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The Purchasing Chessboard TM

Buying in a seller’s market

Consolidating supplier markets, rising energy prices and the growing


demand for raw materials in emerging markets have fundamentally
changed the purchasing framework. Suppliers are more powerful
than ever, which means buyers must adjust quickly to a new playing
field. A.T. Kearney developed The Purchasing Chessboard—a com-
pilation of insights and experience from thousands of purchasing
projects performed worldwide — to help procurement professionals
master the tools of their trade.

Since the 1980s, most procurement work. Suppliers can and will casually In a seller’s
professionals have operated in a raise their prices by 5 percent or more
buyer’s market. Using relatively simple
tools — RFIs and RFPs, bundled
and often are not willing (or able)
to ensure supply safety. The shift in
market, buyers
products and services, and multi-year
contracts—companies could negoti-
power to suppliers requires buyers
to adjust their strategies. In a recent
must adopt
ate from 1 to 3 percent annual price A.T. Kearney survey, we discussed
reductions from suppliers. But this the impact of this new seller’s market
new tools and
“golden age” of purchasing appears with more than 200 CEOs and man-
to be over. The ongoing consolidation aging directors of major companies.
strategies to
of the supplier market, rising energy Among the most often heard remarks
prices and the increasing demand about the market is that their pro- compete effec-
for raw materials from emerging mar- curement departments are not up to
kets means more companies are in the challenge. “We have a deficit in tively on a new
a seller’s market. And buyers must know-how among our procurement
adopt new tools and strategies to professionals,” explains one survey playing field.
compete effectively on a new playing respondent. “There is also a lack of
field (see sidebar: A New Playing Field knowledge about how to use analytic
on the next page). tools to improve the process.”

New Strategies in a Seller’s The Purchasing ChessboardTM


Market To help procurement profession-
In a seller’s market, old purchasing als master the tools of their trade,
strategies such as pitting suppli- we developed The Purchasing
ers against one another, or simply ChessboardTM—a compilation of
requesting price reductions, do not insights and experience from more
than 500 purchasing projects per- pliers against one another in a price
formed worldwide over the past three competition. This is particularly
A New Playing Field
years, and thousands performed over popular in high-demand, low-supply
the past three decades. The chess- markets. Purchasing basic forgings or As cost pressures force companies to
board constitutes 64 methods, each welded steel structures fits nicely into consolidate, suppliers have not been
representing a stand-alone, differen- this category. Companies typically immune. Mergers and acquisitions
among suppliers have increased in
tiating way to work with suppliers use four procurement levers: tender-
recent years as companies struggled
to reduce costs and increase value. ing, leveraging global supplier mar-
to leverage economies of scale and
These methods are derived from kets, reviewing suppliers’ prices and withstand rising costs. Hardest hit
16 approaches and four purchasing enforcing target prices. Experience have been suppliers that passed on
strategies (see figure 1). The following shows that most procurement orga- productivity gains to their custom-
offers a brief discussion of the four nizations readily employ the first ers, while ignoring their own prof-
major strategies. two levers, but only a few companies itability, and were subsequently
Leverage competition among focus on the latter two: pricing and scooped up by more powerful com-
petitors. Today, as never before,
suppliers. The most celebrated and enforcing target prices.
there are fewer suppliers with more
perhaps most frequently employed With this in mind, a cost regres-
supply power.
procurement strategy is pitting sup- sion analysis is a key component of the Increased energy costs are also
affecting suppliers. Rising energy
prices were first ignored as a tem-
porary anomaly and attributed to
FIGURE 1: The Purchasing ChessboardTM effects such as political tensions in
the Middle East. Now, high energy
prices appear to be a long-term real-
ity, especially when discussed in the
Change nature Seek joint advantage
of demand with supplier context of sustainability, emissions,
4 purchasing and the increasing scarceness of fossil
strategies energy sources. The current oil price
Manage Leverage competition of approximately $100 per barrel is
spend among suppliers expected to double by 2018. While
agile organizations can leverage high
energy costs and drive break-through
Innovation Re- Value chain Value innovations, for most suppliers they
breakthrough specification management partnership are a reason to raise prices.
Risk Technical Integrated Cost Adding to the new playing field
management data mining operations partnership
planning is the rising demand from fast-
16 levers
Commercial Supplier growing emerging markets such
Co-sourcing Tendering
data mining pricing review as Brazil, China, India and Russia.
Demand Volume Target Also, developments that seemed
Globalization
management bundling pricing inconceivable just a few years ago are
now a reality. Steel is getting scarce,
Invention Leverage Functionality Specification Value chain Revenue Profit Strategic
on demand innovation
network assessment assessment reconfiguration sharing sharing alliance coal subsidies are again part of the
Core Design Product Design for Supplier Sustainability Project based Value based
cost analysis for sourcing teardown manufacture tiering management partnership sourcing discussion in Europe, and suddenly
Vertical Intelligent Composite Process Collaborative Virtual inventory Total lifecycle Collaborative
integration deal structure benchmark benchmark capacity
management management concept cost reduction Africa and its wealth of raw materials
Bottleneck Political Product Complexity Visible process Vendor managed Supplier Supplier
framework are getting more attention.
64 methods
management management benchmark reduction organization inventory development fitness program

Sourcing Buying Cost data Standard- RFI/RFP Expressive Total cost of Leverage market
community consortia mining ization process bidding ownership imbalances

Procurement Mega supplier Master data Spend Supplier market Reverse Price Unbundled
outsourcing strategy management transparency intelligence auctions benchmark prices

Compliance Closed Supplier Bundling across Make Best Cost regression Factor cost
management loop spend consolidation generations or buy shoring analysis analysis
management
Linear
Demand Contract Bundling across Bundling Global LCC Cost based performance
reduction management product lines across sites sourcing sourcing price modeling pricing

Source: A.T. Kearney


Chessboard. The analysis is performed Seek joint advantage with sup- ing value. Suppliers and buyers work
via a statistical methodology that deter- pliers. When buyers and suppliers in a together to generate ideas for optimiz-
mines target prices based on the tech- transaction have equal market power, ing costs and then agree to share in
nical characteristics of a module. Once the first strategy is not sufficient. The the respective benefits. What begins
identified, the target price becomes automotive industry, for example, as an ad-hoc program could eventu-
the fact base for renegotiating with procures numerous unique modules ally turn into a longer-term strategic
existing suppliers. In the past three (such as engine controls) from its alliance between buyer and supplier.
years, this analysis has proved success- suppliers, so simply pitting suppliers Change the nature of demand.
ful for procurement professionals in against one another will not suffice. In low-demand, high-supply mar-
various industries, including automo- Instead, companies must strive to kets—where suppliers are in monop-
tive (OEMs and suppliers), mechani- find common advantages with their olistic or quasi-monopolistic positions
cal engineering, financial institutions suppliers. The goal is to build joint due to their technical expertise—
and consumer goods. The analysis cost-value partnerships, an integrated companies must change the nature
is not only for commodities such as and transparent operations planning of demand. Low-demand markets
castings, hydraulic components and process, and to manage the entire stem from developing long-term
forgings, but also for indirect catego- value chain jointly. Such partnerships partnerships with key suppliers; these
ries such as IT equipment. can reduce costs while also generat- suppliers soon become indispensable,
particularly in terms of research and
development (R&D) or technologi-
cal expertise. Companies prolong the
FIGURE 2: The Chessboard constitutes 64 stand-alone methods problem when they choose not to
endure the time and costs associated
High with shifting to new suppliers.
Invention Leverage Function-
ality
Specifica-
tion
Value
chain Revenue Profit Strategic
8 on innovation assess- assess- reconfig- sharing sharing alliance In such markets, the objective
demand network ment ment uration
is to change the nature of demand.
Core Design Design Sustain- Project Value
7 cost for Product for manu- Supplier ability based based
This is done by re-specifications of
analysis sourcing teardown facture tiering manage- partner- sourcing
ment ship components, data mining, develop-
Collabor- Virtual ing new technical options and risk
Vertical Intelligent Composite Process ative inventory Total Collabor-
6 deal
integration structure bench- bench- capacity manage- lifecycle ative cost management. In our Chessboard,
mark mark manage- ment concept reduction
ment we call this “invention on demand,”
Political Visible
Bottleneck framework Product Vendor Supplier Supplier which is one of the 64 methods (see
Supply power

Complexity process
5 manage- manage- bench- reduction organiza- managed develop- fitness
ment ment mark tion inventory ment program figure 2). The company systemati-
cally challenges the basic elements of
Sourcing Buying Cost data Standard- RFI/RFP Total
Expressive cost Leverage
4 community consortia mining ization process of
bidding ownership market a technical system and searches for
imbalances
alternatives throughout the field of
Procure- Mega Master Spend Supplier Price science—essentially replacing techni-
data Reverse Unbundled
3 ment supplier trans- market bench-
outsourcing strategy manage-
ment parency intelligence auctions mark prices cal options for modules delivered by
suppliers. This approach is relevant
Closed
Compliance loop Supplier Bundling Cost Factor
2 manage- manage-spend consoli- across Make Best regression cost for industries where patent-protected
ment dation generations or buy shoring analysis analysis
ment components or systems are already
Contract Bundling Bundling Cost Linear successfully employed, for instance, in
Demand across Global LCC based perform-
1 reduction manage- product across sourcing sourcing price ance aviation, engineering and automotive.
ment lines sites modeling pricing
Low Manage spend. The final strat-
A B C D E F G H egy, managing spend, is particularly
Low Demand power High useful in low-demand, low-supply
Source: A.T. Kearney
markets—for example, for most indi- behavior (for example, through organization and its suppliers. It is
rect material categories such as office IT-based spend-cube solutions) is a flexible enough to adapt to changing
supplies or MRO (maintenance, concrete approach to reduce costs and market conditions, such as rising raw
repair and operations). In these situ- increase value. material prices, and strategic enough
ations, the focus should be on volume to address the challenges in a new age
bundling, commercial data mining, Outlook to a New of purchasing.
co-sourcing and demand manage- Purchasing Era
ment. Apart from defining and The Purchasing Chessboard maps
monitoring guidelines, the creation each market situation that takes place
of transparency regarding the spend between a company’s purchasing

Authors
Christian Schuh is based in the Vienna office and can be reached at christian.schuh@atkearney.com.
Robert Kromoser is based in the Vienna office and can be reached at robert.kromoser@atkearney.com.
Michael F. Strohmer is based in the Vienna office and can be reached at michael.strohmer@atkearney.com.
Ramón Romero Pérez is based in the Berlin office and can be reached at ramon.romero@atkearney.com.
Alenka Triplat is based in the Vienna office and can be reached at alenka.triplat@atkearney.com.

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