Supply Chain Strategies Part II

1. Supply Chain StrategiesPart II I-Ping Chou Cristal Brun Augusto Gamarra

2. Price Versus Cost in the Segmentation Arena Leverage items/services • Freight costs, payment terms, and inventory costs Tactical items/services • Transaction costs Critical items/services • Cost of plant or equipment downtime and utilization costs Strategic items/services • Maintainability and reliability costs or avoidance costs

3. Supply Strategy Development Process High Risk or Exposure Low Low High Value

4. Supply Strategy Applied toTactical and Leverage Items Tactical Items • Tactical items are low-value activities which contribute little to the strategic direction of the firm • Implement Streamlining in the acquisition process • Purchasing Goal: Reduce the time spent by personnel in the firm on the acquisition, delivery, stock-keeping, and payment of these items Leverage Items • Leverage items are high-value activities • Focus on short-term contracts and pursue a proactive supply strategy to find new substitute products • Purchasing Goal: Increase profit margin, use competitive purchasing practices to increase profitability

5. Supply Strategy Applied toCritical and Strategic Items Critical Items • Critical items are low-value activities and high exposure/risk • Strategic items are high-value activities and high risk/exposure • Purchasing Goal: Evaluate them for elimination Strategic Items • Require the highest level of purchasing competence, consider long-term contracts. • Total cost of acquisition must be monitored and controlled • Purchasing Goal: Maximize competitive advantage • Earlier time to market, Superior Product Quality, Rapid Innovations

6. Segmentation Quadrant Strategies • Tactical Items • Main driver: minimize number of transactions • Consolidation of number of orders • P cards • Use of integrated suppliers • Outsourcing strategies • Leverage items • Main driver: Minimize the total landed costs • Volume leverage when appropriate • Concentrate purchases across departments • JIT • Supplier quality assurance Frequently ordered items

7. Segmentation Quadrant Strategies • Critical Items • Main driver: Decrease product variety • Develop standardization • Use of cross functional teams • Developefficient processes • Strategic items • Main driver: Gain competitive advantage through new technology access and foster high level of service from suppliers • Strengthen Buyer supplier relationship • Alliance partnering • Joint ventures • Negotiation should revolve around cost sharing discussions

8. Takeaways • Supply segmentation techniques display different characteristics of each item so as to provide the basis of different supply strategies. • ABC analysis has its limitation. • The spend analysis is the first step of supply segmentation analysis. • Items in different categories have different targets, which optimize underlying firms’ strategic goals. • Today’s price should include several other aspects of costs.