Procurement must innovate to survive seller’s market

As consolidating supplier markets, rising energy prices and growing demand for raw materials change the purchasing landscape, procurement professionals must re-think their strategies, according to a discussion paper released by A.T. Kearney.

Procurement specialists at global management consulting firm A.T. Kearney claim that the purchasing framework has recently undergone fundamental changes, in a paper entitled, “The Purchasing Chessboard: buying in a seller’s market”.

“Mergers and acquisitions among suppliers have increased in recent years, as companies struggled to leverage economies of scale and withstand rising costs,” says Hasan Shafi, Principal at A.T. Kearney Australia.

“Many are ultimately scooped up by competitors so that today, as never before, there are fewer suppliers with more supply power.”

Along with supplier consolidation, higher energy prices and rising demand from emerging markets such as China and India, have led to price rises among suppliers.”

In this climate, Mr Shafi says procurement is well past its “golden age”.

“Since the 1980s, procurement professionals have used relatively simple tools — RFI’s and RFP’s, bundled products and services, and multi-year contracts — to negotiate annual price reductions of 1 to 3 per cent,” hew says.

“This is no longer possible, and we’ve moved well and truly into a seller’s market.”

Mr Shafi believes this power shift requires buyers to rethink and renew the strategies they use to reduce costs and increase value.

A.T. Kearney’s solution has been to develop a framework for continuous procurement innovation, expressed through the design of a chessboard.

“The ‘Purchasing Chessboard’ is actually a compilation of insights and experience from more than 500 purchasing projects performed globally over the last three years,” Shafi says.

“These have been distilled into four broad purchasing strategies and 64 separate methods by which procurement can achieve better results.”

Depending on the relative dynamics between supply power and companies demand power, A.T. Kearney uses four broad purchasing strategies:

  • Leverage competition among suppliers
  • Change the nature of demand
  • Seek joint advantages with suppliers
  • Manage spend

Underlying the four strategies are 64 stand alone methods that constitute the ‘chessboard’ pattern.

They are designed to drive innovative practices, as well as build the capabilities of the procurement team.

For many companies, Mr Shafi says, it is about pushing their current practices to a new level of sophistication.

“The strategy of leveraging competition among suppliers is widespread, but is not always taken as far as it could be,” he says.

“Beyond the levers of tendering and leveraging global supplier markets, very few companies readily employ the levers of reviewing suppliers’ prices and enforcing target prices.”

For example, by running regression analysis using a combination of technical parameters against an incumbent supplier’s pricing for hydraulic cylinders and setting a target price, the procurement team was able to identify over 20 per cent cost reduction potential.

Mr Shafi says that when buyers and sellers have equal market power, companies would need to find common advantages with their suppliers.

“Instead of going to tender, for example, companies can identify and realise cost efficiency potentials at incumbent suppliers,” he explains.

“Our experience indicates that such an approach typically leads to substantial material cost improvements of 15-25 per cent.”

According to Mr Shafi, when companies’ demand power is low and suppliers’ market power is high, companies need to change the nature of their demand.

“Risk management is increasingly becoming crucial for companies exposed to the rising and volatile prices of raw materials,” he maintains.

“By quantifying and measuring the risk from the steel price exposure, an automotive client completely shifted its procurement strategy and commercial policy.”

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