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Purchasing chessboard english
The document introduces The Purchasing Chessboard, a framework developed by A.T. Kearney to help companies adapt their procurement strategies to changing market conditions. The Chessboard maps 64 different procurement methods across diverse supply and demand situations. It analyzes four main procurement strategies: leveraging competition among suppliers, seeking joint advantage with suppliers, changing the nature of demand, and managing spend. The Chessboard helps procurement organizations select the appropriate strategies to address their unique market challenges. It is presented as a holistic approach to ensure procurement contributes to business success in today's volatile markets.
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Purchasing chessboard english
- 1. 1The Purchasing Chessboard® ThePurchasing Chessboard® In turbulent times, markets become more volatile and differentiated. What does this mean for companies and industries worldwide? That a “one size fits all” supply strategy no longer applies.
- 2. 2The Purchasing Chessboard® Marketturbulence in recent months has caught many buyers off guard. Their procurement strategies are often geared toward specific market conditions, and lack the flexibility to adapt to radical changes, such as those we are experiencing today. Past procurement strategies were largely focused on ways to counter rising raw materials prices and scarce resources, but the current economic crisis has forced a shift toward cost containment. Although market volatility is likely to continue over the next year, one trend is destined to remain: Supplier markets will become more differentiated. What does this mean for companies and industries worldwide? That a “one size fits all” strategy no longer applies. For years, most procurement organisations have operated in supply markets that could be addressed using relatively simple tools and techniques—RFIs (requests for information) and RFPs (requests for proposals), bundled products and services and multi-year contracts, among others. Today’s supply markets, however, are heterogeneous and require vastly different methods in order to yield benefits from material costs. In turbulent times, buyers must adopt new tools and strategies to compete effectively on a new playing field. To cope with these challenges, A.T. Kearney developed The Purchasing Chessboard®, a frame- work to address every supply and demand market condition (see sidebar: Applying The Purchasing Chessboard: Five Steps to Success on page 4). Differentiated Approaches for Differentiated Markets The “old” purchasing strategies of pitting suppliers against each other, or simply requesting price reductions, are no longer sufficient to address today’s often consolidating and more volatile supply markets. In a recent A.T. Kearney survey, we discussed the impact of differen- tiated markets with more than 200 CPOs and managing directors of major companies. One of the most frequent remarks among survey participants was that procurement departments are not up to the challenge. “We have a deficit in know-how among our procurement professionals,” explains one survey respondent. “There is also a lack of knowledge about how to use analytic tools to improve the process.” The A.T. Kearney Purchasing Chessboard To help procurement professionals master the tools of their trade, we developed The Purchasing Chessboard— a compilation of insights and experience from more than 500 purchasing projects performed worldwide over the past three years, and thousands performed over the past three decades. The Purchasing Chessboard constitutes 64 methods, each repre- senting a stand-alone, differentiating way to work with suppliers to reduce costs and increase value. These methods are derived from 16 approaches and four purchasing strategies (see figure 1 on page 3). The following offers a brief discussion of the four major strategies.
- 3. 3The Purchasing Chessboard® Leveragecompetition among suppliers. The most celebrated and perhaps most frequently employed procurement strategy is competitive tendering or commercial negotiations with a strong focus on price. This is particularly popular when buying in a high-demand, low-supply market, for example component parts. There are four main procurement levers: tendering, leveraging global supplier markets, reviewing suppliers’ prices, and enforcing target prices. Experience shows that most procurement organizations readily employ the first two levers, but only a few companies focus on pricing and enforcing target prices. With this in mind, we have included a cost regression analysis as a key component of The Purchasing Chessboard. The analysis is performed via a statistical methodology that deter- mines target prices based on the technical characteristics of a module. Once identified, the target price becomes the fact base for renegotiating with existing suppliers. In the past three Figure 1 The Purchasing Chessboard®
- 4. 4The Purchasing Chessboard® years,this analysis has proved successful for procurement professionals in the automotive industry (OEMs and suppliers), mechanical engineering firms, financial institutions and consumer goods, especially for commodities such as castings, hydraulic components, forgings, and also for indirect categories such as IT equipment. Seek joint advantage with suppliers. When buyers and suppliers in a transaction have equal market power, the first strategy will not be sufficient to achieve sustainable cost or value advan- tages. For example, the automotive industry procures numerous unique modules (for example, engine controls) so simply putting suppliers into competition will not suffice. In these situations, companies must strive to find common advantages with their suppliers. The goal is to build joint cost-value partnerships, an integrated and transparent operations planning process, and joint management along the entire value chain. Such partnerships can reduce costs while also generating value. Suppliers and buyers work together to spawn ideas for optimizing costs and then agree to share in the respective benefits. What begins as an ad-hoc program could eventually turn into a longer-term strategic alliance between buyer and supplier. Change the nature of demand. In low-demand, high-supply markets—where suppliers are in monopolistic or quasi-monopolistic positions due to their technical expertise—companies must change the nature of demand. Low-demand markets stem from companies developing long-term partnerships with key suppliers; these suppliers soon become indispensable, particu- larly in terms of research and development (R&D) or technological expertise. Companies can make the problem worse by not wanting to endure the time and costs associated with shifting to new suppliers. In such markets, the objective is to change the nature of demand. This is done by re-specifica- tions of components, data mining, developing new technical options, and risk management. Applying the Purchasing Chessboard: Five Steps to Success 1. Place specific categories on the Purchasing Chessboard depending on their unique demand or supply conditions. 2. Make sure you are applying relevant purchasing strategies to ca-tegories. Are you conducting cost regression analysis to identify the target price of packaging material? Have you considered a supplier fitness program for molded plastic parts? Would it be financially beneficial to outsource purchasing of indirect materials? When performing a specification assessment wouldn’t it make sense to also perform a function- ality assessment? 3. Review the competencies of the purchasing function. Can your team play on all relevant fields of the Purchasing Chessboard? In what areas should you broaden your skill sets? 4. Do you have the right composi- tion of cross-functional team members involved when working with categories? Purchasing strategies that fall in the left top corner of the chessboard (innovation breakthroughs) will require deep involvement of engineers whereas the right top corner of the chessboard (value partnership) will require corporate strategy experts. 5. Review and update the position of categories on the Purchasing Chessboard regularly and adjust purchasing strategies accord- ingly. The world is not static. For example, the supply power of key raw materials such as steel, metals and chemicals has significantly decreased in the past year.
- 5. 5The Purchasing Chessboard® InThe Purchasing Chessboard, we call this “invention on demand” (see figure 2 on page 5), whereby a company systematically challenges the basic elements of a technical system and searches for alternatives throughout the field of science—essentially replacing technical options for modules delivered by suppliers. This approach is particularly relevant for industries where patent-protected components or systems are already successfully employed, for instance, in aviation, engineering and automotive. Figure 1 The Chessboard constitutes 64 stand-alone methods Source: A.T. Kearney analysis Invention on demand Leverage innovation network Core cost Analyslis Bottleneck management Demand reduction Bundling across product lines Master data management Supplier market intelligence Price benchmark Product benchmark Visible proces organiza- tion Supplier develop- ment Intelligent deal structure Buying consortia Closed loop spend management Bundling across generations Best shoring Factor cost analysis Process benchmark Virtual inventory management Collabrative cost reduction Function- ality assessment Specificat- ion assessment Revenue sharing Strategic alliance Design for sourcing Product teardown Design for manufac- ture Supplier tiering Sustainab- ility management Project based partnership Value based sourcing Vertical integration Standardi- zation Unbundled prices Valuechain reconfigur- ation Profit sharing Composite benchmark Collaborative capacity management Total life cycle concept Political framework manage- ment Mega supplier strategy Spend transpar- ency Reverse auctions Complexity reduction Vendor managed Inventory Supplier fitness program Cost data mining RFI/RFP process Total costof ownership Expressive bidding Leverage market imbalances Sourcing community Global Sourcing Cost based price modeling Complia- nce management Supplier consolida- tion Make or buy Cost regression analysis Contract manag- ement Bundling across sites LCC sourcing Linear performance pricing 8 High Low Low High 7 6 5 4 3 2 1 A B C D E F G H Supplypower Demand power Procurement outsourcing
- 6. 6The Purchasing Chessboard® Managespend. Managing spend is particularly useful in low-demand, low-supply markets, for example, in most indirect material categories such as maintenance, repair and operations. In these situations, the focus should be on volume bundling, commercial data mining, co-sourcing and demand management. Apart from transparency in spend behavior (for example, through IT-based spend-cube solutions) it is a concrete approach to reducing costs and increasing value. A New Purchasing Era The Purchasing Chessboard is a holistic framework that maps each market situation for different purchasing organizations, allowing each to adapt to changing market conditions. The Chessboard is designed to address the challenges in a new age of procurement—where purchasing becomes a key contributor to a company's success. Authors Christian Schuh, partner, Vienna christian.schuh@atkearney.com Robert Kromoser, principal, Vienna robert.kromoser@atkearney.com Michael Strohmer, principal, Vienna michael.strohmer@atkearney.com Federico Mariscotti, director, Middle East federico.mariscotti@atkearney.com
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- 8. A.T. Kearney isa global team of forward-thinking, collaborative partners that delivers immediate, meaningful results and long-term transformative advantage to clients. Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s leading organizations across all major industries and sectors. A.T. Kearney’s offices are located in major business centers in 39 countries. Americas Europe Asia Pacific Middle East and Africa Atlanta Calgary Chicago Dallas Detroit Houston Mexico City New York San Francisco São Paulo Toronto Washington, D.C. Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Abu Dhabi Dubai Johannesburg Manama Riyadh A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. © 2012, A.T. Kearney, Inc. All rights reserved. The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring “essential rightness” in all that we do. For more information, permission to reprint or translate this work, and all other correspondence, please email: insight@atkearney.com.