This is owed to the evolving role and nature of supply chains and the fact that players are increasingly embedded in complex and globally dispersed supplier networks. Supply chains are increasingly multi-tiered and buyer/supplier relationships multi-faceted, said Nyasha Chizu, a fellow of the Chartered Institute of Procurement and Supply.
Satisfying organisational needs requires proactive and planned analysis of supply markets, leading to effective selection of suppliers. The objective of the exercise is to deliver solutions that meet agreed and predetermined levels of organisational needs.
Understanding supply markets is important for strategic sourcing.
Porter’s five forces is an effective tool for market analysis. A proactive procurement manager can acquire extensive knowledge of the degree of competition in the market.
Supply market structures range from monopoly to perfect competition: these market structures have a bearing on the availability of close substitutes and, consequently, the power of the supplier or the buyer.
A high level of competition creates more options for the buyer. But more options do not come on a silver platter: in fact, having more options implies more work for the buyer in the selection process, a process where it may be difficult for an ill-informed buyer to separate the wood from the trees and trees from forests.
A high level of competition is beneficial to proactive buyers: the speed of industry growth promotes innovation, increases product quality and, at the same time, reduces costs.
Industries in competitive markets have a high capacity utilisation rate that facilitates easy absorption of overheads, which reduces the overall costs of production.
All of this taken into account, informed procurement managers must understand their main product ranges in terms of the competition: buyers must have an overall understanding of their annual purchase volume in relation to the overall market production. This assists to determine the buyer’s control and power in a specific market.
The information on annual spend also assists in analysing risks in the supply markets and buyers can effectively craft appropriate strategies to mitigate them.
Furthermore, buyers can leverage competitive markets: when requirements are consolidated, industry standards emerge and bargaining power is inevitably increased.
Adapted from Nyasha Chizu’s article in NewsDay