#L4M2

Defining Business Need

Diploma in Procurement and Supply

Prepared By :
AHMED KARRAR
CIPS L4 , PMP & Prince2 Practitioner
eng.karrar21@gmail.com
+249 123497611
 Session#1 Big ideas
• Big idea #1:
Based on the business requirements identified, the type of purchase will be selected
• Big idea #2:
Based on the type of purchase selected , the effort of identifying and defining business
requirement will range from (No , Revisit or Full) process
• Big idea #3:
Business needs/objectives could be identified by using problem-solving technique models
• Big idea #4:
Business case is to justify procurement decisions of New purchase / modified re-buy
• Big idea # 5:
Cost information will be used to estimate the Break-even point of the suppliers , understand the
cost drivers and structures , and the profit reasonableness .
• Big idea # 6:
PCA is depend on the nature of purchase and type of supplier relationship
• Big idea # 7:
Target costing is one of important technique of PCA used with strategic suppliers [Note: QFD]
 Session#2 Big ideas
• Big idea #1:
Pricing strategy of suppliers differs based on the level of attractiveness
market and buyer account.
• Big idea #2:
Procurement of asset MUST be based on TCO instead of Purchasing
Price
• Big idea #3:
As procurement professional , you have to devise the business case to
meet all top management approval criteria
• Big idea #4:
Financial budget is the plan that procurement department compare
its performance to , as responsible of stewardship of company spend.
LO2

Understand market
management in
procurement and supply
2.1 Market analysis

2.2 Five Forces Analysis

Sources of information
2.3 for negotiating and
budgeting
2.1 Market analysis
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 Market analysis levels
• Macro Environment analysis [PESTLE analysis]
• Micro Environment analysis [industrial analysis- three levels]
1. Segment analysis
2. Five forces analysis (in specific segments)
3. Analysis of organizations (Value chain)

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 Why market analysis ???
• A market is a place where goods are bought and sold
• A market facilitates the trading between buyer and supplier
• Procurement function is responsible to understand supply market
• Analyzing supply market helps procurement team to find new
sources of supply and can get better understanding of supplier’s costs
and profit.
• As a result of market analysis , procurement function can answer
these questions:
– Are we getting a good price?
– Are we engaging with suitable supplier?
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PESTLE analysis

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 Industrial classifications
• An industry is formed to service a market
• Industries classified to :
– Primary sector = Extraction of raw materials
– Secondary sector = Transformation of raw materials into a finished product
– Tertiary sector = Provides a services and supports primary and secondary
sectors.

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 Generic Strategies
(What is your suppliers strategies?)

• Let us understand how supplier plans to compete

• There are three generic strategies for competing in an
industry:
– Cost leadership
– Differentiation
– Focus on a narrow niche segment

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 Segment analysis
(1st industrial analysis)
• Procurement team should specify in which industry of supply market
they are planning to source their needs
• However usually an industry is huge to be analyzed thus breaking down
the industry into segments will help buyer to understand the market.
• Segment is a group of products or services that provide specific but
different value for their buyers
• Why Segment analysis ??? An understanding of the segments helps
procurement and supply to shape and management the supply markets.
• Finding different way to segment the market with “low competition” could
be one of decision after understanding the current supply market
segments
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 Segment variables
• Product or service segments
• Buyer segments
• Channel segments
• Geographical segments
• ..... etc

Product Buyers
varieties

Example of segmentation based on Products & Buyers variables

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Different examples of different
segmentation for oil industry

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Buyer technological sophistication
vs. geographic location
Segmentation

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Buyer type vs. ownership
Segmentation

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 Find new segmentation factors
(Become first in segment)
• Look at industry past and current perception of how organization competes
• New segment factors questions:
1. Can other technologies or product designs deliver buyer needs in a better
way?
2. Can the product or service be enhanced to provide better value?
3. Can the needs of some buyers be better met by reducing the number of
functions the product or service delivers at the same time as reducing the
price?
4. Are there other bundles of “products or services” and “ancillaries”?
5. Are different channels available for reaching additional buyers or serving
existing buyers more effectively?
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 Finding New Segment Factors
(Significance Test)
• Significance test asks the question :

“What impact will this factor have on competitive advantage?”

• Only factors with a major impact will be considered

• Other factors can be used later to refine understanding

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Buyer Vs Product varieties
(segment analysis & 5Fs)

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 Watch out!!!

nd

rd

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 Analysis of organizations
(3rd industrial analysis)
• Why analysis of organizations ?
– First to know the context in which they operate (markets, industries
and segments) for understanding of the pressures and constraints
that individual companies face.
– Second to understand how a company organizes itself to meet these
pressures and constrains in a way that is profitable
• Procurement professional uses these information for their advantage “to
manage supply market”
• The main tool for analysis of organization is Value chain.

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 Value chain
• Different organizations in an industry may have similar value chains.
• Although this similarities there are differences that create a competitive
advantage

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 Analyzing value chain
• It is to break down activities (such as MFG or Marketing) into groups of
sub-activities with discrete technologies and costs
• Those group of sub-activities have following characteristics:
– Different economics
– A high potential impact on product or service differentiation
– Represent a significant and growing percentage of total costs

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 Breaking down
activities into
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sub-activities
 Firm infrastructure
HR Recruiting Recruiting Recruiting
management Training
Design of Component Information Market research
Technology automated design Technical
system Service manual
Assembly literature
system development and procedures
design
Computer Market agency Spare parts
Transportation Energy
services
Procurement services components
Transport Travel Travel
Services

Inbound Component Order Advertising Services reps

material fabrication processing
handling Promotions Spare parts
Assembly Shipping system
Inbound Sales force
inspection Maintenance

Part picking Facilities

and delivery operation

Inbound Operations Outbound Sales& Service

logistics logistics marketing
 Firm
infrastructure Economies of scale in overhead costs
HR

Technology Blending
technology

Fruits
Procurement purchasing
scale

Bulk shipments Scale

Backward
to economies in Rapid
integration
supermarket national installation
into bottles advertising
warehouse
High service
High speed High sales quality
bottling lines force
utilization due
to scale and
target
accounts
Inbound Operations Outbound Sales& Service
logistics logistics marketing

Cost advantages for juice manufacturer 34

 Sources of differentiation (examples)
Firm
infrastructure Superior management information system
training for Stable workforce
Sales incentives Training
HR personnel policies
Superior Unique Unique vehicle Apps Advanced
Technology product engineering servicing
material scheduling
handling tech. features support technologies
Most reliable Highest Best located Product High quality
transport of quality raw warehouse positioning replacement
Procurement materials
inbound and image parts
deliveries
Handling of Tight Rapid and High
inputs that timely advertising Rapid
conformance
minimize delivery level and installation
to specs
damage or quality
degradation Accurate High service
Attractive
and High sales quality
product
Timeliness appearance responsive force
of supply to order coverage
MFG ..... etc processing and quality
process .... etc .... etc

Inbound Operations Outbound Sales& Service

logistics logistics marketing 35
 Supplier’s Value Chain Analysis
• The role of procurement is to understand major suppliers’ value chains
to :
– Identify how suppliers use differentiation to best support their own
value chains
– Identify suppliers’ major costs

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Linkages between supplier and
buyer’s value chain

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 Analysis of organizations
impact

All information collected from this analysis will

help procurement team when negotiating or
working with suppliers to find improvements and
cost reduction

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 Specific markets
• There are many industrial sectors in a market such as

 Manufacturing  Financial
 Construction  Agriculture
 Retail  Services

• There are common information have been learnt through history about
these sectors in specific markets
• Those common information will help procurement professional to
understand and analysis those sectors.

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 Factors to consider when analyzing
markets
• Objectives: What are companies within the market attempting to
achieve?
• Drivers: What are the key factors that have resulted in those objectives?
• Governance: What rules, structures and institutions are in place to guide
efforts to meet objectives, improve efficiency, reduce costs and assure
sustainability in a market?
• Ownership: What legal form of company is most commonly used in the
market and who therefore has decision-making powers?
• Commodity or non-commodity: To what extent are the goods and
services considered to be commodities?

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 Manufacturing
• Objectives: Improve quality, Reduce costs, Faster throughput, Increase
flexibility
• Drivers: 1) Consumer desire for differentiated products; 2) An
increasing intelligent role for products that integrate with a connected
world, 3) A need to reduce time to market, 4) A need to increase
productivity, 5) Reduce costs by doing more with less
• Governance: Fragmented supply chains (often coordinated by large
OEMs) with suppliers forming collaborative networks
• Ownership: Predominantly shareholders
• Commodity or non-commodity: Raw materials commodity,
Components and finished products non commodity
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 Retailing
• Objectives: Grow market share, Increase brand awareness,Enhance customer
relationships,Introduce new products
• Drivers: Economic growth/level of unemployment, Shift from bricks and
mortar retailing to online shopping, Ability to collect and analyse data to
identify consumer needs, Rise in social media shifting power to consumers
• Governance: Many retail markets are co-ordinated and managed by large
retail groups using a global network of smaller suppliers
• Ownership: Franchises, Sole traders, Shareholders
• Commodity or non-commodity: Food retailing mixture of commodity and
branded (non commodity) products, Other retailers largely non-commodity

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 A general approach to
understanding and managing market
• How is the market segmented? (Current segmentation)
• What is the structure of each segment (e.g., oligopoly, many willing and
capable suppliers)? (five forces)
• How is capacity defined in these segments?
• What is the current industry-wide capacity utilisation of these segments?
What qualitative terms is this analysed in (e.g., very busy or little work
available) ?
• How profitable are these segments generally? Does everyone make money?
(five forces)
• Who are the main competitors?
• What are the barriers to entry?
• What are the core services provided? Which do we buy? If not all, why not?
• What other services do you/could you supply that are not currently core to
your business? 44
 A general approach to understanding
and managing market
• What are the key skills/competencies needed to deliver products and
services? How do you measure yourself against the competition? How do
you currently measure against the competition in these skills? How do you
think this will change over the next few years?
• How do you promote innovation in your organisation? Can you give
examples? To which customers do you take new ideas first? If not us, why
not?
• How should we measure the value you add to our business?
• How would you describe your relationship with us? What would you change
if you could?How does this compare with other customers?
• How would you like to see our trading relationship develop in the future?
What do you see as the main benefits to both parties? How can these be
translated into tangible financial benefits for your customers?
• How do you go about managing your cost base and eliminating non-value
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adding activities/costs?
2.2 Five Forces Analysis
 Five Forces Analysis
• 5Fs help in understanding the attractiveness of the industry
• 5Fs determine the ability of organizations in the industry to earn a profit
that gives an acceptable return on the financial investment made by each
organization.
• 5Fs are
1. Threat of new entrants
2. Availability of substitutes
3. Bargaining power of buyer
4. Bargaining power of Supplier
5. Rivalry (competition)

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5Fs that determine industry
profitability

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 Determinant Analysis High Mid Low
Buyer The four-firm concentration ratio is 1
concentration 40% so it is perfect competition
Size of account Considerably far more than average 1
demand Suggestion
Undifferentiated The product is commodity 1 for
product
identifying
Switching cost There is slight impact on time for 1
new first order Bargaining
Threat of The buyers in the market have 1 power of
backward capabilities to get in manufacturing buyer
integration process
information Buyer are aware of the product but 1
has no more information about
suppliers status
Price sensitivity The customer are price sensitive 1
Availability of There are many other brands 1
substitutes
Buyer power High 5 3 3
intense 49
 5Fs determinants
• The intensity of rivalry (industry competition): many or equal-size suppliers, slow
industry growth, High fixed costs, Lack of differentiation and switching costs,
capacity is added in significant amounts, high exit barriers.
• The bargaining power of buyers: buyer concentration, size of account ,
undifferentiated product ,switching cost, threat of integration, information, price
sensitivity, availability
• The bargaining power of suppliers: degree of differentiation of inputs, presence of
substitute inputs, supplier concentration to firm concentration ratio, cost of inputs
relative to selling price of the product, importance of volume to supplier, existing laws
and regulations to protect local suppliers.
• The threat of new entrants: the existence of barriers to entry, economies of product
differences, brand equity, capital requirements, access to distribution, absolute cost
advantages, learning curve advantages, government policies.
• The availability of substitute products: buyer inclination to substitute, relative price
performance of substitutes, buyer switching costs, perceived level of product
differentiation. Ahmed Karrar +249 123497611 50
 THE TYPICAL STEPS IN INDUSTRY
ANALYSIS (Five Forces)
1. Define the relevant industry.
2. Identify the participants and segment them into groups, if appropriate: buyers and
buyer groups, suppliers and supplier groups, competitors, substitutes, potential
entrants.
3. Assess the underlying drivers of each competitive force to determine which forces
are strong and which are weak and why.
4. Determine overall industry structure, and test the analysis for consistency: why is
the level of profitability what it is?, which are the controlling forces for profitability,
is the industry analysis consistent with actual long-run profitability?, are more
profitability players better positioned in relation to the five forces?
5. Analyze recent and likely future changes in each force, both positive and negative.
6. Identify aspects of industry structure that might be influenced by competitors, new
entrants, or by your company. 51
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 Sources of
2.3 information for
negotiating and
budgeting
How to collate sources of
information to estimate
the breakdown of costs
between direct and
indirect costs for
purchase goods and
services
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Value chain analysis (Direct &
Indirect costs)

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 Sources of information
• Company annual reports:
– Info: from 20 suppliers ; Sales, Profits, Unit price [Assume the same for all
industry]
– Findings: Total cost (Y-axis) = Sales-Profits, Volume of output (X-axis) =
Sales/unit price
• Market data: From Mintel , Gartner and Forrester
• Technical data: Buyer’s technical team estimate direct costs using “should-be
cost analysis” & finance team estimate the indirect costs
• RFI : questionnaire the potential suppliers about the ratio between direct and
indirect costs
• Plant Visits: Ask such questions: Is the supplier busy? Are assets old? Have they
trained staff? Are they efficient? Have they good environment?
• Discount lists: After break-even point suppliers are willing to give discount , by
analyzing this information , Fixed & Variable costs could be estimated
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Golden Rule

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 How to research and use market
data (OWN-IT)
• OWN-IT is collecting and analyzing data and
information
• OWN-IT:
1. Outline
2. Wide search
3. Narrow search
4. Increase your stockpile of information
5. Transform your stockpile into new knowledge
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What to do when you know costs of
your raw material?
• Procurement professional prepares budget
• Also direct and indirect costs are used in negotiation
• To calculate the budgeted purchases ($):
Raw material percentages are known from BoQ of the final product
 Budgeted purchases (units) =End of budget period inventory + Total
quantity needed for production – Start of budget period inventory
Given unit cost ($/unit), then budgeted purchases ($) = Budgeted
purchases (units) X Unit cost ($/unit)

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 A purchasing budget
source of info Q1 Q2 Q3 Q4 Annual
Budget production of
finished product expected sales 5,000 7,500 7,500 6,000 26,000
(Number of items)
Quantity of steel per
Bill of Quantities
unit of finished 0.03 0.03 0.03 0.03 0.03
(BoQ)
product (tonnes)

Total quanitity of steel

Expected sales X BoM 150 225 225 180 780
for production

Inventory of steel at Planned inventory

start of budget period level @ start of 30 40 40 35 145
(tonnes) quarter
Inventory of steel at Planned inventory
end of budget period level @ End of 40 40 35 30 145
(tonnes) quarter
Budgeted quantitiy of
From equation
steel to purchase 780
calculations
(tonnes) 160 225 220 175
Unit cost of steel
Market information $1,000 $1,100 $1,200 $1,200
($/tonne)
Total value of steel 60
Calcuations $160,000 $247,500 $264,000 $210,000 $881,500
purchases ($)
Purchase Price Cost Analysis (PPCA)

Remember that PPCA helps to answer this questions

• What costs are legitimate and necessary to manufacture / deliver the
product?
• Are the values for these cost items reasonable?
• Is the basis for allocating overheads reasonable?
• Has the supplier included allowances for contingencies?
• Are the resulting profits reasonable?

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Example of information about costs
for healthcare service
Element of the Estimated cost as Target cost as % of
service % of price price
Direct costs of 62 62
providing the
service
Direct management 14 12
and administration
Recruitment and 6 4
retention cost
Finance related 4 2
Premises 5 3
Other costs 1 1
Target saving 10

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Target costing

Slide 9
 Evidence-based Negotiating
(Using PPCA results)
Before negotiating current contract , look for below information :
1. Identify objective : e.g: To target a cost reduction
2. Understand the current status: current costs, scope of work, specification,…etc
3. Analyze supply market (Supplier’s value chain): understand cost structure
(direct & indirect costs)
4. Send RFI for current and other suppliers to ask bout:
1. Materials costs
2. Capital costs
3. Direct labor costs
4. Overhead costs
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2.1 Market analysis

2.2 Five Forces Analysis

Sources of information
2.3 for negotiating and
budgeting