Leveraging Competition (Slides) PDF

Leveraging Competition (Slides) Bundling Steps for pooling purchasing volumes Harmonize definitions of commodity groups (percent of common material numbers useful KPI)...

Leveraging Competition (Slides) Bundling Steps for pooling purchasing volumes Harmonize definitions of commodity groups (percent of common material numbers useful KPI) Create data transparency: spend cube with three axes products/what, sites/for whom and suppliers/from whom Rethink scope of pooling: across product lines? sites? product generations? Advantages of Bundling Cost Savings: Lower procurement and transaction costs. Simplified Management: Easier supplier management and negotiations. Leveraging Competition (Slides) 1  Volume Discounts: Increased purchasing power. Disadvantages of Bundling Supplier Dependency: Increased reliance on fewer suppliers. Reduced Flexibility: Less room to switch or negotiate with new suppliers. Quality Risk: If one product/service is subpar, the whole bundle is affected. Cooperative Sourcing Pooling beyond your own company: Cooperative Sourcing Pools demand across several companies to increase buying power At least two independent organizations set up a purchasing cooperation Cooperation intensity may vary from a loose one time pooling project to the foundation of a purchasing joint-venture Spend may be reduced through volume pooling Additionally, transaction cost may bereduced due to joint handling ofpurchasing processes Leveraging Competition (Slides) 2  Team up with competitor within industry → competitor benefit Team up with company from different industry → different spend Advantages of Cooperative Sourcing Cost Reduction: Shared procurement leads to lower costs. Increased Bargaining Power: Joint buying improves negotiation leverage. Risk Sharing: Partners share supply risks. Disadvantages of Cooperative Sourcing Coordination Challenges: Requires alignment between partners. Loss of Flexibility: Limited control over individual procurement decisions. Confidentiality Risks: Sharing sensitive data with partners. e. g Deutsche Telekom and France Telecom set up purchasing venture called BuyIn, saving 1.3 bil euros annually by jointly buying telecommunications equipment e.g Tesco and Carrefour announced joint procurement to increase competitiveness, leverage their joint purchasing power with suppliers but then ended the alliance → Reason: high competition due to the same target group, product complexity (flavor, regulation between market, package size), high transaction cost, high complexity of arrangement, complexity of arrangements with different products, variation (time consumption when discussing with the alliance) → Conclusion: procurement alliance effective but not always work out, situations but and partners have to fit. Single vs Multi Sourcing Leveraging Competition (Slides) 3  Sole Sourcing Reasons: Specialized supplier, proprietary technology, long-term relationship, high switching costs. Positive: Strong relationship, better quality control. Negative: High risk of supply disruption. Solutions: Develop contingency plans, strengthen supplier relations, monitor performance closely. Single Sourcing Positive: Cost efficiency, better negotiation leverage, simplicity, volume discounts. Negative: Vulnerable to supplier issues (e.g., delays) Solutions: Build strong contracts, ensure supplier reliability. Dual Sourcing Positive: Risk mitigation, competition between suppliers, security of supply. Leveraging Competition (Slides) 4  Negative: Increased coordination complexity. Solutions: Balance order volumes, monitor supplier performance, foster competition. Multiple Sourcing Positive: Flexibility, supply chain resilience, avoid dependency, competitive pricing. Negative: Higher administrative and management costs. Solutions: Ensure supplier qualification, manage relationships, monitor overall costs. Roles of different suppliers In a portfolio perspective on the supply base, suppliers are categorized based on spend share and supplier performance Spend share: spend of the company on a particular supplier (budget spent on the supplier) Supplier performance: how well the supplier meets the company´s requirements Leveraging Competition (Slides) 5  Core Suppliers Strategic, critical for long-term success. They provide key products/services. Strategy for company: Develop strategic partnerships, engage in joint innovation, and establish long-term contracts. Challengers Role: potential for improvement, new companies with innovation → pressure on the core suppliers Strategy: Monitor performance, provide support, and set improvement targets. Developers Role: Medium spend, high potential to become core suppliers Strategy: Invest in training and collaborate on pilot projects. Local partners Role: medium spend and performance, close to OEM, supply small quantity → risk management Strategy: Foster relationships and utilize for regional needs. Bottleneck suppliers Role: Critical but underperforming, high risk, provide goods/ services difficult to substitute Strategy: Secure supply through tight contracts and maintain safety stock. Expendables Role: Low spend, low performance, easily replaceable. Strategy: Use short-term contracts and maintain flexibility to switch suppliers. → Global developments influence the supplier strategy: Global developments, like geopolitical tensions, trade wars, and supply chain disruptions (e.g., COVID-19), have pushed companies like Apple to shift away from single sourcing in China. Apple is diversifying its supply chain by Leveraging Competition (Slides) 6  moving production to countries like India and Vietnam, reducing dependency on China for manufacturing. Auctioning English reverse auction How It Works: Bidders can see the current lowest bid and continuously submit lower bids in real time Advantage: Encourages competitive bidding, often leading to lower prices. Disadvantage: Can be time-consuming and may create tension among bidders Dutch reverse auction: How It Works: The auction starts at a high price and decreases until a bidder accepts the price. Advantage: Quick decision-making as bidders must act fast. Disadvantage: Risk of undervaluing the item due to rapid price drops. Japanese reverse auction: How It Works: Bidders submit sealed bids without knowing others' bids. They can revise their bids multiple times in response to lower offers revealed in later rounds. When the last bidder leaves the auction, the winner is decided (last bidder) Advantage: Allows bidders to adjust offers, fostering competitiveness. Disadvantage: Can be complex and confusing for participants, leading to potential errors. Leveraging Competition (Slides) 7  Auctions are most promising for standardized items, bulk purchases, commodities (i.e good/ material that is uniform in quality, interchangeable) Market situations: high supplier competition, standardized products, bulk purchasing, market volatility What is important when preparing a procurement auction: Clear specification of items → supplier will deliver what we want Which suppliers we invite to the auction Auctions can make the sourcing process more agile Degree of rivalry (i.e competition) Leveraging Competition (Slides) 8  Alternatives to auctions Leveraging Competition (Slides) 9  1. Using an interactive bidding process to get clarity on desired specifications: (i.e bidding in multiple rounds/ stages → participants adjust their bids based on feedback and new information provided) 2.Expressive bidding invites suppliers to make conditional offers Expressive bidding encourages suppliers to submit conditional offers → move toward more collaborative optimization between supplier and buyer Frequently used in automotive supplier negotiations, and in negotiating for logistics services Total Cost of Ownership For sourcing decisions, it is not sufficient to only consider the purchase price, at least landed cost to be analyzed Total Cost of Ownership (TCO) allows for a comprehensive comparison of costs of different alternatives (cost of acquiring, operating, maintaining, maintaining and disposing of an asset) Purchase price: cost of acquiring Landed cost: cost of acquiring and bringing to the final destination Leveraging Competition (Slides) 10  TCo perspective clarifies the scope of purchasing cost Leveraging Competition (Slides) 11  Traditionally, sourcing decision have mainly relied on cost considerations when evaluating alternative options Traditional sourcing approaches are often heavily skewed towards minimizing costs, even as firms increasingly outsource strategic activities. With more complex markets, risks and changing demands, such an approach can be highly problematic today (e.g. as demonstrated by the COVID-19 pandemic and the drawbacks of off-shored operations). Sourcing managers have potentially large effects on a product’s sales price and volume, which can be wrongfully neglected in sourcing decisions (e.g. quality or source of materials can play a crucial role for the end-customer). A purchasing approach may need to be tied closer to the overall firm value proposition, maximizing a firm’s long-term value. →An emerging approach for sourcing decisions: Total Value Contribution (TVC) Evaluates the total value provided by a supplier beyond just cost, including quality, service, and innovation. Leveraging Competition (Slides) 12  Value centric, focus on benefit, strategic advantages However, TVC also has drawbacks compared to traditional sourcing approaches Leveraging Competition (Slides) 13