Author: Peep Tomingas
Delta Bid have produced a 10 chapter Strategic Sourcing Guide. Each week, PASA is bringing you a new chapter. Here’s the fifth installment, you can download the full PDF at the end…
Chapter 5: The Purchasing Chessboard® and Sourcing Strategy Selection
The previous chapter was an introduction to strategy preparation, and I explained the methods you will use when planning your sourcing strategy. By now, you should have learned about your supplier base and your product details. You have already identified a lot of hypotheses, and you have selected realistic ideas about where to start your strategic sourcing implementation. Step by step, you are learning more about your categories, increasing your negotiation powers, and boosting your sourcing self-confidence.
1. Weighing your bargaining power
Imagine your company is in the middle of Porter’s five competitive forces: supplier bargaining power, buyer bargaining power, industry internal rivalry, threat of new entrants, and threat of substitutes. Your company is sustainable and stable if it can find an equilibrium between these forces. Stability is good, but having it now does not guarantee you will have it in the long run. Competitors, customers, and suppliers will make sure that you do not operate for very long in a stable environment. In our modern globalized business environment, you will need to be proactive if you want to control your market position. Ensuring a stable market position requires teamwork; all functions must work together for this common goal. Sourcing and Supply Chain are responsible for increasing bargaining power when it comes to negotiating with suppliers. When these two functions succeed in increasing bargaining power, then they improve Sales’ negotiation position with customers.
One thing is to have strong bargaining power; another thing is to know how to use it. In the long run, cooperative supply chains tend to be more successful than competitive ones.
How do you evaluate your own bargaining power and find a suitable sourcing strategy using the Purchasing Chessboard®?
It is a tricky task that requires experience and gut feeling. A.T. Kearney recommends assessing buyer and supplier power on an 8-point scale. However, I have had trouble with this. I would struggle with determining the difference between 3 and 4 points or between 5 and 6 points.
I found it much easier to assign those points once I broke them down into four different categories. Then each of those categories could be assigned 0, 1, or 2 points, which is a much easier scoring rubric to manage.
Let’s take a closer look at how I break down these scores. First, try to evaluate bargaining power between you and your supplier. Think about all your findings from the preparation carried out in the previous chapters, and try to measure them on a scale from 0 to 2.
Weigh supplier and buyer bargaining power using these four dependency criteria:
- Business (spend/revenue) dependency: Look at buyer’s share of supplier’s revenue and supplier’s share of buyer’s spend. Who depends on the other the most?
- Supplier competition and ease of replacement: How easily and quickly can you replace supplier with an alternative supplier? Do you use a double-source strategy?
- Component complexity and ease of replacement: How easily and quickly can you replace a component or service? Can you reduce component complexity?
- Innovation and technology dependency: Do you need an innovation and technology partner? What is the level of your partnership?
Read the full chapter here: https://www.deltabid.com/the-purchasing-chessboard/