Dear pocurement professionals,
We continue to consider the best procurement practices from Purchasing chessboard of A.T.Kearney. And we consider the relevant sourcing strategies which can be useful in case of high supply power and low demand power.
In cases where supply power is high, the second basic strategy is to change the nature of the demand. High supply power exists in cases whenever a supplier succeeds in establishing a monopolistic or oligopolistic position thanks to a unique technical advantage or exclusive market access. Quite often, a market constellation of this kind is not inevitable but is in fact
brought about, either knowingly or unknowingly, by the buying company itself. Changing the nature of demand requires sounding out the limits – i.e. determining to what extent technical specifications can be modified so as to regain freedom of choice. Experience has taught that nearly all monopolies can be circumvented. The remaining residual risk can then be managed through the use of appropriate measures.The approaches for cutting costs and adding value within this basic strategy are risk management, innovation breakthrough, technical data mining, and re-specification. These approaches and their underlying methods are briefly described below.
Picture 1. Sourcing strategies in case of high supply power and small demand power (A.T. Kearney, Purchasing chessboard)
Risk management
The term “risk management” is used to designate the sum of defensive measures that can be employed in order to ensure that the customers can be supplied and that the company’s financial outcomes remain plannable.Risk management encompasses the following methods:
A5. Bottleneck management: A combination of steps to facilitate proactive avoidance, early recognition and adoption of timely countermeasures against bottlenecks. The aim is to ensure the supply of end products to the customer under all circumstances.
A6. Vertical integration: In a seller’s market with constantly rising prices and restricted supply, the long-spurned method of vertical integration is coming back into favor.
B5. Political framework management: With skillful lobbying, it is possible to maneuver a monopolistically operating supplier into a position that works to the advantage of the dependent company.
B6. Intelligent deal structure: Especially when purchasing from monopolistic suppliers, careful drafting of contracts is of paramount importance. Contracts skillfully designed to suit the specific demand structure of the company can be a competitive factor of considerable importance.
Innovation breakthrough
Whether as a result of monopolies or patents, or because specifications are excessively geared to a single supplier, companies sometimes find themselves in a position of complete dependence. In cases of this kind, the only solution is an innovation breakthrough that will fundamentally change the rules of the game. Innovation breakthrough encompasses
the following methods:
A7. Core cost analysis: In essence, core cost analysis is a “zero-based method” to product development. Instead of dragging along all the extras that have attached themselves to a product over the years, one goes back to basics and asks what functions are absolutely essential. The product is then radically optimized in line with these basic requirements.A8. Invention on demand: Patent-protected suppliers constitute a particularly difficult challenge to purchasing. Under the invention on demand strategy, which is based on the TRIZ method, alternative technical solutions are systematically developed, taking account of ideas from all scientific fields.
B7. Design for sourcing: By fostering closer cooperation between R&D and purchasing, design for sourcing generalizes specifications to such an extent that they are no longer tailored to suit just one particular supplier.
B8. Leverage innovation network: R&D is fostered through cooperation in a cross-company innovation network. This also allows the company to gain new insights into innovative technologies. By looking beyond its own backyard, the company frees itself from long-standing supply dependencies.
Technical data mining
Increasing differentiation, shorter product lifecycles and growing product variety make sourcing increasingly complex. As a result, it is also becoming more difficult to practice volume bundling or to achieve economies of scale from suppliers. The first step, therefore, is to apply the appropriate tools to bring order into the apparent chaos. By using analysis and benchmarking, it should be possible to identify potential improvements that can be realized in a joint effort between R&D and production. Technical data mining encompasses the following methods:
C5. Product benchmark: Product benchmarking enables the comparison of the different design solutions that are available on the market.
C6. Composite benchmark: In this case, a selection of competing products is sent to several suppliers for component analysis. The suppliers make proposals and submit offers at both the component and product level. By combining the best proposals, a “best of the best” concept is arrived at, while insight is also acquired into the suppliers’ production costs.
D5. Complexity reduction: Product complexity is rendered visible and tangible through structured variant trees. As a result, the number of variants can be systematically reduced.
D6. Process benchmark: Process benchmarking is the comparison of costs for individual production steps, such as surface treatment of turned parts. The resulting figures provide a basis on which purchasing can negotiate processing costs directly with the supplier.
Re-specification
Many of the costs of a product are already determined in the early phases of its development. If one cannot reduce cost within the scope of existing specifications, there is only one thing to do: go back to the drawing board! The obstacle in this case is to get the creative process going again. After all, there was good reason why the product was designed the way it was. Thus, the key question is, “Do I really need a particular feature or
characteristic for my product to be successful on the market or to be able to produce it efficiently?” Re-specification encompasses the following methods:C7. Product teardown: Product teardown means breaking down competitors’ products into their component parts and comparing them with one’s own solution.
C8. Functionality assessment: The costs which each function of a product incurs are attributed to that function. An interdisciplinary team then identifies functions that are dispensable or that could be provided more cheaply.
D7. Design for manufacture: Design for manufacture is a systematic process for designing products (or modifying their design) so that they are easy and inexpensive to produce.
D8. Specification assessment: Specification assessment means critically evaluating current specifications and asking whether they are in fact useful or merely increase cost and complexity. Specifications that are not necessary are amended accordingly.
