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Category Strategy/Sourcing Strategy

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Ram Raghuraman (Founder, BCube Global Solutions & Director, ISM-India) talks about creating unique category strategies and sourcing strategies as part of the ISM webinar series.

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Category Strategy/Sourcing Strategy

  1. 1. ISM India Strategic Sourcing Webinar Series Apr 18, 2015 Category Strategy, Supply Market Analysis
  2. 2. www.bcubeglobal.com Agenda 22 How to analyze your supply base, create corresponding strategies to maximize savings opportunities Supply Market Analysis A model that was developed in 1983 – still has relevance now Kraljic Portfolio Model What are the key elements of a category strategy? Understand how to create unique strategies for different categories Category Strategy & Sourcing Strategy Understand what you buy, how are purchases related, identifying trends Building Category Profiles Raise your hand or post a comment Quick Recap, Q&A Session CATEGORY STRATEGY & SUPPLY MARKET ANALYSIS
  3. 3. Category Profiles & Supply Market Analysis Learn about creating profiles for your various categories and performing a thorough analysis of your supply base.
  4. 4. www.bcubeglobal.com Remember Spend Cube? 4 S E C T I O N 1 4 Which supplier are we buying from? Which category is being purchased? What are we buying? What is the cost center to which the purchase can be attributed to? For who are we buying? From who are we buying?
  5. 5. www.bcubeglobal.com Category Profile 5 S E C T I O N O N E 5 A Category Profile is just an extension of the Spend Cube Suppliers Understand who the top suppliers are in terms of purchased volume, # sub- categories, units purchased Supplier Performance Quality, Delivery, Value Addition, Customer Support Specifications If you are purchasing a book:  Paper weight and grade  Finish and Quality  Size & Number of pages  Colors  Graphics Volumes Understand the volumes purchased by using historical information up to 3 years. Use appropriate forecasting techniques Pricing Compare pricing across suppliers supplying similar products/services. Consolidate contract information. Spend Perform comprehensive analytics and try to make sense of all purchases within category
  6. 6. www.bcubeglobal.com Supply Market Analysis 6 S E C T I O N O N E 6 Remember Porter’s Five Forces Analysis? Supply Market Rivalry Insights to Develop  What forces are at work?  What drivers most influence supplier competitiveness?  What is the profile of a successful competitor?  How can we use the supply market dynamics to our advantage? New Entrants Buyers Suppliers Substitutes
  7. 7. www.bcubeglobal.com Supply Market Analysis – Sample (Electrical Components) 7 S E C T I O N O N E 7 Barriers to Entry Supplier’s Power Internal Competition Threats to Substitution Buyer’s Power  Relativelylow barriers of entry to produce standard electrical equipment  Injection molded tooling costs and dies; large number of dies due to complexity and high volume  Economies of scale play an important role  Global presence becoming critical  Low supplier bargaining power due to high competition and fragmentation  Low due to the fact that primary inputs are commodities: metals, resins, semiconductors.  Higher for wire harnesses manufacturer due to buying of finished components (e.g. connectors, switches, sensors)  Components manufacturers moving to LCC (Asia, Eastern Europe)  Markets dominated by few big players but a very large number of small manufacturers  Trend to consolidate facilities and increase capacity utilization  Low: Virtually no alternative in terms of moving away from electrical components used in equipment (in fact rather the opposite)  Construction products becoming more reliant on increasinglycomplex electrical systems; no substitution but product improvement  High bargaining power since standard relatively undifferentiated products  Easy to switch due to standards for drawings and devices across the industry  Limited for controllers due to design and engineering dependence  In some cases impacted by performance concerns (durability, reliability), e.g. for connectors
  8. 8. Strategy Creating a Dynamic Category Strategy. Developing an appropriate sourcing strategy
  9. 9. www.bcubeglobal.com What is a Category Strategy? 9 S E C T I O N T W O 9 It is a Document A strategy cannot exist until you put it in writing. While some companies use ‘strategy’ as a thought process, the best-in class companies put it in writing. It is Dynamic A Category Strategy should constantly evolve – remain static at your own peril. However, it is important that the fundamentals of the strategy should remain the same else it will lead to muddled thinking and loss of efficiency. The strategy document should be reviewed at least every quarter Alignment A Category strategy should align with the goals and objectives of the Procurement Function as well as the Organization as a whole. Misalignment will lead to lack of support and strained relationships Stakeholder Involvement A Strategy should be created after having consulted all involved functions and stakeholders for it to be effective. Engineering, Sales & Marketing, Finance, Operations, Quality – sometimes even key suppliers.
  10. 10. www.bcubeglobal.com Elements of a Category Strategy 10 S E C T I O N T W O 10 Spend Information See Spend Cube. Slice and dice the data in multipleways Market Information A comprehensivepicture of the market – including (but not limited to) major players, size, geography, capabilitiesand drivers Supplier SWOT Analysis One of the more important aspects – A SWOT Analysis of the Top suppliers is a must (80% spend) Strategy: Long-term & Short-term A Strategy should list out the roadmap for the next 5 years. Include targets and goals, milestones and success metrics Future Trends It is important to understand the cost drivers and trends of all associated components and commodities Value Stream Analysis Understand the entire value stream of the purchased category – break down into as many processes as possible
  11. 11. www.bcubeglobal.com Various Sourcing Strategies 11 S E C T I O N T W O 11 Product Specs Improvement Product VA/VE, Optimize life cycle costs by using substitute materials and exploring alternatives Joint Process Improvement Re-engineer joint processes with key suppliers and share productivity gains, Integrate logistics and support supplier operations improvement Relationship Restructuring Develop integrated supply chain by identifying key suppliers and developing strategic alliances/partnerships. Strategic Make vs Buy? Volume Concentration Consolidate number of suppliers by combining and pooling volumes and redistributing among existing supply base Best Price Evaluation Compare total costs by comparing ‘should-costs’ and renegotiate pricing. Unbundle pricing Global Sourcing Expand supply base by moving to lower cost counties. Profit from global supply demand imbalances Exploit Buying Power Create Advantage
  12. 12. www.bcubeglobal.com Choosing the Right Sourcing Event Type 12 S E C T I O N T W O 12 eAuction Mixed Mode Traditional RFP Part Detail Information Drawings, Specifications Simple and Clear Complex Bidding Allowable time for suppliers to submit bids Minutes to bid/rebid Weeks to bid/rebid Pricing Components Number of cost element/ detail required Few Multiple and complex Pricing Analyses Level of detail, manual pricing calculations Simple, real time and fully automated Sophisticated reports, manual inputs allowed Information Information given to suppliers Auction price posting on web Human contact and control of feedback
  13. 13. Kraljic’s Portfolio Purchasing Model Creating a Dynamic Category Strategy. Developing an appropriate sourcing strategy
  14. 14. www.bcubeglobal.com The Model Explained 14 S E C T I O N T H R E E 14 CLASSIFICATION MARKET POSITIONING PLANNING For a particular category, if a graph is drawn by plotting Supply Risk vs Profit Impact, all suppliers will fall within 4 quadrants Supply Risk Low High ProfitImpact LowHigh Non-Critical Leverage Bottleneck Strategic
  15. 15. www.bcubeglobal.com The Model Explained 15 S E C T I O N T H R E E 15 CLASSIFICATION MARKET POSITIONING PLANNING Understand market forces that affect the category purchased. Perform Porter’s Five Forces Analysis
  16. 16. www.bcubeglobal.com The Model Explained 16 S E C T I O N T H R E E 16 CLASSIFICATION MARKET POSITIONING PLANNING Adopt individual strategies per quadrant classification in the first step Exploit Balance Diversify
  17. 17. www.bcubeglobal.com The Model Explained 17 S E C T I O N T H R E E 17 CLASSIFICATION MARKET POSITIONING PLANNING The Purchasing Strategies should evolve into clear action plans EXPLOIT Make the most of your high buying power to secure good prices and long-term contracts from a number of suppliers, so that you can reduce the supply risk involved in these important items. You may also be able to make "spot purchases" of individual batches of the item, if a particular supplier offers you a good deal. BALANCE Take the middle ground between both the Exploit approach and the Diversify approach – each category is different, plan on a case by case basis DIVERSIFY Reduce the supply risks by seeking alternative suppliers or alternative products. You can also increase your buying power by consolidating to a single supplier. And, in other situations, you could bring the production of the item in-house.
  18. 18. ISM India Strategic Sourcing Webinar Series Apr 18, 2015 Ram Raghuraman Founder, BCube Global Solutions Director, ISM India ram@bcubeglobal.com www.bcubeglobal.com Mobile: (91) 9500017385

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