How to do supplier selection who can deliver the best value proposition for our organization? There are several approaches. What I want to share with you today is selecting right supplier at various stages of our product maturity in the market.
A right supplier will not just deliver our offer but will also enhance our brand. Hence Supplier selection is most crucial in success of procurement.
We need different suppliers and contractual terms at various points in the maturity of the market within which we are operating. The way we construct your supply chain will be determined by where the good or service we offer is on its market maturity curve
Let us understand the maturity curve that influence our decision in supplier selection. Check out below illustration.
Pioneer is the stage where market is immature and risky business venture. This may a new product launched or start-ups and customer base yet to be established.
In this stage although the supplier need to be strategically aligned to our business ambition and have expertise in the desired area, contracts are likely to be short in duration, with reward structure aligned to joint success and will be paid only for what we use. Hence supplier selection should aim to select a supplier who can assist us in our initial state of product launch.
The market is still relatively immature but we can clearly see the growth going ahead. Here we need to work towards positioned our Supply Chain for a growing market.
We will be looking to find a supplier through well organized supplier selection process that can help us dominate the market as it matures by providing things like scale and established distribution channels or routes to the customer.
Supplier consolidation starts here, performing suppliers will perish and non-performing supplier needed to be weeded out. Our Contracts are likely to be longer term and reward structures will still be aligned to joint success (when wouldn’t they?), though joint success may now look different. We will be still paying for use, simultaneously will also start thinking about paying for capacity.
The market has matured and Business is well positioned to make the most of it. However, we might be starting to think about market segmentation, new geographies and product differentiation to boost our margin.
Our ideal suppliers will be those that can help us to keep our product offering fresh and appealing and break into new areas of the market, thereby keeping our market share relatively high and always profitable.
We need to hone your supply chain in this phase, getting it fit for a much more mature market with savvy customers, smarter competition and more challenging prices.
For differentiation and cost leadership we need suppliers that can support us throughout the Supply Chain. Our contracts will now vary, depending on our suppliers, those needed to be agile and innovative so as to deliver product breakthroughs or productivity oriented cost leadership.
The market has matured and is probably saturated. Customers are now more demanding and opportunities for making money are becoming harder.
Focus is more on evolution than innovation to keep our offer attractive but simultaneously cost-competitive.
Supplier selection process should be able to find our suppliers at this stage need to be cost-advantageous to ensure that supply chain can remain cost-competitive as the product becomes commoditized. One option is low-cost sourcing overseas.
We might consider contracting out the whole production to another company, as happens often in high-tech and pharmaceuticals organizations. The focus is on cost as well as continuous and incremental improvement.
There are underlying complexities because two-by-twos curves make things simple and sometimes too simple. A market moves so rapidly that to be successful we need to think about the whole lifecycle from the very beginning of our journey or a new entrant that has both attractive products and lowest costs can change the whole market scenario at any moment.
Collected some information online to look at some examples of how this model has worked in practice.
Intel started in the late 1960s and invented first commercial micro-processing chip in 1971. By the early 1980s, microchips market become commoditized because of huge availability of making from Japan. Due to increased competition, Intel’s profit was impacting. It was becoming a ‘farmer’s’ market. This encouraged Andy Grove, Intel’s then CEO, to change the focus of his company to the development of microprocessors, which was then entering ‘land grab’.
Intel’s shift focus in 1983, manufacturing of complex integrated circuits was unreliable and due to which every buyer keeps several suppliers under contract to ensure supply of this critical component. But Intel took different procurement approach and took a dual strategy of improving the quality of manufacture by establishing three large factories in different parts of the United States and stopping the license of its designs to other manufacturers. In effect, Grove’s strategy was to first ‘land grab’, then ‘hunt’ and, through a variety of strategies, to stay in these highly profitable states as long as possible. These other strategies included technological advance – after all, Moore’s Law, that computing power will double every two years, came from the founder of Intel.
Intel Atom™ processor is the most recent innovation from Intel used in netbooks and its own netbook, the classmate PC. Interestingly, while Intel remains true to Grove’s desire to keep microprocessor manufacturing in-house its approach to the classmate PC is dramatically different. While every classmate PC marked ‘Intel Inside’, there is a network of country-specific manufacturers and other technology partners (referred to as the ‘Alliance’) to develop and satisfy local demands. Intel now has 15 wafer fabrication plants worldwide.
In the UK the local manufacturer produces them as Fizzbooks, in India Connoi Convertible Classmate PC and in China there are two manufacturers, and in the United States four. In all cases, with the exception of the ‘Intel Inside’, the brand names and peripheral specifications are different.
This is an interesting strategy for ‘land grab’. The target market for netbooks for globally billion school children, Intel is mixing it strategy by utilizing local manufacturers and technology companies and distribution channels and making the product attractive cost competitive to the local market as well as appropriately supported with country-specific applications.
As Our Organisation goes through various stages of market maturity curve, we as a sourcing team must tailor both the sources of supply and the contract terms to ensure that the supplier offering continues to exploit the opportunities present in the market. While some suppliers will go alongside on the whole journey, others will come and go, and right choice will ensure the success along the way.