Category Sourcing Strategy – Helping Get Unstuck & Strike a Value Chord

As a part of category sourcing strategy, organizations need to align and link key business decisions to maximize competitive advantage.

Alignment: common vision, goals, purpose and objectives across firms, functions and processes in the SC
Linkage: communication and sharing of information needed for planning and decision-making, and the interaction of people involved in planning and decision-making.

A company needs to consider alignment strategies at different levels:

I) Business Unit/Product Strategies: The key question here is: “How does the organization compete?"

II Procurement/Supply Chain Strategies: The key question here is: “How does Procurement/Supply Chain function contribute?"

III) Commodity/ Category Strategies: The key question here is: “How should the organization source specific requirements?”

As a part of the strategic sourcing process, a company needs to consider how they should source a particular purchase category. Companies source a variety of goods and services. In this regard, one size does not fit all. It is important to adopt a structure, fact-driven method.

The strategic sourcing process can be structures into the following five steps:

1) Profile Category– assessing value potential

2) Understand Supply Market

3) Develop Strategy

4) Implement Strategy

5) Manage Performance

Krajlic’s matrix, a widely used framework for sourcing strategy development serves quite well in systematically thinking about strategic sourcing. The matrix can be viewed in terms of the following two dimensions:

Value potential – importance of the category to the business
Supply market complexity – how easy/difficult to get a good deal

As a first step in applying the Kraljic framework, a company needs to profile the purchase category, with a focus on understanding its value potential. To accomplish this task, it is necessary to collect data, conduct category spend analysis, and assess potential impact of the category one the business from multiple dimensions (such as cost, product performance, customer perception, innovation).

The data collection needs to consider a wide variety of information about the category such as the price/cost, volume/usage, product specifications, current purchasing process, and constraints on sourcing.

Spend analysis should assess the current spend. Specifically, it is important to do a thorough analysis of how much is the current spend, with which suppliers, and the prices paid. This assessment needs to be done by business unit or location. Further, an understanding of projected future spend can be accomplished through this exercise. Spend analysis essentially links into a broader assessment of the value potential of the purchase category to the business.

To assess the value potential of better sourcing of the category on the business, managers needs to think about the cost impact, product performance impact, customer perception impact and innovation/technology impact.

To assess supply market complexity, it is important to segment to supply market. Within a supply market for a commodity, there may be segments of the market that specialize in certain “sub-commodities.” It is important to recognize these segments, as they may have different market conditions, and may require different strategies.

Supply market complexity can be considered in terms of four dimensions – rivalry, barriers, substitutes, buyer/supplier bargaining power. Rivalry captures the degree of competition, number of capable suppliers, and the rate of industry growth. Entry barriers refer to capital needs, regulatory restrictions, and proprietary technology/patents. Substitutes consider availability of suitable substitutes and cost/willingness to switch. Bargaining Power of the supplier manifests in terms of market concentration, product/service differentiation, and the criticality of product/service to customer. For the buyer the bargaining power is characterized by the volume of requirements, supplier switching cost, ability to insource and the knowledge of product/technology. Managers can rate the supply market situation on each of these dimension to assess the level of complexity.