Chapter 9
Purchasing and business
strategy
Program
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Purchasing and competitive strategy
Cost leadership and differentiation
Lean manufacturing
Integrating purchasing into business strategy
Towards purchasing excellence
Purchasing portfolio analysis
Global sourcing
Purchasing and competitive strategies
Reasons for outsourcing those activities that
are not considered ‘core business’:
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Increased outsourcing and subcontracting, as a result of
make-or-buy studies
Buying of finished products instead of components
Turnkey delivery
Technological development
Purchasing and competitive strategy
The competitive situation of West European
industry has changed over the past decade:
1.
More competition from countries like Korea,
Singapore, China, Taiwan.
2.
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:
Purchasing and competitive strategy
Introduction
Growth
Saturation
Chemicals
Food products
Rubber, plastics
Automobile industry
Machine construction
Telecommunications
Computers
Pharmaceuticals
Medical equipment
Optical industry
Biochemistry
Decline
Textiles
Clothing
Leatherware/shoes
Steel
Shipbuilding
Cost leadership and differentiation
Porter (1980) defines three strategies leading to a
distinguishing market position:
1.
Cost leadership main focus: continually reducing the cost price of the
final product.
2.
Differentiation aims at marketing products which are perceived by the
customer as being unique
3.
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.
Lean manufacturing
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.
Womack et al. (1990)
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
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Simple but comprehensive information display systems that
make it possible for everyone in the plant to respond quickly to
problems and understand the plant’s overall situation.
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Total commitment to quality improvement on the shop floor.
Lean manufacturing
Differences between Japanese and European
new product development:
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Japanese manager in charge of new product development; greater
authority to make decisions than his Western counterpart.
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Product and process engineering are integrated responsibility
areas
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Engineering manager decides on who he wants to involve in his
engineering team and for what period.
Lean manufacturing
The Japanese way to manage supply base:
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Average supply base is much smaller than for Western
manufacturers.
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Most Japanese OEMs have a ‘layered’ structure, which is often
three or more tiers deep.
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Suppliers are usually involved in new product development at a
very early stage.
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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
Strategic triangle
Customers
Marketing
Company
Competitive
benchmarking
Competitors
Make vs. Buy
Strategic sourcing
Suppliers
Choices regarding the strategic triangle
Primary customer groups
1.
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Match product and customer
Focused marketing plan
Choose between specific vs. standard solutions
Major competitors
2.
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Sustainable competitive advantage
Competitive benchmarking
Major suppliers
3.
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Investigate core competences
Subcontracting if activities can not be performed in a competitive
way
Towards purchasing excellence
Monczka as quoted by Purspective www.purspective.com
Towards purchasing excellence
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Insourcing/outsourcing
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Clear policy regarding make-or-buy
Develop commodity strategies
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Spend analysis (spend cube)
Structure and classify purchasing expenses (category tree)
Determine strategy
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Number of suppliers geographical dispersal, relation, contract form
Involvement of specialists and internal customers in execution
Towards purchasing excellence
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World class supply base management
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Intensify relations with suppliers
 Database with supplier information
 Detailed audits with important suppliers
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Develop and manage supplier relationships
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Continuous improvements
 Classification of suppliers:
 Commercial suppliers
 Preferred suppliers
 Supplier partners
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Integration of suppliers in product development
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Suppliers with proved competences
 Using specific knowledge
Towards purchasing excellence
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Supplier integration into order fulfillment process
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Outsource logistic and administrative tasks
 Connect suppliers with information systems and production planning
 Develop plans to increase value for customer through purchasing
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Supplier development and quality management
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Suppliers are invited to participate in suggestions for improvement
 Suppliers are a source of new ideas
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Strategic cost management
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Detailed cost models
 Supply chain analysis and measures to decrease supply chain costs
together with suppliers
 Sharing of advantages is necessary
Enabling processes
II
Develop
Organization and
Teaming strategies
Establish globally I
integrated and aligned
purchasing and supply
chain Strategies + Plans
Establish HumanVI
Resource development and training
Source: Robert.M. Monczka, Ph.D.
INTEGRATED,
ALIGNED AND
GLOBAL
Develop and V
implement enabling
IS / IT systems
III
Deploy
Globalization
IV
Develop purchasing
and supply chain
Measurements
Purchasing portfolio analysis
In developing effective supplier strategies, the following
questions may be helpful:
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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 classsuppliers?
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?
20-80 rule: 20% of the products and suppliers
represent 80% of purchasing turnover
Purchasing portfolio analysis
Kraljic’s (1983) product portfolio based on two variables:
1.
Purchasing’s impact on the bottom line
the profit impact of a given supply item measured against criteria
such as cost of materials, total cost, volume purchased
2.
Supply risk
measured against criteria such as short-term and long term
availability, number of potential suppliers, structure of supply
markets.
Purchasing product portfolio
High
Leverage products
Strategic products
alternative sources of
supply available
 substitution possible
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critical for product’s cost price
 dependence on supplier
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Purchasing’s
impact on
financial
results
Performance based
partnership
Competitive bidding
Routine products
Bottleneck products
large product variety
 high logistics complexity
 labor intensive
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monopolistic market
 large entry barriers
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Systems contracting +
E-Procurement solutions
Secure supply + search
for alternatives
Low
Low
Supply risk
High
Supplier portfolio
High
Leverage suppliers
Strategic suppliers
many competitors
 commodity products
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market leaders
 specific know-how
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Supplier
impact on
financial
results
Buyer dominated segment
Balance of power may differ
among buyer-supplier
Routine suppliers
Bottleneck suppliers
large supply
 many suppliers with
dependent position
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technology leaders
 few, if any, alternative suppliers
Reduce number of suppliers Supplier Dominated segment
Low
Low
Supply risk
High
Product categories
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Strategic products:
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Often high-tech, high-volume products
Only one supply source available
Significant share in cost price of end product
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Three situations possible:
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Buyer-dominated segment
Supplier-dominated segment
Balanced relationship  a partnership may develop over time
Product categories
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Bottleneck products:
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Relatively low value, vulnerable regarding supply
Few alternatives available
Supplier is often dominating the market
Routine products:
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Large variety in products
 Low value per product
 High transaction costs
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Leverage products:
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Choice between different suppliers
 Low switching costs
 Relatively high share in end product price
Purchasing portfolio-analysis
Four basic supplier strategies:
1.
2.
3.
4.
Partnership
Competitive bidding
Secure supply
Category management and e-procurement solutions
Four basic supplier strategies
Partnership:
Objective
create mutual commitment in long-term relationship
Suitable for
Activities:
strategic products (gearboxes, axles, optics, engines)
Decision
level
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accurate forecast of future requirements
 supply risk analysis
 careful supplier selection
 ‘should cost’ analysis
 rolling materials schedules
 effective change order procedure
 vendor rating
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board level
 Cross- functional approach
Four basic supplier strategies
Competitive bidding
Objective
Suitable for
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obtain ‘best deal’ for short term
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leverage products (commodities, steel plate, wire)
Activities:
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Decision
level
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improve product/market development
 search for alternative products/suppliers
 reallocate purchasing volumes over suppliers
 optimize order quantities
 ‘target pricing’
board level
 purchasing
Four basic supplier strategies
Secure supply
secure short- and long-term supply
 reduce supply risk
Objective
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Suitable for
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Activities:
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Decision
level
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bottleneck products (natural flavors, vitamins, pigments)
accurate forecast of future requirements
 supply risk analysis
 determine ranking in supplier’s client list
 develop preventative measures (buffer stock, consigned
stock, transportation)
 search for alternative products/ suppliers
purchasing
 cross functional approach
Four basic supplier strategies
Category management and
e-procurement solutions
reduce logistics complexity
 improve operational efficiency
 reduce number of suppliers
Objective
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Suitable for
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Activities:
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Decision
level
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routine products (consumables, supplies)
subcontract per product group/ product family
 standardize product assortment
 design effective internal order delivery and invoicing
procedures
 delegate order handling to internal user
purchasing
 cross functional approach
Four basic supplier strategies
Partnership
Competitive bidding
Leverage products (e.g.
commodities, steelplate, wire)
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Improve product / market
knowledge
 Search for alternative
products / suppliers
 Reallocate purchasing
volumes over suppliers
 Optimize order quantities
 ‘target’ pricing

Accurate forecast of
future requirements
 Supply risk analysis
 Determine ranking in
supplier’s client list
 Develop preventative
measures (e.g. buffer
stock, consigned stock)
 Search for alternative
products / suppliers
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Board level
 Purchasing
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Purchasing
 Cross functional
approach
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Strategic products (e.g.
gearboxes, axles, engines)

Accurate forecast of future
requirements
 Supply risk analysis
 Careful supplier selection
 ‘should cost’ analysis
 ‘rolling’ materials
schedules
 Effective change order
procedure
 Vendor rating
Board level
 Cross functional approach

Activities
Decision
level
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Suitable for
Secure short and long
term supply
 Reduce supply risk
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Category management
and e-procurement
solutions
Obtain ‘best deal’ for short
term
Create mutual
commitment in long term
relationship
Objective
Secure supply
Bottleneck products (e.g.
natural flavors, vitamins,
pigments)
Reduce logistic complexity
 Improve operational
efficiency
 Reduce number of
suppliers

Routine products (e.g.
consumables, office
supplies)
Subcontract per product
group
 Standardize product
assortment
 Design effective internal
order delivery and invoicing
procedures
 Delegate order handling to
internal user
Purchasing
 Cross functional approach
Purchasing portfolio
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Remarks:
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The use of a purchase portfolio alone is often not sufficient to
develop buying and supplier strategies.
For a strategic relation acknowledgement from both sides is
necessary
The Dutch windmill, analyzing buyer-seller interdependence

combining both the buyers portfolio approach and the suppliers customers
portfolio approach, leads to more realistic expectations and plans with
regard to future buyer seller collaboration.
Purchasing Portfolio Management
CORE
• Sound position
• Improve own profit
NUISANCE
• Mismatch
• Accept short term
• Change supplier
DEVELOPMENT
• Supplier developm.
opportunities
• Encourage
participation
Relative
cost
EXPLOITABLE
• Adversarial
relationship
• Check power balance
• Consider other
sources
Relative value
Evaluate the impact of the supplier’s view within strategy development
EXPLOITABLE
• Moderate risk
• Monitor price trend
• Seek alternatives
CORE
• Strong position
• Maintain
relationship
• Offer other
opportunities
NUISANCE
• Possible mismatch
• Passive relationship
• Seek alternative
supplier
DEVELOPMENT
• Good supplier
interest
• Offer incentives
• Raise mutual
dependency
EXPLOITABLE
• Great caution
• Raise mutual
dependency
• Seek competition
CORE
• Good match
• Potential long term
relationship
NUISANCE
• Very high risk
• Seek competition
•Raise attraction
DEVELOPMENT
• Potential match
• Work closely
together to develop
business
Our Company’s attractiveness
Supply risk
EXPLOITABLE
•Moderate
cost risk
• Closely monitor
price and service
• Change supplier
NUISANCE
• High service risk
• Change supplier
• Offer incentives
CORE
• Good match
• Intensify relationship
• Maintain long term
relationship
DEVELOPMENT
• Potential risk
• Raise mutual
dependency
• Offer inducements
Global sourcing
Definition:
Proactively integrating and coordinating common items and materials,
processes, designs, technologies and suppliers across worldwide
purchasing, engineering and operating locations.
 Advantages: Global sourcing may lower unit costs, benchmarking current
suppliers, accessing new markets, etc.

Disadvantages: much more complicated distribution and logistics,
increasing handling costs, problems when dealing with different cultures,
contractual problems, higher uncertainty about on-time delivery and quality,
etc.
Conclusions
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Purchasing and supply management is getting a more prominent
position due to the strategic reorientation of many companies.
The purchasing strategy cannot be separated from the corporate
policy or from competitive strategy.
The framework developed by Monczke et al. (2005) consists of
strategic management processes on hand, and enabling processes
on the other hand.
When developing specific supplier strategies purchasing product
portfolio of Kraljic (1983) may be very helpful.