RMIT Classification: Trusted
PROCUREMENT
MANAGEMENT &
GLOBAL SOURCING
-----------------
Purchasing and Commodity
Strategy Development
COMMONWEALTH OF AUSTRALIA
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RMIT University© Monday, 12Information
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Presentation Plan
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Strategy Development
▪ Overview and Key Questions related to
Procurement and Commodity Strategy
Development
▪ Aligning supply management and enterprise
objectives
▪ Category strategy
• Translating Objectives → Goals
• Spend Analysis
• Portfolio analysis
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Overview
— Procurement is a major contributor to a firm’s
competitive advantage.
— Procurement goals drive both strategic
procurement processes and commodity
strategies.
— Provides a step-by-step process to translate
corporate strategy objectives into procurement
strategies.
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Key Questions
What is strategy ?
Why strategy is important ?
What are linkages between strategy ,
procurement and supply chain
management?
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Three Basic Questions of Strategy
Strategy is about choice that
deals:
➢ Where are we now?
➢ Where do we want to go ?
➢ How do we get there ?
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Definition of strategy
The determination of the basic long term goals and objectives of an
enterprise and the adoption of courses of action and the allocation
of resources necessary for carrying out these goal - CHANDLER
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Aligning Objectives
• What markets will firm compete in?
* On what basis?
• What are the long-term and short-term
business goals?
• What are budgetary and economic resource
constraints?
* How will these be allocated to functional groups and
business units?
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How Companies Create
Shareholder Value
1.Increase revenues
o Raise prices
o Increase volume
2.Decrease costs
o Reduce cost of employees (downsize)
o Reduce cost of process and waste
o Reduce cost of goods and services
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Integrative Strategy Development
Corporate strategies
Definition of businesses in which to participate
Acquisition and allocation of resources to these
business units
Business unit strategies
Scope or boundaries of each business and links with
corporate strategy
Basis of competitive advantage
Supply management strategies
Support desired competitive business-level strategy
How to complement other functional strategies
Category/Sourcing strategies
How to purchase commodities to support higher-level
strategies
Components of Integrative Strategy
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Enabling Effective Category Strategies
• Allocate resources initially, including
assessment of current spend, data collection,
market research, training, and people
• Validate savings or contribution to other
company objectives achieved by supply
management
• Sustain initiative through presentations to
senior executives who support the move
towards an integrated supply management
function with other functional groups in supply
chain
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Translating Objectives → Goals
OBJECTIVE GOAL MEANS/MESURES
Cost reduction Be low-cost producer in Reduce material costs
industry by 15% in 1 year
Reduce levels of inventory Reduce raw material
required to supply internal inventory ≤ 20 days’
customers supply
Technology/new Outsource non-core Qualify 2 new
product competency activities suppliers for all major
development services by end of
fiscal year
Develop new products and Develop formal
services supplier integration
process manual by
12/31
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Translating Objectives → Goals
OBJECTIVE GOAL MEANS/MESURES
Supply base Reduce number of Reduce total supply
reduction suppliers used base by 30% in next 6
months
Reduce product Identify $300K in
complexity potential cost savings
opportunities with 2
suppliers by 12/31
Supply assurance Assure uninterrupted Reduce cycle time on
supply from identified key parts to ≤ 1 week
suppliers within 6 months
Quality Increase quality of Reduce average
services and products defects by 200 ppm
on all material
receipts within 1 year
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Category Strategy (What is it?)
• Activities
* Understand business unit requirements
* Conduct research on supply market characteristics
* Evaluate specific suppliers and establish capabilities
* Develop a strategy aligning supply capabilities and demand
requirements
* Determine optimal relationship characteristics and price/cost
issues
* Develop business case
* Develop negotiation and contract strategy
* Execute the negotiation and develop contract
* Establish basis for ongoing management and continuous
improvement
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• Job of a Category Manager
− Engage internal stakeholders and fully understand their
requirements
− Scan the marketplace to understand market trends, cost drivers,
and risks
− Build a strategy that aligns stakeholder requirements with supply
market realities
• Categories Requiring a Strategy
− Complex projects
− Significant spend
− High risk categories that could impact operations or customers
• Important Outcomes
− Minimizing risk to the enterprise
− Reducing total cost of ownership for a category
− Improving category performance along key dimensions
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Spend Analysis (Few Questions)
• What did the business spend its money on over the past
year?
• Did the business receive right amount of products and
services, given what it paid for them?
• What suppliers received majority of business?
• Did suppliers charge accurate price across all divisions
versus P.O. requirements, contracts, and SOWs?
• Which divisions spent their money on products and
services that were correctly budgeted for?
• Are there opportunities to …?
* Combine volumes of spending from different businesses; Standardize
product requirements; Reduce number of suppliers; Exploit market
conditions for better pricing
Challenges in Conducting a
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Comprehensive Spend Analysis
•Difficulty in obtaining timely and
accurate information
•Impact of mergers and acquisitions
*Different recording procedures
*Different accounting systems
*Difficulty in translating data between
systems
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The Strategic Sourcing Process
Monczka/Handfield/Giunipero/Patterson, Purchasing & Supply Chain Management, 6th Edition. © 2016 Cengage. All Rights
Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Build the Team and the Project Charter
• Identify key people and subject matter experts
• Assign knowledgeable project leader
• Define scope of category strategy
• Publish project charter
• Develop work and communication plan
• Project summary document (Scope, Impact,
potential savings/outcome)
• Consider stakeholder needs
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Identifying Stakeholders
• Identify and name each stakeholder
• Note degree to which they are ready for change
* H, M, or L
• Note their capability for change
* H, M, or L
• Note their power (formal or informal) to make change
happen
* H, M, or L
• Identify factors which will help or inhibit the change
• Identify stakeholders and factors you need to work
with to make change happen
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Porter’s Five Forces Model
*Other possible
forces:
• Globalization
• Digitization
Source: Competitive Strategy Michael E. • Deregulation
Porter (19 80)
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Sample SWOT Analysis
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Strategy Development
• Portfolio analysis
* Critical category – strategic supplier
* Routine category
* Leverage category – preferred supplier
* Bottleneck category – transactional supplier
• Determine strategic importance of category to buyer
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Summary
Strategy Development
▪ Overview and Key Questions related to
Procurement and Commodity Strategy
Development
▪ Aligning supply management and enterprise
objectives
▪ Category strategy
• Translating Objectives → Goals
• Spend Analysis
• Portfolio analysis
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