Module 2: Procurement Strategies

MODULE 2: PROCUREMENT STRATEGIES
ANALYZING THE SUPPLY MARKETS
Supply market analysis assists procurement planning and the ongoing management of supply arrangement by identifying the following:
Structure of the market Market behavior Supply chain Barriers to market entry
Environmental factors
Ethical considerations The buyers value in the market
SPEND MANAGEMENT
Spend management
is the way in which companies control and optimize the money they spend. It involves cutting operating and other costs associated with doing business Even though the money is spent for goods or services for: direct inputs (raw goods and materials used in the manufacture of products), indirect material (office supplies and other expenses that do not go into a finished product),
or services (temporary and contractual labor, print services, etc.),

a company needs a mechanism by which they are not only able to save money but control costs.
Spend Management
is meant to represent a holistic view of the activities involved in the "source-to-settle" process which includes the following: spend analysis sourcing procurement receiving payment settlement
management of accounts payable and general ledger accounts
SPEND MANAGEMENT SYSTEMS
Companies have recently been utilizing the following new tools that promise not only to automate paper intensive and manual processes, but also to help monitor and control spending activity and to create an integrated process in which each activity feeds into another.
1. 2. e-sourcing - for bidding and reverse auction e-procurement - to control and monitor purchasing activities and contracts e-spend analytics - to gain insight into how much money is being spent on what types of services or products
3.
HOW SPEND MANAGEMENT SAVES MONEY
Decreasing "maverick" spend

-
"Maverick" spend is the process whereby requestors
buy items or services that are outside the preferred
process. Requestors are those who are creating a

request for an item or service that will be turned into an order to a supplier. This means that a "maverick" purchase results in an individual or department buying an item that results in paying a premium for that item.
Decreasing "maverick" spend

This is often hard to enforce unless some control mechanism (often technological) is put in place that:
1) prohibits this type of purchasing

2) sets up penalties for these types of purchases 3) puts into place some type of approval or check and balance system.
Increase of spend economies of scale

- By directing more spend toward a particular supplier, a
company can negotiate more favorable pricing based on how much money it spends with that supplier in a given year. By consolidating this "spend", and directing it toward one or a few suppliers, companies are able to get bigger discounts.
Increase process efficiencies

- Automating sourcing, procurement and payment processes will
greatly improve the efficiency of paper based and manual

processes. The general idea is not just to automate, but also use the technology to improve upon these processes. Process savings can be measured in various ways such as how long it takes to process a purchase order, how many individuals
need to touch the purchase order before it can be sent, how

long it takes to reconcile and pay the supplier, and many other methods to measure these process improvements.
Increase procurement efficiency

This involves using e-sourcing tools for the
bidding and contract award process similar to eBay in which there may have one buyer and many suppliers, or one supplier and many buyers. These supply chain management tools also help to develop product requirements that can be sent to suppliers (typically called an "RFP" or Request For Proposal).
This may involve the following procedures:

A buyer will develop a document listing the type of product they need and why, specifications, the bidding process (how the process will work and how suppliers will be scored), rules for the bidding process, and other factors.
Buyers will then invite suppliers to register online, and open the event for a set period of time so that suppliers can bid. At the end, the buyer awards the contract to one of several suppliers.
The e-sourcing of direct items (raw materials) is often much

more complex than indirect (office supplies, etc.), as the deciding factor is not just price but also the way the product fits
into the overall manufacturing of a product.
DEVELOPING SUPPLY STRATEGIES
Purchasing departments are seen as highly valued, strategic contributors to the organization because
of their ability to impact product design and quality,

cost of goods sold, cycle time. Their influence both within and outside the organization is considered
unique in that it interacts with internal and external

customers and suppliers, and with internal design, production, personnel. finance, marketing and accounting
The ever changing global economic environment has
forced many organizations to institute strategic

sourcing initiatives. Strategic sourcing is managing the firms external resources in ways that support the long-term goals of the firms. This includes the following:
Make-or-buy decision
Whether to make or buy components is a strategic decision that can impact an organizations
competitive position.
Cost has been the major
driver when making sourcing decisions.
Reasons for buying or outsourcing:

1. Cost advantage
2. Insufficient capacity
3. Lack of expertise
4. Quality
Reasons for making:

1. Protect proprietary technology
2. No competent supplier 3. Better quality control 4. Use existing idle capacity 5. Control of lead-time, transportation and warehousing cost 6. Lower cost
Identification and selection of suppliers
The process of selecting a group of competent materials, which can suppliers components, impact on for and the important services firms
competitive advantage is a complex one.
Factors that firms should consider while selecting suppliers are:

1. Product and process technologies
2.
3. 4.
Willingness to share technologies and information

Quality Cost
5.
6. 7.
Reliability
Order system and cycle time Capacity
8.
9.
Communication capability
Location
10. Service
Managing and improving supplier relationships and capabilities

Organizations must develop the right capabilities
for developing long-term relationships with their suppliers. However, before entering into any partnerships, it is important for an organization to conduct a thorough investigation of the suppliers
capabilities and core competencies.
Monitoring and rewarding supplier performance

By evaluating supplier performance, organizations hope to
identify suppliers with exceptional performance. A supplier evaluation and certification process must be in place so that
organizations can identify their best and most reliable suppliers.

Providing frequent feedbacks on supplier performance can help organizations relationships. avoid major surprises and maintain good
Example of supplier performance metrics:

1.
2. 3.
Cost/price
Quality Delivery
4.
5. 6.
Responsiveness and flexibility

Environment Technology
7.
8.
Business metrics
Total cost of ownership
SPEND ANALYSIS
Spend analysis
is the process of collecting, cleansing, classifying and
analyzing expenditure data with the purpose of reducing procurement costs, improving efficiency and monitoring compliance. It can also be leveraged in other areas of business such as inventory management, budgeting and planning, and product development.
SUPPLY POSITIONING MODEL
Supply Positioning Model

- allows you to weigh the relative importance of each one of
your various purchase of goods and services by taking

account of the following factors:
a. Level of annual expenditure on the item

b. Impact on the enterprise c. Supply opportunity and risk
a. Level of annual expenditure on the item

Here, we have been following Paretos rule, which states that 20% of your purchase items are likely to take up 80% of your total expenditure. Consequently, the remaining 80% of our purchase items are likely to take up only 20% of your total
expenditure. The more you spend on an item, the more

important it will be to you because of the potential for cost savings
b. Impact on the enterprise

This involves determining what the effect will be on your
company, generally in terms of lost profit if you are not able

to meet your supply targets for the item.
c. Supply opportunity and risk

This indicator gauges the extent to which the items supply market conditions will require you to make a particular effort either to avoid the risk of falling short of your supply targets and/or to take advantage of supply opportunities that will
allow you to move ahead of the competition.
The Supply Positioning Model serves two main purposes:

1. To guide you in prioritizing your efforts
2. To guide you in developing your supply strategy
PETER KRALJIC SUPPLIER POSITIONING MODEL

http://www.bing.com/images/search?q=Peter+Kraljic+&view=detail&id=A5 D6E0398B00777034B5AAA59F13298FFA88DC20&first=1&FORM=IDFRIR
Peter Kraljic
is Director Emeritus of Mc Kinsey holding various senior positions for the last 22 years. He holds a Masters degree in business management and a PhD degree in Germany. He wrote a number of scientific and business articles for publications such as Harvard Business Review and Le Figaro Economic.
continuation
This model was first published in Harvard Business Review. The
core of the model as shown in the graphic below is to rank

suppliers based on two dimensions: High or Low. The amount of company spend with the supplier How vulnerable a company is to a supplier's failure or disappearance
Kraljic Matrix
The four types of relationships are:

Acquisition: Many suppliers, buyers dominate. Focus on supply chain optimization, efficient procurement processes, and receiving bids from many suppliers Profit: Lots of suppliers, but big impact on company if supply is disrupted; so, consider target pricing strategies and umbrella contracts with preferred suppliers. Security: Few suppliers, but not a lot of financial risk from supplier failure; so, consider volume insurance contracts, maintaining buffer stock, and always be on look out for alternative suppliers. Critical: The company depends on the suppliers. Generally, the company will look for performance-based partnerships, with market and technology leaders, owning specific know-how
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MODULE 2: PROCUREMENT STRATEGIES

ANALYZING THE SUPPLY MARKETS

or services (temporary and contractual labor, print services, etc.),

management of accounts payable and general ledger accounts

SPEND MANAGEMENT SYSTEMS

HOW SPEND MANAGEMENT SAVES MONEY

Decreasing "maverick" spend

"Maverick" spend is the process whereby requestors

buy items or services that are outside the preferred

process. Requestors are those who are creating a

Decreasing "maverick" spend

1) prohibits this type of purchasing

Increase of spend economies of scale

Increase process efficiencies

greatly improve the efficiency of paper based and manual

need to touch the purchase order before it can be sent, how

Increase procurement efficiency

This may involve the following procedures:

The e-sourcing of direct items (raw materials) is often much

into the overall manufacturing of a product.

DEVELOPING SUPPLY STRATEGIES

of their ability to impact product design and quality,

unique in that it interacts with internal and external

The ever changing global economic environment has

forced many organizations to institute strategic

Cost has been the major

driver when making sourcing decisions.

Reasons for buying or outsourcing:

Reasons for making:

Identification and selection of suppliers

competitive advantage is a complex one.

Factors that firms should consider while selecting suppliers are:

Willingness to share technologies and information

Managing and improving supplier relationships and capabilities

capabilities and core competencies.

Monitoring and rewarding supplier performance

organizations can identify their best and most reliable suppliers.

Example of supplier performance metrics:

Responsiveness and flexibility

SUPPLY POSITIONING MODEL

Supply Positioning Model

your various purchase of goods and services by taking

a. Level of annual expenditure on the item

a. Level of annual expenditure on the item

expenditure. The more you spend on an item, the more

b. Impact on the enterprise

company, generally in terms of lost profit if you are not able

c. Supply opportunity and risk

allow you to move ahead of the competition.

The Supply Positioning Model serves two main purposes:

2. To guide you in developing your supply strategy

PETER KRALJIC SUPPLIER POSITIONING MODEL

This model was first published in Harvard Business Review. The

core of the model as shown in the graphic below is to rank

The four types of relationships are:

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