How to Analyze the Supply Market
By Staff -- Purchasing, 3/1/2007 7:00:00 AM
Strategic sourcing is at the heart of the purchasing function. Yes, there are plenty of other important skills that purchasing professionals must possess, but analyzing the supplier market, identifying potential suppliers to work with, deciding how you'll work with them, planning your negotiations strategy, integrating suppliers into your business and monitoring their performance are absolutely critical for successful purchasing and supply chain management.
With this issue, we start a series on how purchasing staffs at a variety of companies organize their strategic sourcing activities. We've structured the series according to a version of the classic sourcing process described by consultant firm A. T. Kearney and used by such companies as United Technologies, which recently won the Purchasing magazine Medal of Professional Excellence. On these pages, you'll read how some of your peers try to understand the competitive pressures prospective suppliers are under and how those pressures could affect their performance.
This series is more of a conversation than a tutorial, and we want your thoughts too. Tell us about your own strategic sourcing activities with an e-mail to pteague@reedbusiness.com, and we'll post your comments on the strategic sourcing channel at purchasing.com.
Dive deeper
 “We track labor costs by global region.” —Deb Lynch, Toro Co. |
Deb Lynch, director of sourcing and supply management at outdoor products maker Toro Co. in Bloomington, Minn., says the four-quadrant supplier categorization process is the best base for any future sourcing activity. Putting suppliers into four categories (leverage, strategic, transactional, and bottleneck) helps identify overall trends and opportunities in the supply markets, she says.
"Of course the transactional and bottleneck categories are easier to identify," she adds. "Determining which suppliers are strategic and which can provide leverage is more difficult."
Lynch says she has been doing more analysis of suppliers' cost structures than in the past. At the broader level, Toro tracks supplier industry margins and evaluate its suppliers' margins vs. those typical in that industry to ensure suppliers are "profitable, but not too profitable."
"We track raw material prices and know what percentage of the product we're buying is made of that raw material, so we have an idea of when and how our suppliers are impacted," she points out. "We also track labor costs by global region—and I mean one region of China vs. another—so when a supplier pushes a cost increase out we have this data available."
Lynch says one aspect that many buyers may overlook when it comes to analyzing a supplier or supply base is the outcome of the last bidding cycle in that area. For example, if the supplier that is awarded the business backs out of the contract or declares material price increases or quotes on new business at a much higher rate, it's typically a sign that the individual supplier or supply base in that area is struggling.
When a certain supply area—or a specific supplier—is not competitive enough, Toro runs joint cost-reduction programs with the supplier(s) to improve the margins and competitiveness in that supply base that will benefit future sourcing events. In fact, Lynch says joint cost savings agreements are now standard in most Toro supply agreements.
"We agree to share continuous improvement resources and cost savings with suppliers, and they agree to do the same," she says. There are some suppliers that resist these joint cost reduction projects, taking the "if it isn't broke, then don't fix it" philosophy.
Lynch says Toro's experience with e-sourcing has taught her about supply base analysis.
"Of course we work to understand our supply base prior to an e-sourcing event, but the events themselves provide us with a lot of information about the competitiveness in that area and which sourcing strategy will work best," she says. "When we issue an e-RFQ, the format allows suppliers to provide more feedback on how they would prefer to see the lots structured to provide their best price package. It also allows them to provide feedback on process improvements, or improvements in packaging or design to help us all reduce costs."
—David Hannon
Build a team approach
 “We work to get their best efforts, not just their best price.” —Jeff Bruett, FCI |
Over the years, Jeff Bruett has learned that "the law of supply and demand ultimately determines market costs and prices, so his buying team can't be a 900-lb gorilla dictating terms and conditions to the supply base." That's especially important for the automotive division purchasing manager of connector maker FCI because "we have to work with our suppliers to get their best efforts, not just their best prices.
That's why Bruett's 10-member procurement staff works to engender a team approach with the 100 or so suppliers, in supervising the sourcing of $45 million in direct materials. "We know that these businesses have to make money, provide quality materials and be innovative on new products," he says. "At the same time, they have to fulfill their obligations to provide on-time deliveries of functional-quality materials at competitive prices and to have the tactical and technical ability to resolve problems when they occur and plan for the future."
Bruett is the divisional purchasing manager for North American automotive operations at FCI, a producer of connectors and interconnect systems for electrical, automotive and electronic applications. This division is a tier-three supplier to General Motors, Ford Motor and Chrysler Group. Bruett's procurement group also sources around $20 million/year in MRO materials, office products and capital equipment from an average 350 active suppliers. The purchasing organization supports automotive connector manufacturing plants in Westland, Mich., Markham, Ont., and Juarez, Mexico.
"The fact is that we are analyzing supply performance for direct materials on a regular basis; if the suppliers we have are doing the job, they are selected for more business," says Bruett in an interview. "Sometimes, suppliers fall down because of competitive pressures. It doesn't matter the reason why, we have to make objective decisions on performance—whether the suppliers are doing their job or not—and, if necessary, fix the problem or change suppliers."
"We buy 65 million meters a year of copper insulated wire, enough to go around the earth twice," Bruett says.
The FCI procurement team uses standard potential-supplier evaluations of product capabilities, quality control systems, manufacturing process management and operating procedures—using standard measurable metrics. The goal, of course, is perfect quality. FCI analyzes firms for quality of products available and looks at history of on-time deliveries, whether early, on target or late; functional quality based on history of supply measured in parts per million, and quick or late response to customer complaints.
So, what FCI automotive really wants is total value from its suppliers, "meaning a combination of price, quality, delivery and service." The philosophy is that a great price means nothing if the quality is suspect. Similarly, great quality is meaningless if there's no on-time delivery. Also, service has to include value-added performance, not just resolving delivery or technical problems.
There always is an interdepartmental approach in supervising the supply base so that purchasing, advance engineering and manufacturing get feedback from the assembly operations and from the Big Three. That's important, Bruett says, because the end customers—the automakers—directed about 15% of which connector systems and which component suppliers are to be used. For the other 85% of supply, "we at FCI need to know if the companies we have selected are doing the job; that is, if they are providing what they were selected to provide," Bruett says.
—Tom Stundza
Quiz your peers
 “Word of mouth really helps in analyzing the market.” —Darren d. Wright |
After they've tapped databases and online sources, MRO purchasing professionals simply pick up the phone and talk to people on their commodity teams and, even, colleagues at other companies to analyze the supplier market.
When he was at the Kansas City, Mo.-based Hallmark Inc., Darren D. Wright, former category manager—MRO, global procurement, would solicit information from databases on his desktop, and later consult with other purchasing professionals who work for companies located nearby. He lists Sprint and Yellow Roadway as two examples, but says he contacts buyers at smaller companies as well. He calls it his local area, or regional, network. For him, it's typically an informal process, but he says he also meets with buyers through the local chapter of the Institute for Supply Management.
"Whether positive or negative, word of mouth really helps in analyzing the supply market," says Wright. "A colleague may say that he or she wouldn't touch ABC supplier with a 10-ft. pole for a particular reason. That doesn't mean I won't consider them, but it does mean that my antenna is up to do a little more investigation."
He adds that it isn't difficult to find information on the markets for the MRO items he purchases. "However, it is hard to find good suppliers. You need to be cautious and try to take the personal or emotional piece out of the equation," pointing out that those he consults with may sometimes refer suppliers with whom they have a personal relationship.
—Susan Avery
Hold regular meetings
 “We recognize that they have to make money.” —Harvinder Sembhi, Celestica |
Purchasers at the Toronto-based electronics manufacturing services provider Celestica meet with about 200 key suppliers every three months to discuss a variety of issues, including pricing trends and supply conditions, says Harvinder Sembhi, vice president, supply chain strategy and planning. The goal? Make sure Celestica is getting the best total cost of ownership from suppliers.
"At the meetings, we give them an update on the state of business and what our customers are asking for and what our price pressures are," he says. "At the same time they give us a business update as well, where they see the market going, where they see commodity pricing."
He adds that prior to the meetings, Celestica's commodity managers examine component pricing and review "purchasing associations' numbers and market reports" from researchers such as iSuppli and Gartner for commodity-specific intelligence.
"For instance with connectors they would take a look at The Bishop Report that gives specific information about connectors," says Sembhi.
In some cases, Celestica gets pricing information from its OEM customers that have contracts with suppliers and share their pricing information. In other cases, Celestica gets information from RFQs sent to multiple suppliers.
Sembhi says Celestica wants to understand the pricing pressures that its suppliers face. However, Celestica expects suppliers to find ways to deal with that pricing pressure.
"A supplier's standard answer cannot be 'my commodity pricing went up so I have to increase pricing,'" he says. Celestica wants to hear from suppliers what efficiency measures the supplier has taken to improve their manufacturing process and in their logistics operations to reduce cost.
Celestica also does a breakdown analysis of the parts and materials a supplier provides so it can understand their costs. "What is their material cost? What is their labor rate per hour? In some cases what are their scrap allowances?" he says.
The breakdown analysis factors in flexibility terms the supplier may provide. "Are they giving us vendor-managed inventory, shorter leadtimes, better payment terms? Are they rewarding you for getting their products into the market? We look at a total cost-of-ownership score for suppliers and decide who is awarded business," says Sembhi.
He says Celestica often can determine the supplier's margin and compare prices and margins to other suppliers.
"We aren't trying to squeeze their margins. We recognize that they have to make some money. Our point is to get the best total landed cost pricing," says Sembhi.
—Jim Carbone
Check the records
 “Import records are public information.” —Roy Calderón |
Roy Calderón spends a large part of his day trying to understand the competitive situation of his suppliers. The Latin America sourcing manager for H.B. Fuller, a manufacturer of adhesives, sealants and coatings based in St. Paul, Minn., Calderón employs a variety of strategies to find out what his suppliers are paying for their raw materials so he can anticipate any incoming price changes.
"In some countries, import records are public information, so that means I can go to the import records and see what they're importing and what prices they're using," says Calderón. "That gives me an idea of how the market is moving...how much my suppliers are paying for their basic raw materials." In nations where import records aren't available, Calderón goes to his second- or third-tier suppliers to find out how their raw materials prices may be fluctuating. "Based on that information I can predict whether my supplier is getting a better or worse raw material cost, or if they're having problems getting raw materials, and that will affect my supply and demand," he says.
Suppliers' locations also come into play when Calderón considers any difficulty they may be facing. If a supplier's host nation is experiencing any kind of civil unrest or economic problem, he can anticipate whether or not that supplier will have a problem getting their materials through.
All this information that Calderón gathers is helpful to him in price negotiations, especially in debating any price increases a supplier might try to pass along. On the other hand, if he notices a price drop in a raw material one of his suppliers uses, he "proactively push[es]" that supplier about the decrease in costs and how that will be passed along to him. "Instead of me waiting for them to come back to bulk material price reductions, I am knocking on their door, saying that their raw material price is going down by 15%, and if this raw material is 30% of their manufacturing costs, I will expect at least a 5% price adjustment," he says.
This works both ways. If Calderón sees that a supplier's raw material costs are going up, he will anticipate the price increases coming his way up between 30 to 45 days ahead of time. In some cases, he can communicate price increases ahead of time to minimize any impact on the company's gross margin. "There are many things we can do creatively to avoid that impact, and if we know beforehand, it's going to help us."
—Maria Varmazis
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