Appraising market segments
When a buyer conducts supply market analysis, he or she will have two possible options:
1. The buyer may decide that he or she does not want to go any further in the analysis. This may be the case if the buyer concludes from the assessment that the supply market suffers from distorted competition or it is risky to buy from the market.
2. The buyer may decide to continue the analysis if he or she feels that the market is sufficiently competitive to give the organisation worthwhile options. In this case, the next step will be to segment the market.
The buyer understands the overall mechanisms and drivers of the interested supply market but have not yet reached any significant conclusions as to obvious sources of supply for meeting the organisation’s supply objectives. There are perhaps hundreds of possible suppliers around the world who could meet the particular requirements and it is impractical of course to evaluate every single supplier. The solution is to delimit different groups of suppliers within the interested supply markets and to evaluate individual suppliers within the best group(s).
The buyer can do this by grouping together all suppliers for whom market risks and opportunities are broadly similar due to comparable technologies, supply channels and/or geographic location. Such a group of similar suppliers is called a ‘supply market segment’ or just ‘segment’. The segmentation process can be summarised as in Figure 3.3.
Figure 3.3 The segmentation process
Segmentation process will follow the following steps:
1. Identify the types of supply risks and opportunities of different segments
a. Approach to assessing different geographic locations: PESTLE (political, economical, socio-cultural, technological, legal and ecological factors) and Porter’s ‘Five Forces’ analysis.
b. Approach to assessing technology and production processes: maturity of the technology, complexity, organisation’s experience with the technology, technical suitability and adaptability, interconnectivity and openness of the technology, etc.
c. Approach to assessing supply channel, e.g., from manufacturer, distributors or agents: bargaining power, lead-time, minimum
order quantity, product-range, continuity of supply, support and responsiveness, etc.
2. Identify and screen the relevant events in the segments
Theoretically, all risks and opportunities could be possible in all segments. In practice, however, many can be ignored since the likelihood of them occurring is remote. Using prior knowledge and common sense, the buyer can start off by separating those risks and opportunities that are likely to be relevant from those that can be put aside.
3. Further research the risks and opportunities related to these events
Common sense, however, cannot provide answers to all questions. To establish whether the risks the buyer is aware of are indeed significant or not, whether the opportunities he or she perceives actually exist, and whether there are any other significant risks or opportunities that the buyer may be unaware of, the buyer may need to undertake further research into the supply market.
4. Build scenarios to assess the extent of the risks and opportunities
Scenarios help to get around the problem of trying to be precise about something that cannot be accurately predicted. This approach usually involves considering the following three scenarios: Best case, most likely and worst case.
5. Identify which supply targets are affected by these risks and opportunities
The next stage is to think through how a particular event will impact on the overall supply objectives and individual supply targets. Supply objectives generally apply to the particular corporate product-line or project. These then lead to specific supply targets for individual procurement items, e.g., cost, quality, availability, customer service and responsiveness.
6. Determine how much the events may affect the supply targets
Once the buyer has identified which events affect which supply targets, he or she will need to go one step further and determine how significant the effects are likely to be on each of the supply targets.
7. Select the segment(s) with the best balance of risks and opportunities
By the time the buyer reaches this stage of the supply market analysis, the buyer will have assessed each potential market segment in relation to each of the supply targets for the procurement the buyer is considering. The buyer now needs to be able to conclude which supply market segment is the most attractive. This will serve the buyer as a basis for later identifying and assessing potential suppliers from within that segment.
8. Continue to monitor supply market risks and opportunities
By definition, risk implies uncertainty, involving events that can unfold in different directions. Hence, in addition to identifying key events, it is equally important to keep track of how these events are evolving in order to know whether the risks and opportunities are growing or decreasing.
Monitoring is needed especially when:
a. The buyer has not yet made a final decision on a supply market and is waiting to see how the situation evolves.
b. The buyer has made a decision to supply from a particular market but is keeping some others as backups. By closely monitoring risks and opportunities, the buyer may later wish to shift to the backup markets if conditions change.
c. The buyer is buying from a supply market that represents a relatively high degree of risk. The buyer needs to monitor the situation to make sure that the risks do not get out of hand, and be ready to take alternative course of action — including investing in measures to reduce risk — if this happens. We shall look into how to reduce supply risks and take more advantage of supply opportunities when we discuss developing supply strategy later.
In general, the higher the supply risk, or if situations are changing rapidly, the more important it will be for the buyer to keep an eye on the situation carefully. It is equally important to be aware of the way different supply opportunities are evolving. Some opportunities may dissipate, while others may become easier to exploit. New opportunities may be arising continually. It is hence necessary to have this information for the buyer to determine trends and their possible implications for the future.
|Question to activity 3.5
||Suggested answer to activity 3.5