Analyzing supply market &

developing supply strategy

Lutfur Rahman Bhuyan

Certified in SCM ITC-Genava
AGM-OP
PRAN FOODS LTD
 Objectives
• What product are available to meet requirements.
• Who are the producer of these products.
• Who are the buyers and /or consumers.
• What is the degree of competition in the market.
• Which are the different distribution channels within
the marketplace.
• Which are the various price levels and how these
prices are determined.
 Supply market
• A market exist where-
1. there are two or more parties
2. Each party has something that may be value
to the others
3. Each party can communicate and deliver
4. each party is free to accept or reject an offer
supply market is a potential sources of supply
“a market is an arena for potential exchange”
 Definition & importance
• What is it?
review of the structure, characteristics and trends of a
supply market for a particular product or service.
Why do it?
To identify the best possible supply segments for your
requirements and to understand the risk and
opportunities associated with these.
It is not something you do just once- but an ongoing
process.
Benefits of Supply market analysis
• Reduce risk and cost.
• Identify opportunities.
• Identify market segments.
• Identify new product and technology.
• Understand the different conditions and constrains.
• Assess the ability of different markets that meet your
requirements.
Supply market analysis should be carried out early in the
procurement process.
Before analysis you need to know-
1. what you want to buy?
2. current and probable future requirements.
 Priorities for supply market analysis
• It is time consuming & costly. Some factors to be
consider-
1. is it a new item?
2. time onwards since the last analysis. Onwards.
3. the speed of market & technological change.
4. level of expenditure.
5. level of impact on organization.
Supply positioning model and 80/20 rule will help
regarding this.
 Steps to analysis supply market
• Prepare for a supply market analysis.
• Assess the degree and effects of competition
• Forecast market developments.
• Understanding what drives the market.
• Assess price.
• Segment the supply market based on supply risk and
opportunities.
• Screen out less relevant segments.
• Appraising market segments by POCKET approach.
 The five forces in the market

1. Competition amongst suppliers.

2. Threat of new competitors entering the market.
3. New / substitute product/services in the market.
4. Competition amongst suppliers of inputs.
5. Buyers’ position in the market.
 Demand & Supply
• Demand & supply are the key dimensions of every market.
• Demand: influence by
1. price
2. Available income.
3. price of substitute goods.
4. price of complementary goods.
5. buyer preferences and taste.
6. buyer’s expectations.
7. the number of buyers.
Supply : supply influences by
1. price.
2. prices of inputs.
3. technology.
4. supplier’s expectations.
5. the number of seller’s
 Different markets
• Perfect competition
• Monopoly
• Oligopoly
• Monopsony
• Oligopsony
The degree of competition depends on the
number and size of the suppliers in the
market.
 Market characteristics
• Four characteristics:
1. Trend.
2. Cyclical fluctuations.
3. Seasonality.
4. Random variations.
Supply market forecasting:
1. Expert opinion: scenario analysis & delphi technique.
2. Testing the supply market.
3. Quantitative analysis: time series analysis and casual
methods.
 Product market life cycle
• Lunch stage
• Growth stage
• Maturity stage
• Decline stage
 Assessing the price
• The price of product is a direct result of :
1. its cost of production and distribution.
2. customer’s perceptions of the value of the
product.
3. the degree of competition and other market
factors.
Building a cost/price model will help you to
understand the cost/price
 Market segmentation
• A market segment is a group of similar suppliers.
1 . Geographic location.
2. Technology.
3. Supply channel.
Segmentation is useful because-
a. delimit different group of suppliers within a supply market.
b. better assess supply risks.
c. focus on certain segments and make better use of time and
resources.
 Appraising market
• Identify the types of supply risk & opportunities of
different segments.
• Identify which supply targets are affected by these
risks & opportunities.
• Select the segment with the best balance of risks &
opportunities.
• Assessing geographic segments-POCKET approach.
• Assessing technology segments.
• Assessing supply channel segments.
 Information support to supply market analysis
• Specialised publishing houses.
• Specialised newspapers and journals.
• Chamber of commerce and trade support bodies.
• Specialised trade and industry associations.
• National purchasing and supply management associations.
• Official foreign trade representatives.
• Various international organizations.
• Your suppliers.
• Other buyers
• Service organizations.
• Fairs and exhibitions.
• Consultancy firms
• Universities and local research organizations.
• Your own purchasing departments.
 summary
• Poter’s analysis( the five forces)
• Identify the market drivers.
• Screening of segments.
• Cost/price analysis.
• Forecasting supply.
• POCKET analysis
 Supply strategy
• Supply strategy means knowing the way you intend to achieve
these supply objectives and targets.
• Different types of products requires different supply strategy.
• It involves :
1. How many supply market segments to buy from.
2. How many suppliers to buy from.
3. The type of relationship to have with the supplier(s) of a
purchase item.
4. The type of contract to have in order to support this
relationship.
5. The types of operational procurement strategies to be
pursued.
 Supply positioning model & supply strategy

(almost bottleneck) (classic critical)

(Classic bottleneck) (Almost critical)

critical
bottleneck
almost leverage
(Almost routine)
almost critical
(almost bottle neck)

Routine leverage

(Classic routine) (Almost leverage) (almost routine) (Almost leverage)

Volume of expenditure
• The main objectives should be to try to move purchase items
toward classical leverage position.
• This can be achieved either by reducing risk or by increasing
expenditure.
Expenditure can be increase in following way:
1. Reduce unnecessary variety in specifications.
2. group as many items as possible.
3. Centralize purchase.
4. collaborate with other companies.
Risk can be reduce :
1. If risk is technical, with engineers and suppliers to reduce risk,
try to use standard items.
2. Reduce risk by identifying new sources.
3. Developing supplier capabilities.
 Supplier-buyer relationship /contract
continuum

Spot Regular Call-off Fixed partner Joint Internal

purchase trading contract contract ship ventures provision

• Details :
 The Supplier Perception Model

High
Develop Core

Marginal Exploit

Low Value of business High

How suppliers see your company as a potential client

 Implication of suppliers’
perception
Suppliers’ perceptions of your business What to do as s buyer
Low Be a good customer
Medium-high Develop a partnership
Very High Dominate the relationship, but be fair and
reliable .

*Reverse marketing: critical and bottleneck items

**Trade –off between switching costs and supplier development

*** linking from SPM to SPM

 Supply strategy for routine items
• Number of suppliers :- one
• Nature of relationship:- minimum intervention.
• Type of contract:- long-term contract.
• Type of supplier:
1. able to supply as many of your requirements’ as possible.
2. responsive, therefore minimizing the need for intervention.
3. will continue to supply the required products for the long
term.
4. the supplier should be financial sound.
 Additional strategy
• The rule is : KEEP IT SAMPLE!
• Having sample process for acquiring.
• Minimizing administrative cost.
• Delegate actual buying to end users.
• OPERATIONAL STRATEGIES:
1. Process re –engineering.
2. Process Automation.
3. Eliminating inspection.
4. delegation of call-off responsibility.
5. use of purchasing card.
6. E-commerce.
7. Holding inventory.
8. consolidated billing
9. customer account manager.
 Supply strategy for leverage items
• The most attractive area.
• There are many suppliers and the product is readily available.
• It is standard item.
• The annual expenditure is high.
• The item is low risk.
• Since the value is high and the risk is low, price is important.
• Changes in market prices will have a significant impact.
• Supply strategy depends on:
• the volatility of the supply market.
• your level of knowledge of the supply market.
• the extent of switching costs.
• the degree of price variation amongst suppliers.
 Switching cost
• Cost of negotiations.
• Communication of the new supply arrangement to staff.
• Re-training of staff.
• Change of design to accommodate the new supplier’s
product.
• Change of processes to accommodate the new supplier’s way
of doing business.
• obsolescence of stock.
• Purchase of new stock.
• Penalties of early termination of existing contract.
• Inefficiencies that may arise as go through the learning curve
with the new supplier.
• Resistance of staff to using the new supplier.
• Switching cost must be assess before purchasing high value/
fixed asset procurement.
• Spot purchase may be appropriate where switching costs are
not substantial.
• High switching cost prevent you from changing suppliers for
long periods of time.
• Where sourcing from single supplier and high switching cost,
the supplier will become uncompetitive or unfairly exploit you
• Always try to reduce switching cost.
• Supplier always try to build in switching cost for the buyer.
• Where very high switching cost can not be avoided, the best
supply strategy will be contract with a single supplier over a
longer period of time.
 The relative bargaining position of buyer
and supplier changes over time

high
supplier

Bargaining
power
buyer

low

Contract Early part Middle of Contract

being of contract become due
negotiated contract term for renewal
term
Supply strategy for very high switching cost

• Type of relationship : Co operative

• Type of contract: Term contract-typically long term.
• Type of supplier to seek: lowest cost over the
contract term
 Supply strategy for low price variability
• If switching cost are negligible, then
• number of supplier : Many
• nature of relationship: Arms-length
• Type of contract : Spot.
• Type of supplier to seek: lowest price at time of purchase
If placing all of business with one supplier gives you a price
advantage:
•number of supplier : One
• nature of relationship: Arms-length
• Type of contract : Term contract.
• Type of supplier to seek: lowest cost over the term of the
contract.
High price variability & low switching costs

• number of supplier : Many

• nature of relationship: Arms-length
• Type of contract : Spot.
• Type of supplier to seek: lowest price at
time of purchase
 High price variability & relatively high
switching costs

• number of supplier : Two or Three(regular

trading)
• nature of relationship: Co-operative
• Type of contract : Framework/call-off
• Type of supplier to seek: lowest cost over
the contact term.
 Operational strategy for leverage
items
• Electronic commerce.
• Benchmarking against industry norms.
• Demand forecasting.
• Process re-engineering.
• Purchasing cards.
• Delegate call-off responsibility.
• Consolidated billing.
• Inspection.
• Customer accounts manager
 Desirable supplier characteristics fro
leverage items
• In case of spot purchase, check supplier
capabilities.
• In regular trading approach, looking for
suppliers that are cost competitive in the short
and medium term.
• In term contract and switching cost is low,
check supplier performance and lowest price.
• In long term contract and high switching cost,
check supplier reputation.
 Supply strategy for bottleneck items
• The main focus is on minimizing the risk, price and
cost of acquisition is secondary importance.
• Number of suppliers: one or two
• Nature of relationship: be a good customer.
• Type of contract: term contract.
• Type of supplier:
• must be capable in the areas.
• will not exploit its strong bargaining position.
• will continue to supply the required products over
the long term.
 Operational strategy for bottleneck items

• Demand forecasting and early phased release

of specification information.
• Holding stock.
• Quality planning.
• Designating a supplier account manager.
• Business process re-engineering.
 Supply strategy for critical items
• Critical items are specialized and available from a small number
of suppliers.
• Number of suppliers: one
• Nature of relationship: partnership.
• Type of contract: long term partnership contract.
• Type of buyer:
•must be capable
•low cost provider/ technological leader.
• the product will be the core business of the supplier
• same business strategy,
• financially stable and sustainable market position
• no relation with your competitors.
• it should not seek to exploit your company’s position
 Operational strategy for critical items
• VA/VE analysis.
• Process re engineering.
• Demand forecasting.
• Phased release of specification information.
• Organizational learning and communication strategy.
• Capture supplier expertise and innovation
• Protecting future costs availability.
• Quality assurance.
• Supplier development.
• Supplier account manager.
• Total cost of ownership model ling.
• Contingency planning
• Holding stock
• On site supplier support and training.
 Supply strategy for commodities
• The main feature is price volatility.
• This are nature product.
• Its extremely sensitive to supply and demand.
• Factors affecting demand and supply:
1. floods, drought and plant disease.
2. wars and strikes.
3. changes in govt. policy.
4. cartel agreements amongst supplying countries.
5. change in industrial processes.
6. change in consumer taste.
7. availability of new substitute materials.
8. the activities of speculators.
 Operational strategy for commodity

• Most commodities are traded in exchange

market called paper trading.
• Spot purchase
• Speculating on the prices.
• Hedging through buying forward.
• Call options.