Chapter 2: Supply Market Analysis
In this chapter, we will look outside of the company and start researching the supplier market. This will guide us as we find suppliers who could potentially provide us with the products and services we need. By the end of the supply market analysis, we will have started to identify the suppliers to whom we will send out an RFx.
Select a scope for your supplier market. Depending on the category, scope may be global, continental (regional), by country or some other region. By selecting a scope you will focus only on those suppliers operating in this market. By using different public sources (mainly the Internet) collect data for each supplier that could potentially supply your category. Do not limit yourself to suppliers that are already your partners. Research ALL suppliers. You need to track suppliers’ revenue and EBITA. Make an Excel sheet where you can record supplier data.
Now we have a list of players who can potentially supply us with the materials and services for the category we are currently researching. By looking at this list we can see who dominates the market and who makes the most profit.
Next, we need to analyze our spend within the category. Use a spend analysis tool or take data out of your ERP. Split your spend by supplier. Make an Excel sheet similar to the one in Fig. 2.
Now we need to identify how strong of a player we are by comparing our spend with supplier revenue. Combine the data from the last two tables, and you will get an interesting picture.
Seems that our spend covers 12% of the total demand market, which makes us a valuable customer to every supplier, but especially to Supplier B since our share of his revenue is 20%.
If we compare suppliers’ EBITA data we see we can buy from suppliers whose EBITA is higher than average. These are raw numbers, and you should never come to quick and easy conclusions based only on statistics. Make note of these findings on your list of savings hypotheses. Later on during discussions with suppliers try to obtain the missing information from them.
During the first and second steps we came up with some ideas and questions that we need to check out. Let’s start by gathering the missing information. Why do we do this? Like I wrote in the first article, the category manager must be critical by nature. He or she needs to know what his or her company’s price level is compared to the market price level. In other words, we need to get a benchmark price level. I suggest to start by fishing for information from your existing suppliers. You should already be holding quarterly business review (QBR) meetings with your key suppliers. Take along your CSA and TCO templates that you started to fill in during Step 1 and try get the answers you need to fill in the gaps.
For the new suppliers that you identified in your market research, run a quick RFI and ask for information about the supplier and their products. Try to understand if the supplier and their product or service is suitable to you.
We also need to define the category risk level. Once again we will use the Kralji matrix that you are now familiar with from Step 1. Evaluate each supplier using different criteria like availability, quality, finances, or cooperation level.
If you identify your category risk as high, you need to take action to either avoid or mitigate the risk.
The outcome from the supply market analysis should be a better working knowledge of the supplier market and your place in it. You have identified potential suppliers and know your value as a customer. You have already started to take a wider view of your categories. You have identified category risk levels and have some ideas for how to deal with them. With each step, you are learning more and more. Piece by piece, you will put together a complete category management picture. By collecting and analyzing this information, you will become a stronger negotiator in the future.
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Written by Peep Tomingas