Planning

1
Planning

• 8. Purchasing and Business strategy

2
Program

• Purchasing and competitive strategy
• Cost leadership and differentiation consequences
  for manufacturing and purchasing strategy
• Lean manufacturing
• Integrating purchasing into company policy
• Towards leveraged purchasing strategies
• Purchasing portfolio-analysis
• Four basic supplier strategies

3
Purchasing and competitive strategy

• The competitive situation of West European
  industry has
• changed over the past decade
• More competition from countries like Korea,
  Singapore, China, Taiwan.
• Industry in W-Europe seems to be
  under-represented in areas of new technologies.
  Many industries seem to be at the stage of
  saturation or decline

4
Purchasing and competitive strategy
Textiles
Chemicals
Clothing
Food products
Leatherware/shoes
Rubber, plastics
Steel
Automobile industry
Machine construction
Shipbuilding
Telecommunications
Computers
Pharmaceuticals
Medical equipment
Optical industry
Biochemistry
5
Purchasing and competitive strategy

• Result Long-term strategy of many companies
  focuses on selective growth a combination of
  enhancing the core activity and starting up new,
  promising activities.
• Consequence of this strategy
• companies sell off activities that are not
  considered to belong to their core business

6
Purchasing and competitive strategy

• Reasons underlying this trend
• Increased subcontracting, as a result of make-or-
  buy studies
• Buying of finished products instead of components
• Turnkey delivery
• Technological development

7
Cost leadership and differentiation
consequences for manufacturing and purchasing
strategy

• Each companys goal
• develop a distinctive,sustainable competitive
  advantage.

Porter, 1980
8
Cost leadership and differentiation consequences
for manufacturing and purchasing strategy

• Porter (1980) defines three strategies leading to
  a distinguishing market
• position
• Cost leadership main focus continually reducing
  the cost price of the final product.
• Differentiation aims at marketing products which
  are perceived by the customer as being unique
• Focus strategy aims at serving a particular,
  clearly defined group of customers in an optimal
  way
• The consequence of not making a choice between
  the strategic alternatives is that the company
  will be unable to build up a sustainable
  competitive advantage in the end-user market

9
Lean manufacturing

• Womack et al. (1990)
• Fundamental to lean management is that
• It transfers the maximum number of tasks and
  responsibilities to those workers actually adding
  value to the car on the line, and it has in place
  a system for detecting defects that quickly
  traces every problem, once discovered, to its
  ultimate cause

10
Lean manufacturing

• Important features of lean management
• Teamwork among line workers, who are trained in a
  variety of skills to conduct different jobs
  within their working group
• Simple but comprehensive information display
  systems that make it possible for everyone in the
  plant to respond quickly to problems and
  understand the plants overall situation.
• Total commitment to quality improvement on the
  shop floor.

11
Lean manufacturing

• Differences Japanese and European new product
• development
• Japanese manager in charge of new product
  development greater authority to make decisions
  than his Western counterpart.
• product and process engineering are integrated
  responsibility areas
• engineering manager decides on who he wants to
  involve in his engineering team and for what
  period.

12
Lean manufacturing

• Japanese way to manage supply base
• Average supply base is much smaller than for
  Westernn manufacturers.
• Most Japanese OEMs have a layered structure,
  which is often three or more tiers deep.
• Suppliers are usually involved in new product
  development at a very early stage
• Suppliers are confronted with well-defined
  targets in terms of quality improvement, lead
  time reduction an cost reduction. They are
  informed as to whether they meet contractual
  obligations

13
Integrating purchasing into company policy

• In designing business strategy top management
  will have to make decisions about the companys
  positioning vis-a vis its 3 major stakeholders
• Primary customer groups or target groups.
  Touches upon the issue of market positioning and
  segmentation.
• Major competitors. Companies must not only be
  able to respond to customer needs but also
  respond in such a way that they achieve
  distinctive, sustainable competitive advantage.
• Major suppliers. Developments in the supplier
  markets necessitate continuous review of the
  companys core activities.

14
Customers
The strategic triangle
Marketing
Company
Competitive benchmarking
Make vs Buy Strategic sourcing
Competitors
Suppliers
15
Towards leveraged purchasing strategies

• Stages
• In sourcing / outsourcing. Decide what activities
  to handle inside and outside the company
• Develop commodity strategies. Develop a clear and
  detailed picture of the purchasing spend and a
  commodity strategy.
• Establish and leverage world class supply base
  management. Supply base management relates to how
  many suppliers will be dealt with for a certain
  commodity, what conditions the best in class
  supplier should meet and how suppliers are
  selected
• Develop and manage supplier relationship
  Suppliers are grouped into distinctive
  categories. E.g. commercial suppliers, preferred
  suppliers, supplier partners.

16
Towards leveraged purchasing strategies

• Integration of suppliers in product development.
  Focus on building constructive relationships with
  suppliers in area of new product development
• Supplier integration into the order fulfillment
  process. Idea is that manufacturer and supplier
  in the end have agreement on mutually shared
  objectives aimed at satisfying the final customer
  as best as they can.
• Supplier development and quality management. At
  this stage suppliers are challenged actively to
  provide new ideas (related to product design,
  manufacturing technology, etc.) for improvement.
• Strategic cost management. This concept includes
  the identification of all costs, cost drivers and
  strategies aimed at reducing costs throughout the
  supply chain. (see chap. 13)

17
Towards leveraged purchasing strategies
18
Purchasing portfolio-analysis

• In developing effective supplier strategies, the
  following questions
• may be helpful
• Does the present purchasing strategy support our
  business strategy and does it meet our long term
  requirements?
• What is the balance of power between our company
  and our major suppliers?
• Are the strategic products and services sourced
  from the best in class- suppliers?
• What percentage of our purchasing requirements is
  covered by contracts?
• To what extent are internal operations
  benchmarked against specialist suppliers?
• What opportunities exist for collaboration with
  suppliers with product development, quality
  improvement, lead time reduction reduction?

20-80 rule 20 of the products and suppliers
represent 80 of purchasing turnover
19
Purchasing portfolio-analysis

• Kraljics (1983) product portfolio based on two
  variables
• Purchasings impact on the bottom linethe profit
  impact of a given supply item measured against
  criteria such as cost of materials, total cost,
  volume purchased
• Supply risk measured against criteria such as
  short-term and long term availability, number of
  potential suppliers, structure of supply markets.

20
Purchasing product portfolio
High
Purchasings impact on financial results
Low
Low
Supply risk
High
21
Supplier portfolio
High
Supplier impact on financial results
Low
Low
Supply risk
High
22
Purchasing portfolio-analysis

• Four basic supplier strategies
• Partnership
• Competitive bidding
• Secure supply
• Category management and e-procurement solutions

23
Four basic supplier strategies
Partnership
24
Four basic supplier strategies
Competitive bidding
25
Four basic supplier strategies
Secure supply
26
Four basic supplier strategies
Category management and e-procurement solutions
27
Four basic supplier strategies