Sales people spend a lot of time and effort understanding their target markets and prospects. Meaningful insights mean better sales strategies and more sales. Similarly, procurement professionals need a good understanding of the supply markets they operate in. These insights will shape sourcing strategies, which in turn will put the buying organisation in the best position to effectively leverage supply markets to create more value.
Some useful supply market insights to uncover are:
- what business dynamics are at play;
- how trends in the macro environment affect the supply market;
- supply risk and your financial exposure to suppliers; and
- how suppliers view you as a customer.
So, how will those kinds of insights shape your procurement strategy? For example, you will want to approach a highly competitive and commoditised supply market differently from a supply market where there are only a few monopolistic suppliers providing highly specialised critical goods and services.
In the first case you should consider a “leverage” approach (provided your spend is high enough), where you go out to tender frequently to take advantage of those competitive market forces. In the second example (again assuming your spend is high) you should consider building long term relationships as part of your strategy. A good model to use to think through those types of considerations is the “Kraljic Matrix” illustrated below.
As buying organisations we often forget that just like we sometimes moan about suppliers, they also occasionally moan about us! And their perceptions of us as clients do matter in terms of the relationships we are able to build with them. Good supplier relationships often translate into better access to innovation and win-win deals where we jointly work to take out costs – competitive advantages, in other words. So, this is definitely something worth paying attention to.
To help assess how they may feel about us, the following “Supplier Preferencing” model looks at how “attractive” we are as a client account (e.g. do we pay on time? Are we easy/difficult to do business with?) vs. how much we mean to them money-wise. If you think a supplier you want to develop a strategic relationship with sees you as a “Nuisance”, you’ve obviously got a problem! You’d want the supplier to see you as “Core”, or at least “Development”
The question then becomes how to fix that. Could you do something to become a more attractive client? Could you consolidate more spend with that supplier? It may or may not be possible to shift supplier perception to the extent you would like. Or, it could be a long-term endeavour. Whatever the case is, being aware of how you are perceived as a client and having strategies in place to address it is vital.
A number of tried and tested models are available to help you analyse what business dynamics are at play in key supply markets and how trends in the macro environment affect the market. The most common ones are “Porter’s 5 Forces” and “PESTEL”. The first looks at the impact of competitive forces and the latter looks at how Political, Economic, Social, Technological, Environmental, and Legal trends affect the supply market. Since both are quite prolific you will find lots of material about them online.
Those aren’t the only models, and it is important to remember that none of them will give you “the answer”. They will instead prompt you to ask the right questions. Since these models all have a different angle of encouraging you to view the situation, no single one should be used in isolation. The trick is to use those that prove helpful in enabling you to piece-by-piece see the bigger picture. So, after you have spent sufficient time with an analytical model, ask yourself, “What implications does that insight have in terms of the strategies I should consider?”
One piece may still be missing for you. You may not yet know enough about the key supply markets you have identified. How do you research in a time effective manner? Some consultants, advisors and trainers may give you a long shopping list of information sources to explore, which is great if market research is your only job. However, if you are reading this article, you probably have a very demanding “day job” to attend to as well. So, here are FOUR useful “short cuts”:
- Talk to the people in your organisation who are most dependent on the goods and services from your top suppliers. You may already have identified them by Cost Centre and Department when you did your spend analysis. These people will know a thing or two about the suppliers they use. A good starting point, but be aware that they may also think they know stuff which they actually don’t know. Such as “XYZ supplier is the ONLY one who can meet my needs”. Perhaps, but most likely not. So, listen with an open mind. This is also an opportune moment to connect with your internal stakeholders to let them know what you are doing.
- Talk to your top suppliers! Yes, however simple that may sound, it will give you a very good return on a relatively modest time investment. Since you are looking at the most important supply markets now, chances are that you have suppliers there who have been waiting for a long time to have a more “meaningful” conversation with you. They may, in fact, have been harassing your organisation for that opportunity to connect. Tell them that you are reviewing your procurement approach and looking to build closer relationships with top suppliers. They will love to hear that! Then spend an hour or so with them to learn as much as possible about their world – everyone loves talking about themselves! Understand their business, competitive environment, latest innovations, etc. This will give you lots of insights for your analytical work. You can follow up with regular Supplier Management Meetings if you feel it’s warranted.
- Read annual reports of key players in the supply market you are researching. If your supplier is not publicly listed, find a competitor that is. It doesn’t matter if you don’t do business with them. Their annual report will still give you lots of industry insights. By looking at the company’s profit margin and other financial data, you will also be able to tell how competitive the industry is and what the barriers to entry might be.
- The last “short-cut” is to simply ask procurement professionals who have already researched the supply market. You can find them online in e.g. LinkedIn groups focused on Procurement. Go through points 1 – 3 above first, though. You don’t want to alienate people by asking simple questions you could easily have found the answers to had you done a little research.
To learn more about strategic supply market analysis, contact our Managing Director, Armand Brevig, today
