Chapter 6Commodity Strategy Development ProcessPortfolio Analysis ApproachExample of Goal SettingStages of Strategy EvolutionLow Value PurchasesSlide 7Slide 8Slide 9Portfolio AnalysisSlide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Commodity Strategy DevelopmentSlide 19Slide 20Data Collection SourcesAre You Able to Answer the Following Questions?Are You Able to Answer the Following Questions?Key Commodity Strategy QuestionsSlide 25Measure and Evaluate Strategy Performance1Chapter 6Purchasing And Commodity Strategy DevelopmentIDIS 424Spring 20042Commodity Strategy Development Process1. Business Requirements Definition2. Define Strategic Importance of Commodity3. Determine Business Requirements and Supply Market Research4. Goal Setting & Conduct Gap Analysis5. Develop Sourcing Strategy and Objectives6. Execute the Plan!7. Results Monitoring and Review3Portfolio Analysis ApproachValue toBuyerNumber of Capable SuppliersLowHighFewManyStrategic(Time & Effort)Leverage(Consolidate Purchases)Acquisition(Establish Purchasing Systems)Multiple(Bids)4Example of Goal SettingIncrease volume and market share through pricing reductionReduce cost of goods by 20%Reduce purchase prices (with redesign) by 25% in 12 monthsDevelop lower cost production processes or modify design resulting in 25% lower pricesBusiness Goals (SBU)Product GoalsSystem / Component GoalsSystem / Component Goals5Stages of Strategy Evolution IV- Fully Integrated Supply ChainsII - Moderate DevelopmentI - Basic BeginningsIII - Limited IntegrationQuality/cost teamsLonger -term contractsVolume leveragingSupply baseconsolidationSupplier quality focusAd hoc supplier alliancesCross-functional sourcing teamsSupply base optimizationInternational sourcingCross-location sourcing teamsGlobal sourcing Strategic supplier alliancesSupplier TQM developmentTotal cost of ownershipNon-traditional purchase focusParts/service standardizationEarly supplier involvementDock to stock pull systemsGlobal supply chains with external customer focusCross-enterprise decision makingFull service suppliersEarly sourcingInsourcing/ outsourcing to maximize core competencies of firms throughout the supply chain6Low Value PurchasesStrategy emphasis: AcquisitionAutomate ordering/releasing systemsSimplify processes and proceduresOff-load ordering to users or suppliers through low value purchase systems Standardize and streamline where possible7Low Value PurchasesKey Question--How do organizationsreduce the effort and transactionsrequired to process low value purchases?(Acquisition quadrant) How do organizationsreduce the effort and transactionsrequired to process low value purchases?(Acquisition quadrant) Based on a 1998 research projectconducted by Trent and Kolchin titled “Reducingthe Cost of Processing Low Value Purchases”8Low Value PurchasesFirms that have made greater progress in managing low value purchases……..Emphasize certain methods, approaches, or activities when reducing the effort or transactions required to process low value purchases (in order of effect):1 On-line ordering through the use of electronic catalogs2 Procurement cards issued to users3 Electronic commerce through the internet9Low Value Purchases 4 Purchasing process redesign efforts 5 Automated accounts payable systems 6 Allowing users to contact suppliers below some dollar threshold 7 Consolidation of purchase requirement between units 8 Auto fax with suppliers 9 Electronic data interchange with suppliers10 Electronic funds transfer payments10Portfolio AnalysisPortfolio Analysis Quadrant Characteristics: AcquisitionFewer capable suppliers within a regionLow priority itemsFewer total dollars spentMay consume a disproportionate amount of time and dollars to acquireDeveloped quality and technologyAble to move easily between suppliers--low switching costsFocus on removing effort and transactions through low dollar purchase systems11Portfolio AnalysisStrategy emphasis: AcquisitionAutomate ordering/releasing systemsSimplify processes and proceduresOff-load ordering to users or suppliers through low value purchase systems Standardize and streamline where possible12Portfolio AnalysisPortfolio Analysis Quadrant Characteristics: MultipleGreater number of suppliersLow to medium annual dollarsAble to move easily between suppliers--low switching costsDeveloped quality and technologyFocus on price analysis to gain benefit13Portfolio AnalysisStrategy emphasis: MultipleLet market forces workPlay the market--perform price analysesPeriodically market test Apply pressureShort-term commitments (with the option to renew)14Portfolio AnalysisPortfolio Analysis Quadrant Characteristics: LeverageGreater number of suppliersMedium to high annual dollarsWin-win approach may work here Focused commodity familiesCombining contracts across units yields savings Developed quality and technologyAble to move easily between suppliersFocus on cost and price analysis15Portfolio AnalysisStrategy emphasis: LeverageCombine volumes for lower costMay use a longer-term agreementUse target costingProbe for efficiencies or improvements16Portfolio AnalysisPortfolio Analysis Quadrant Characteristics: StrategicFew capable suppliersItems or services critical to successUnique or customized itemsCollaborative or interdependent relationships Unable to move between suppliers easilyCost analysis yields benefitsUnproven or undeveloped technologyWin-win environment17Portfolio AnalysisStrategy emphasis: StrategicJoint ventures/alliances/partnershipsPractice reverse marketingDevelop collaborative relationshipsPursue annual cost/price/quality/cycle time improvement goalsUse of longer-term agreements18Commodity Strategy Development1. Business Requirements Definition2. Define Strategic Importance of Commodity- Short and long term- What is needed to compete- Define commodity categories- Form commodity team- Determine linkage of commodity to business units- Identify potential problems3. Determine Business Requirements and Supply Market Research- Collect data from multiple sources of information- Determine trends- Identify market leaders19Commodity Strategy Development4. Goal Setting & Gap Analysis5. Develop Sourcing Strategy and Objectives-