Mapping Your Procurement Strategy
When considering procurement strategies, not all supplies can be treated equally. One way to resolve and anticipate certain procurement problems, while minimizing risk, would be to classify the supplies you are buying into categories or segments and pursue strategies accordingly. Keep reading to learn how to identify types of supply markets, with procurement strategies and pitfalls associated with each.
So, let’s say you are responsible for buying different parts for a bicycle company. First, you may buy handlebar grips, which are relatively inexpensive and don’t cost you very much. Next, you’ll probably buy the wheels. These cost a bit more, but there are a lot of suppliers of wheels, so you can leverage your purchasing position for a better price You would also need to buy a bike frame. The frame is different and especially important because it is the part that gives your company its competitive advantage.
Generally, when reviewing each product segment, you want to ask four questions:
- How many should you buy?
- How much does each part cost?
- How unique is the part?
- How many vendors are in the market?
You can then map these segments over two dimensions, on two axes:
Risk/impact and Total spend
In the bottom left quadrant is the Common (or “simple”) market. There is low risk/impact, many suppliers, easily exchangeable parts, a lot of market capacity, standard specifications, supplies that are not unique and easy to substitute. As you move up and right, toward greater risk/impact and higher total spend, the supply markets become more complex.
Another name for the bottom left quadrant is the Tactical quadrant, where you find common or “simple” supplies. There’s not a lot of money or resource put toward purchasing these supplies.They are of low importance, value, and risk, with high market supply and transaction volume.
Suggestions:
With Tactical goods, it becomes especially important to consolidate transactions for greater efficiency. You can achieve this through supplier managed inventories or system contracting. You also want to make sure to use electronic data interchange and digital communication in order to bring down fixed costs per transaction.
In a Leverage market (bottom right) there are many suppliers; you have generic items and a high volume of supply. It’s not a complex buying process but requires a lot of attention because of large amounts of money spent here.
Suggestions:
It’s very important to minimize total landed cost and assure continued supply. You want to continuously analyze the supply base and be aware of new suppliers. You also want to keep contracts as short and flexible as possible. Some suppliers may run standard procurement auctions; if that’s the case, then you’ll want to leverage volume. Two helpful strategies are purchasing across divisions or organizing a consortium of several non-competing companies.
The Critical buy (top left) carries potential problems because it’s a complex market with few substitutes. You don’t spend a lot of money on it, which limits your negotiating power and ability to leverage.
Suggestions:
Here the strategy would be to decrease product variety and reduce the number of stock keeping units (e.g. smaller inventory). The more you standardize the items and services the better. You also want to develop a method to manage assets over a lifetime of business and organizational growth. To ensure availability, press for long term contracts, and maintain a higher level of safety stock (i.e. a greater margin of error); in case the unexpected happens, you’ll have partly covered yourself by mitigating risk. And always keep looking for alternatives.
The Strategic buys are things that give us our competitive advantage. Where you spend a lot of money, there is usually high risk and high impact.
Suggestions:
Here is where you want to establish partnerships for even greater competitive advantage. You want the partnership agreement to be at all levels, so that not only are your procurement people talking to their salespeople, but your engineers are talking to their engineers, your CEO is talking to their CEO, so on and so forth. You definitely want a long-term contract, ideally with gain sharing, revenue sharing, and joint product development.
