A 9-step guide to strategic sourcing

A 9-step guide to strategic sourcing

implementation
implementation

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 Supply Market Analysis

In this chapter, we will look outside of the company and start researching
the supplier market. This will guide us as we find suppliers who could
potentially provide us with the products and services we need. By the end
of the supply market analysis, we will have started to identify the suppliers
to whom we will send out an RFx.

Supplier market analysis

Demand analysis

Supplier interviews

Category risk level

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1. Supplier market analysis

Select a scope for your supplier market. Depending on the category, scope may be
global, continental (regional), by country or some other region. By selecting a scope
you will focus only on those suppliers operating in this market. By using different
public sources (mainly the Internet) collect data for each supplier that could
potentially supply your category. Do not limit yourself to suppliers that are already
your partners. Research ALL suppliers. You need to track suppliers’ revenue and
EBITA. Make an Excel sheet where you can record supplier data.

Fig.1 Supplier market analysis

Now we have a list of players who can potentially supply us with the materials and
services for the category we are currently researching. By looking at this list we can
see who dominates the market and who makes the most profit.

2. Demand analysis

Next, we need to analyze our spend within the category. Use a spend analysis tool or
take data out of your ERP. Split your spend by supplier. Make an Excel sheet similar to
the one in Fig. 2.

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Fig.2 Company category spend analysis

Now we need to identify how strong of a player we are by comparing our spend with
supplier revenue. Combine the data from the last two tables, and you will get an
interesting picture.

Fig.3 Company category spend related to market revenue

Seems that our spend covers 12% of the total demand market, which makes us a
valuable customer to every supplier, but especially to Supplier B since our share of
his revenue is 20%.

If we compare suppliers’ EBITA data we see we can buy from suppliers whose EBITA
is higher than average. These are raw numbers, and you should never come to quick
and easy conclusions based only on statistics. Make note of these findings on your
list of savings hypotheses. Later on during discussions with suppliers try to obtain
the missing information from them.

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3. Supplier interviews

During the first and second steps we came up with some ideas and questions that we
need to check out. Let’s start by gathering the missing information. Why do we do
this? Like I wrote in the first article, the category manager must be critical by nature.
He or she needs to know what his or her company’s price level is compared to the
market price level. In other words, we need to get a benchmark price level. I suggest
to start by fishing for information from your existing suppliers. You should already
be holding quarterly business review (QBR) meetings with your key suppliers. Take
along your CSA and TCO templates that you started to fill in during Step 1 and try get
the answers you need to fill in the gaps.

For the new suppliers that you identified in your market research, run a quick RFI and
ask for information about the supplier and their products. Try to understand if the
supplier and their product or service is suitable to you.

4. Category risk level

We also need to define the category risk level. Once again we will use the Kralji matrix
that you are now familiar with from Step 1. Evaluate each supplier using different
criteria like availability, quality, finances, or cooperation level.

Fig. 4 Category risk analysis

If you identify your category risk as high, you need to take action to either avoid or
mitigate the risk.

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Summary

The outcome from the supply market analysis should be a better working knowledge
of the supplier market and your place in it. You have identified potential suppliers
and know your value as a customer. You have already started to take a wider view of
your categories. You have identified category risk levels and have some ideas for
how to deal with them. With each step, you are learning more and more. Piece by
piece, you will put together a complete category management picture. By collecting
and analyzing this information, you will become a stronger negotiator in the future.

About the author: Peep Tomingas

After graduating from Tallinn University of Technology with a degree in Mechanical Engineering, Peep received a
master’s degree in International Business Administration from the Estonian Business School. Peep spent five years at
Ericsson Estonia as logistics manager, and then worked as a supply chain manager for the Baltic States at ABB until 2015.
Peep has been a board member for Estonia's Purchasing and Supply Chain Management Association Prolog since 2014,
and he is currently their CEO. He is also an advisor at DeltaBid, specializing in supply chain management, strategic
sourcing, and supplier relationship management. LinkedIn Profile

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