Chapter 10
Category sourcing:
Getting better performance from
suppliers
Program
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Reasons underlying cost savings potential in purchasing
How to identify cost savings potential
Developing a sourcing strategy
Category sourcing planning
Getting better results from suppliers
The myth of partnership
Conclusions
Cost saving potential in purchasing (1)
Companywide programs focused on cost reduction seem to
be successful.
Reasons for slack in materials cost and prices:
 Traditional purchasing (Buyers are involved late, if at all, in the
purchasing decision-making process; the company deals with a fixed group
of familiar suppliers)
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Continuous competitive bidding amongst a fixed
group of suppliers Purchasers regularly sound out competition
amongst a limited number of suppliers by playing them off against each
other
Cost saving potential in purchasing (2)
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Price increases automatically passed on to the next
in line
Over -specification
Technical requirements (defined by R&D departments) which are not
necessary for the functioning of the product are imposed on suppliers.
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Supplier cartels in (international) supply markets
In spite of the agreements made on EC level, cartels in most European
economies are very common. In many industries, there are only a limited
number of players, which enables silent agreements
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Suppliers’ customers relationship programs
Relationship programs include offering fringe benefits to customers in order
to create a preferred position at members of Decision Making Unit.
Identify cost savings potential
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Starts with analysis of the company’s purchasing spend
by means of a spend cube
Category tree based on direct and indirect spend
categories
Spend categories:
A group of coherent products or services, bought from the supply
market that are used in our company to satisfy internal or external
customer demands
Example a category tree
for non-production related purchasing spend
Identify cost savings potential
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Cost savings can depend on:
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Customize versus standard specifications
Modular versus component buying
Buyer-supplier dependence
Number of suppliers involved in last tender
Scope of last tender
Type and age of contract
Market price versus cost price differential
Level of purchasing involvement
Developing a sourcing strategy
Supplier relationship
Sourcing strategy issues
 Global versus local sourcing: International supplier
orientation necessary or is local, national orientation sufficient?
 Single versus multiple sourcing: Purchase the product
at one or more suppliers?
 Partnership or competitive bidding? Buy from supplier
with whom a partnership relation is preferred or keep the
supplier at distance?
Developing a sourcing strategy
Supplier relationship
Contract strategy issues
 Buying on contract or buying on spot basis. Is the
total volume of purchased products to be covered by a contract
or is part of the volume bought on a spot basis?
 Price agreement versus performance agreement.
Just a price agreement or is a detailed service level agreement
(SLA) necessary with arrangements on time, tests, maintenance
etc?
Category sourcing planning
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The category sourcing planning provides a strategy for
every important purchasing category
Content:
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Business strategy and business issues
Analysis of historical data
Customer requirements and purchasing process
Objectives sourcing strategy
Commodity sourcing strategy
Planning of activities
Organization and team composition
Getting better results from suppliers
Towards performance based relationships. A
stepwise approach:
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Set up the best legal contract, A thorough analysis of current
contract arrangements with existing suppliers. Objective: agree on a
performance based contract.
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Select the best supplier, analysis of (international) supply market,
sounding out international competition. Objective: Select Best-In-Class
supplier.
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Get the best solution from the best supplier, focus is on
continuous improvement with the supplier based upon Total Cost of
Ownership.
The myth of partnership
Philips, one of the first European companies focusing on
partnership, introduced the term ‘co-makership’.
Objective of this type co-operation is to achieve
improvements in:
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Cost
Logistics
Quality
Product development
The myth of partnership
Ellram and Hendrick (1993):
A ‘partner’ is defined as a firm with whom your company has an
ongoing buyer-seller relationship, involving a commitment over
an extended time-period, a mutual sharing of information and a
sharing of risks and rewards resulting from the relationship
This research has demonstrated that:
 Less than 1% of supplier relations can be characterized as a
partnership relationship. However, these suppliers were
responsible for 12 % of total purchasing volume!
The myth of partnership
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A DTI (1994) study concludes that ‘in developing new working
agreements with their suppliers most vehicle manufacturers
still appear to deal more in rhetoric than in reality’
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This comes a no surprise. Cooperation with suppliers requires
internal teamwork between all disciplines and companies still
operate in a functional manner.
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Developing a partnership with suppliers takes time. The road is long
and difficult. There are no easy ways or short cuts to success here.
The myth of partnership
Aspects
Supplier
operational
Preferred supplier
Relationship
characteristics
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Time – horizon
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Quality
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Logistics
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orders
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Contract
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from order to order
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Price/cost
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price
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from order to order
as requested by
producer
 quality control by
producer
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operational
1 year
Supply partner
Design Partner
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tactical
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strategic
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1-3 years
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1-5 years
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as requested by
producer
 quality control by
producer
and supplier
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‘sign-off’ by supplier
 quality assessment by
supplier
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annual agreements +
call- off orders
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periodical scheduling of
materials requirement by
producer
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annual agreement
(>1 year)
 quality agreement
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annual agreement
(1 year)
price+ rebate
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price + cost-reduction
targets
sign-off by supplier
 early supplier
involvement in design
 quality assessment by
supplier
electronic document
interchange
design contract
 life of type responsibility
price based on open
calculation
 continuous improvement
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The myth of partnership
“Partnership is the result of the contractors’
continuous effort to improve results in the
relationship with suppliers, rather than a technique
which can be adapted and applied in a short time”
Conclusions
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Effective supplier management is another cornerstone for a
successful business strategy.
The international competitive arena forces manufacturers to look
continuously for ways to improve their value propositions to
customers.
The foundation of any category sourcing plan is a sound spend
analysis. The purchasing spend is categorized in homogeneous
product categories though a category tree.
The road to partnership is long and difficult. There are no easy ways
or short cuts to success.