PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e

Supply Management and

Commodity Strategy
Development
Chapter 6
From Organization
Strategy to Category
© 2012 Cengage Learning. All rights reserved. May
not be scanned, copied or duplicated, or posted to
a publically accessible website, in whole or in part. Strategy
 Chapter Overview

 Aligning supply management and

enterprise objectives
 Clarifying a “spend category”
 What is a category strategy?
 Developing a category strategy
 Using the strategy matrix

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 Organizational Strategy

 Supply management strategies seek to

support the broader organizational (ie,
Corporate) goals
1. What are the goals of the organization?
2. What is the SM strategy and how does
it tie to the Org?
Why should supply management care
about #1 and #2?
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Purchasing & Supply Chain Management, 5e
 Supply Chain Impact
BP pins Deepwater oil disaster on key suppliers
Sues rig owner and drilling subcontractor for shared liability
- The Wall Street Journal, Nov 2010

iPhone YoY sales drop 1st in 4 years

Phone sales down 14% in Q2
- Yahoo News, July 2016
Samsung Battery
Issue to cost $5B
- Wall Street Journal October 2016

Apple sweatshop problem;16 hr days,70c/hr

- Yahoo Finance, January 2012

Tesla battery fires Japan Tsunami Disaster

impact Model S sales disrupts Supply Chain
- Bloomberg News, May 2014 - The Wall Street Journal March 2011
 Integrative Strategy Development
 Corporate strategy
 Define businesses
 How acquire and allocate resources?
 Business unit (BU) strategy
 Scope of business
 Basis of competitive advantage (key)
 Supply management (SM) strategy
 Support desired business-level strategies
 How to complement other functional areas
 Spend Category strategy
 How to define & manage supply of a particular category to
support higher-level strategies

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 Strategic Mapping

Corporate: (ex. GE)

BU1: BU2: Corporate
Aviation Appliances SM
BU1 SM BU2 SM
• Steel • Steel
Steel
• Cylinders • Controls
• etc • etc

BU1 Other BU2 Other Marketing

Functions Functions Services

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Purchasing & Supply Chain Management, 5e
Generic View of SM Strategy Process

1. Assess
Situation

4. Execute Feedback 2. Analyze

& Adapt is Continuous Possibilities

3. Define
Actions &
Scenarios

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Purchasing & Supply Chain Management, 5e
 Material Cost impact is HUGE…

Total purchasing spend as percentage of sales (2007)

70%

60%
60
56%
54% 53%
52%
49% 48%
47% 46%
Average: 43%
Intel 43% 42% 41%

40 38%
33%

27%
23%

20 17%

0
Semi- Eng/ Industrial Aerospace/ Pharma Other Retail Health Financial
conductor Const Manuf. Defense Care Srvcs Srvcs
Chemical Electronics Metals & Diversified Telecom DOE/NNSA Petroleum Utilities
Mining Beverages Srvcs Contractor
& Food

Note: Other includes Computer Hardware, Computer Software, Consumer Products, Media and Transportation Services
Source: CAPS Research “Cross-Industry Report of Standard Benchmarks” Published October 2008
 1. SM Situation Assessment
 Purpose
 Simply & comprehensively capture current
situation aspects
 Approach
 Assess environment affecting strategy
 External and internal scope changes
 Frameworks for analysis (Video to explore)
 SWOT
 PEST
 Porter 5-Forces Model (Comp,Buy,Supp,Threats,Subs)

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Purchasing & Supply Chain Management, 5e
 2. Analysis
 Purpose
 Explore situation to identify structure, courses of
action, and potential challenges / opportunities
 Inputs
 Known factors and structures
 Uncertainties - current and future
 Model situation
 Quantitative: Spreadsheet & market research
 Qualitative: Surveys, Themes, Scores
 Output
 Supply mgmt direction
 Potential future contingencies
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 3. Strategic Plan / Actions
 Purpose
 Outline a course of action to achieve goals while
accounting for uncertainties
 Basic Plan
 Timeline of activities & resources
 Measurable objectives
 Scenarios
 What-if storylines based on uncertainties
 Contingency plans to adapt plan
 Maintenance
 Governance to keep structure
 Metrics (KPIs) to monitor & control

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Purchasing & Supply Chain Management, 5e
 4. Execution / Adaptation
 Purpose
 Drive direction/change while reacting to
new realities
 Multiples tasks
 Manage stakeholders / decision makers
 Resource as needed
 Monitoring process (Report Cards)
 Change management
 Overcoming/understanding resistance
 Unintended consequences
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Purchasing & Supply Chain Management, 5e
 What is a Spend Category?

 Categorization has a long history

 Aristotle began categorizing in 300s BC.
 Linnaean taxonomy
 “Animal, vegetable, & mineral”
 Class, order, genus, species, & variety
 Video on categorizing in biology
 Science categorizes to structure, simplify,
relate, and ultimately understand entities
 SM categorizes spend for similar
reason, but also to improve control
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Purchasing & Supply Chain Management, 5e
 What is a Spend Category?
 A spend category is a convenient
grouping of like-spend items
 Commodities are categories with limited
differentiation (ex; ofc supplies)
 Group by inherent characteristics but also
 Sourcing location (LCGs) or process
 Volume or value
 Use
 Much depends on organization itself
 Exercise: # spend categories vs total
purchase spend/category
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Purchasing & Supply Chain Management, 5e
Common Service Spend Items

Imagine a
clothing retailer

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 Category Strategy Process
Step 1 Step 2 Step 3 Step 4
Step 5
Build the Research/ Strategy Contract
SRM
Team Analysis Development Negotiation

Goal: Goal: Goal:

Goal: Goal:
Develop a Classify suppliers Continuously
Understand the Negotiate a win-win
statement of work and define improve
supply market contract
and plan sourcing approach performance

Inputs and Tools:

Inputs and Tools: Inputs and Tools: Inputs and Tools:
Market research; Inputs and Tools:
Project leader; Interviews; online Negotiation plan;
segmentation/ Contract; supplier
other team research; supplier evaluation
portfolio matrix; scorecard/metrics
members conferences tool
forecasted spend

Outputs:
Outputs: Outputs: Outputs:
Analyses on
Baseline data; Category Strategy Outputs: Supplier
supply trends;
project charter; Strategy Matrix Signed contract development plan;
pricing; portfolios;
work plan Supplier Eval. Tool communication
etc.

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Step 1: Team and Project Charter

 Identify key cross-functional team

members
 Define the scope of the category
strategy
 Publish a team charter
 Develop and communicate plan, assign
roles

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 Step 2: Conduct Research
 Understand Focus
 Purchase requirements relative to business unit objectives
 Identify specific internal users / current suppliers
 Collect Data
 Research supply marketplace
 Information required
 Total annual purchases
 Interviews with stakeholders re requirements
 External market research
 Triangulation –data from multiple sources
 Interpretation
 Multiple analyses to understand reality (see next slide)
 Use of frameworks or templates
 Establish benchmarks through industry data, where
practical
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 Step 2: Category Realities
 Be able to describe how does/can this
category fit in the organization’s direction
 Spend analysis = importance / opportunity
 Demand analysis = needs
 Supply market analysis = capabilities
 Price analysis = past / future / fairness
 Portfolio (segment’n) analysis = category /
potential
 Supplier analyses = current state/comps
 Summarize key factors enabling
alignment of category within the firm

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Purchasing & Supply Chain Management, 5e
 Step 3: Strategy Development
 Category Strategy
 Plans to achieve various supply elements
 Contingency / Scenario Plans
 Strategic plan for how to design supply
structure
 Organization: Managerial structure
 Supply Base: Portfolio of suppliers
 Quality: Meeting requirements
 Cost: Pricing & total cost of ownership
 Contracts: Exchange agreements
 Processing: Procure-to-pay method
 Use Strategy Matrix (next slide) to enable
strategic alignment
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Purchasing & Supply Chain Management, 5e
 Strategy Matrix (Example)
Category: Construction Services

Organization

Supply Base

Processing
Contracts
Costing
Quality
Category
BU Objectives SM Objectives Objectives
Attain 5%
Reduce year spend Appoint Target
Low cost over year spend reduction lead Reduce suppliers costing Remove Cost+

clothing leader
Assure basic /
Maintain value consistent More detailed Touchless
from last year designs specs Add warranties A/P

Contingencies Training Consortium Lawyers Lawyers

Meeting Complain
KPIs freq Number Complaints Spend PPV ts

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Purchasing & Supply Chain Management, 5e
 Step 4: Contract Negotiation

 Implementation to match strategy

 Identify tasks and time lines
 Assigning resp’bty and process ownership
 Ensure adequate resources available
 Strategy communicated to all stakeholders, buy in
 Tools
 Price quote analysis
 Preferred supplier lists
 Suppliers segmented (focus critical, leverage)
 Competitive bidding
 Negotiation

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 Step 5: SRM

 Assure “purchasing efficacy” – ability

to achieve goals
 Continuous monitoring of both the
strategy and the supplier
 Continuous monitoring of the supplier’s
performance on key goals and objectives
 Supplier scorecard
 Use quarterly and review results with
supplier
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 Conclusion
 Categories help simplify management
of supply
 Align sourcing strategy to corporate &
BU objectives
 Category strategy is much of where SM
strategy happens
 Research/Analyze to understand, and
assure category strategy success
 Monitor and adapt as needs change
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Purchasing & Supply Chain Management, 5e
 Further Reading
 Harvard Business Review
 “The secrets to successful strategy execution” Neilson et al.
2008
 “What is strategy” Porter 1996
 Inside Supply Management
 “Operational Risk Management – Event Scenario Planning”
CAPS Research 2013
 “Turn a Commodity Strategy Into a Competitive Advantage”
Reaume 2012
 “Drive Supply Chain Excellence Through Performance
Metrics” Desai 2011
 Supply Chain Management Review
 “How Unilever Aligned its Supply Chain and Business
Strategies” Monahan et al. 2007
 “Strategic Planning: Now More Important Than Ever” Shapiro
2004
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