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Category strategy development & implementation

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Category strategy development & implementation

  1. 1. ATR Consulting Limited Category Strategy Development & Implementation Tahir Rafiq April 2013 Applying automotive best practice in the Banking Industry.....Author : Tahir RafiqProject Start Date:atr
  2. 2. 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 11atr 1
  3. 3. Category strategies & supplier relationship management Portfolio analysis workshop out put Out put of workshop Category positioning matrix ( tool) 10.00 An analytical (excel) tool was used to Position the material groups on the Portfolio Matrix. 9.00 Based on the following weighted variables  Spend 8.00  Number of Suppliers  The level of competition  Number of Buyers 7.00  The Buyers Search Cost  The Buyers Switching Cost 6.00  The Suppliers Switching Cost Value ($) of Spend  Product Complexity 5.00  Number of Substitutes  Buyers Spend as % of Suppliers T/O  The level of Importance to Supplier 4.00 A workshop was held with the Contracts Department & The Purchasing Department to 3.00 determine the position of each material group A workshop was held with the Contracts 2.00 Department & The Purchasing Department to determine the position of each material group on 1.00 the material This is an iterative process and this exercise should be conducted on a regular basis i.e. The more times it is 0.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 performed the more accurate the out put will be. Supply Riskatr 2 1
  4. 4. Baseline :- Portfolio analysis Examining buyer – supplier power dynamics Potential approaches to buyer supplier High relationship management B=S Buyer Supplier Inter- B>S Buyer Dominance 2. B > S 3. B = S dependence Leverage – Focus on Short Term Relationship Use competitive tendering to reduce cost and consolidate volume Leverage Strategic Strategic - Focus on Long Term Relationship Ensure availability of supply, focus on relationship Buyer Power building, process integration and innovation Tactical Bottleneck Tactical – Focus on Short Term Quick Wins Simplify and streamline purchasing process, reduce number of suppliers and simplify ordering B0S Buyer Supplier B<S Supplier Dominance Bottleneck - Focus on Long Term Security of Independence Supply Search for alternatives, seek new suppliers, reduce dependency on current supplier Low Low Supplier Power Highatr 3 2
  5. 5. Ideal positioning Adopting strategies to optimize power Adopt following strategies..... High The best place to be 2. B > S 3. B = S L Maintain position L S S The second best place to be Maintain position but shift Long term to leverage Buyer Power Consolidate with other T Material groups & shift up B Reduce dependency on the current Supplier base .  changing the specification  Finding alternative suppliers T B  Encouraging new suppliers into the  market  Consolidating with other material Low  groups Low Supplier Power Highatr 4 3
  6. 6. Adopting a strategy based on power regimes (Hexagon Analysis) Example of typical levers have been identified for the various sourcing approaches Exploit Buying Power Create An Advantage Exploit Create An Buying Power Advantage Consolidation Specification • Supplier Rationalization • Rationalise/standardise product(s) • Consolidate volume across Business • Product Substitution • Redistribute volume among suppliers • Apply product value analysis • Combine volume from different • Apply product value engineering commodity group • Use functional/ output specification • Rationalize/standardise parts • Examine life cycle costs Consolidation Specification Cost Leadership Joint Process Improvement • Benchmark prices regularly • Optimise physical material flow • Renegotiate/rollback prices • Support supplier operations improvement • Un-bundle prices Cost Joint Process • Develop long-term contracts • Use competitive bidding Leadership Strategy • Share productivity gains Improvement • Use commodity hedging/trading • Integrate logistics • Compare total cost among potential • Cost reductions suppliers • Product Innovation / Development • Base pricing on profitability Global Relationship Sourcing Mgt Global Sourcing Relationship Mgt • Expand geographic supply base • Analyse core competencies • Examine new suppliers • Employ strategic alliances/partnering • Capitalise on currency fluctuations • Co Investment • Take advantage of trade incentives • Vertical Integration • Low cost country sourcingatr 5 4
  7. 7. 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 Vatr 6 5
  8. 8. Adopting a strategy based on power regimes Typical levers identified for various sourcing approaches Relationship Type Category Positioning 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 √atr 7 6
  9. 9. Developing the right commodity strategy Selection criteria ( matrix) Best Fit Commodity Strategy Exploit Buying Power Create an Advantage Scoring Matrix 5 = High value 1 = Low value Tactical Leverage Bottleneck Strategic Consolidation 3 5 1 2 Cost Leadership 5 5 2 2 Global Sourcing 3 5 2 2 Specification 1 2 5 4 Joint Process Improvement 2 2 4 5 Relationship Mgt 1 2 3 5atr 8 7
  10. 10. Assessing the gap between ideal sourcing strategy and current practices Gap analysis 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 % Low gap Small Strategic Gap Ratio – All applicable approaches have been applied and 20 % 20 – 40 % have yielded considerable results already 40 % 40 – 60 % 60 % 60 – 80 % Large Strategic Gap Ratio – There are a number of applicable approaches Very high which have not been applied, or which have been applied without success 80 % 80 – 100 % gapatr 9 8
  11. 11. Implementing strategy & action plans Standardized tracking tool Example . Electrical Category Material Joint Process Relationship Group Sub Material Group Consolidation Cost Leadership Global Sourcing Specification Improvement 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 A C T C T T C C T A Electrical Hand Tools C C T C T A C T A Electrical Automatic Hand Tools C C T C T A C T A Electrical Alkaline Batteries C C T A A C T C T A Electrical Rechargeable Batteries A T C T C T T C C T C T Electrical Accessories T C A A C T C T C Electrical LED Flash Light C T C T C T T C C T C T Electrical Flashlight T A C T C T T C C T A Electrical Standard Wires C T A A C T C T A Electrical Energy Savings Lighting C T C T C T T C A C T Electrical Switches C A C T C T T C C T A Electrical Diodes C T C T C T C T C T A Electrical Connectors Current position Target Position Objective Achieved A Achieved T Target C Current Positionatr 10 9
  12. 12. Appendix A Action Plan (How to use the tool) Conduct a Portfolio Analysis Exercise on a. The Material Group Start Point b. On The Sub Material Group For each Material Group / Sub Material Group determine the current approach against each of the six criteria in the Hexagon using Step 1 “The Commodity Group Positioning Tool” This activity should be conducted jointly with SRS and Purchasing / Contracting Determine the type of Supplier Relationship (Consult the Portfolio Analysis to see where the commodity is positioned) that you need to Step 2 have with the supplier of this particular Commodity Group / Sub Group. Use the “Supplier Relationship Tool” to establish this. Using “The Best Fit Strategy Tool” compare the current approach against each of the six criteria with Best Practice. Step 3 Using “The Gap Analysis Tool” determine the size of the Strategic Gap, between the current approach and Best Practice. Step 4 Using the “Commodity Tracking Tool” plot the current position, the target position and monitor the progress on a monthly basis. Step 5atr 11 10
  13. 13. Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)Term ExplanationSupplier Rationalization Reducing the number of suppliersConsolidate 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 competitionCombine volume from different Adding together several related commodity groups to increase volume of spend, reduce the number of supplierscommodity groupsRationalize / 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 groupBenchmark Prices Regularly Compare the prices on an annual basis by going out to the market and getting other suppliers to quote for the businessRenegotiate / 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 / businessCommodity 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 profitCompare 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)atr 12 11
  14. 14. Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)Term ExplanationBase 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 etcCapitalise 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 jobProduct 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.atr 13 12
  15. 15. Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis) 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 productsatr 14 13
  16. 16. End of presentationTahir RafiqFeedback would be greatly received and appreciatedatr 15 14

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