
• Cost of Inventory
• Activity Based Costing
• Total Cost Management
• Etc.

QUALITY

• Product Quality
• Service Quality
• Reliability
• Etc.

TIME

• Long-term Agreements
• Flexibility
• Short Lead Times
• Freight Terms
• Etc.

TECHNOLOGY

• Commodity Leader
• Market Position
• Equipment
• Processes
• Innovations
• Vision (Future)
• Etc.

Total 1.0 Sum of C's = Influence Index

TOOL #2. The second tool, Procurement Risk, is used to chart on a scale of 0-5 the varying levels of procurement risk. An assessment of the four competitive forces of bargaining power, substitution, rivalry and entry barriers determines the procurement risk you face. The strength/weakness of these forces may be different for each material/commodity.

TOOL #2: Procurement Risk MATERIAL/COMMODITY Procurement Risk (Scale 0-5)

BARGAINING POWER buyer seller 0 1 2 3 4 5

SUBSTITUTION easy difficult 0 1 2 3 4 5

RIVALRY intense mild 0 1 2 3 4 5

BARRIERS weak strong 0 1 2 3 4 5

SUM/4 =

Below are some examples of what competitive forces might be listed under the categories in Tool #2:

1. BARGAINING POWER
   1. BUYER POWER
      1. Volume purchases
      2. Significant material content
      3. Standard product/undifferentiated product
      4. Low switching costs
      5. Low profit
      6. Potential for backward integration
      7. Fully knowledgeable
   2. SELLER POWER
      1. Monopoly/Oligopoly
      2. Important product to customer
      3. High switching cost
      4. Potential for forward integration
      5. Complex/differentiated product
2. SUBSTITUTION
   1. Cost of switching
   2. Willingness to switch
   3. Level of differentiation
3. RIVALRY
   1. Industry growth
   2. Number of competitors
   3. Capital intensity
4. ENTRY BARRIERS
   1. Capital requirements
   2. Technology/patents
   3. Government policies
   4. Level of differentiation
   5. Availability of raw materials
   6. Availability of distribution network

MATERIAL POSITIONING MATRIX.
After you have scored the Influence on Company Results and Procurement Risk tools, position the material/commodity on the Material Positioning matrix. The quadrant it occupies will determine the most appropriate strategies for this material/commodity.

PROCUREMENT RISK
When you have completed Tool #1 and #2, then you can select a strategy. For example, if completion of Tool #1 and #2 indicated that the selected material/commodity was in the top, right quadrant of the Material Positioning Matrix, then you would look under the possible dominant strategies listed in the table below.

Definitions of the typical strategies listed above are given here:

• PARTNER/ALLIANCE - Select and develop capability of preferred suppliers. The emphasis is on early supplier involvement, continuous improvement, total cost and cycle time reduction.
• LONG-TERM AGREEMENT/CONTRACT - Negotiate longer term contract to reduce/stabilize pricing, cost, delivery and/or improve quality.
• STANDARDIZE - Design change to allow for use of industry standard and/or reduce product proliferation.
• QUALITY IMPROVEMENT - Improve quality thru process mapping, process control, capability study, etc.
• OVERHEAD COST REDUCTION - Reduce cost of doing business by Kanban, EDI, blanket orders, etc.
• CONSOLIDATE WITH OTHER DIVISIONS - Negotiate on consolidated volumes of other business units, divisions, etc.
• COMPETITIVE BIDDING - Negotiate with two or more suppliers.
• PRICE ROLLBACK - Ask existing supplier to match price of competitive source.
• SUPPLIER REDUCTION - Reduce the number of suppliers for a commodity in order to increase leverage and reduce cost of doing business.
• CROSS COMMODITY LEVERAGE - Source purchases with suppliers that have multiple commodity capabilities.
• INTERNAL PRICE BENCHMARKING - Exchange of information within company in regards to price, term and conditions.
• RESOURCE TO NEW SUPPLIERS - Resource to a different supplier.
• SUBSTITUTE - Find or redesign substitute material.

SELECTING A SUPPLY STRATEGY. When selecting your supply strategy, be aware that the following factors influence strategy selection:

• Dependent on material position on matrix.
• Dependent on strength of indices.
• May include multiple strategies.
• May use strategies not in quadrant.

In the diagram on the next page, write in the name of the material, commodity or sub-commodity in the space provided. Place an "x" in the Classification box. Fill in the Influence and Risk Indices. Note the selected strategies, who is responsible for each, and due dates.

Clients which have used the tools described in this article find that they are much better able to attain customer satisfaction. This makes sense because our clients have sourced suppliers which help them to attain overall company goals. Successful Supply Management programs rest upon a foundation which is comprised of the correct supplier strategy for a given situation.

NOTE: This article is missing charts. For a complete copy of the article, please call the NAPM Information Center.

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