51 3.2 Researching and Analysing Supply Markets

Objectives

By the end of this section, you should be able to:

1.  Set priorities for undertaking a supply market analysis.

2.  Identify the different information sources and the importance of obtaining good market intelligence.

3.  Assess the level of competition in your supply market using Porter’s ‘Five Forces’, SWOT and supplier analysis.

4.  Determine which market segments best meet the organisation’s supply objectives and present the best balance of risks and opportunities by combining assessment of supply market risk and its potential impact on the organisation.

Introduction

We have discussed how specifications play an important role in the search for the right quality and the right value. One of the other critical success factors in the business world today is the willingness and the ability of business professionals to anticipate, accept and adapt to change. This section aims to build on this principle, by giving procurement professionals the key elements needed to understand their supply markets and then use this understanding to make better supply decisions.

 

What is a market?

The term ‘market’ can mean a place where goods and services are bought and sold. Markets are created to satisfy the needs and wants of people and organisations through an exchange process. On the basis of this definition, the supply market could be defined from a buyer perspective as the arena containing potential sources of supply.

This supply market has a major impact on the performance of the Procurement function. It is the starting point for developing supply strategies and supplier management activities that will influence all procurement operations:

1.  What and how much to buy

2.  Where to buy

3.  When and how to buy

 

What is supply market analysis?

It is the review of the structure, characteristics and trends of a supply market for a particular product or service, to identify the best possible supply segments for the organisation’s requirements and to understand the risks and opportunities associated with these.

 

Why is the analysis of market conditions important to sourcing?

The horizon of procurement awareness determines whether the contribution made by Procurement function to an organisation is transactional or strategic.

Procurement staff who never look beyond fulfilling the requirements of the current week are little more than expert expediters. Strategic procurement involves using business intelligence to analyse the procurement environment and make appropriate decisions and recommendations. Only on the basis of intelligence can strengths, weaknesses, opportunities and threats that impact supplier be evaluated. Business intelligence also provides information on how the organisation — and procurement as an activity within the business — is performing relative to competitors. Analysis of market conditions as an aspect of business intelligence is useful for the following reasons:

1.  It helps in forecasting the long-term demand for the product, of which bought-out materials, components and so on are part, so it has an interest in market research, too.

2.  It assists in forecasting the price trends of bought-out items and how material costs are likely to affect production costs and selling prices, so, for example, the need for cheaper prices may influence sourcing decisions.

3.  It indicates what alternative goods and supply sources are available — it might be more economical to source items from abroad, for example. It also identifies new products and/or technologies that meet the organisation’s requirements.

4.  It promotes understanding of the different conditions and/or constraints related to buying a particular item. Information relating to pay trends, commodity prices, political factors and the like can assist in deciding whether to adopt a strategy of forward buying and stockpiling or hand-to-mouth buying and minimum stocks.

5.  It identifies those market segments which represent the best opportunity and lowest risk for a particular procurement. It gives guidance on the security of supply sources, which is particularly important with sensitive commodities sourced abroad.

Supply market analysis is an important activity, too often neglected by buyers who tend to limit it to a few questions to existing suppliers and market specialists. This favours short-term approaches to procurement operations and leads to a lack of understanding of market mechanisms, resulting in continuous supply problems. As a result, buyers may find themselves wasting time sorting out day-to-day problems rather than anticipating risks and taking advantage of opportunities ahead of competitors.

If an organisation does not monitor and analyse its supply markets where needed, it may face disruptions in supply, delays, quality problems and cost overruns due to suppliers facing unexpected long supply lead times, shortages of materials, logistics bottlenecks and a range of other difficulties that could have been anticipated.

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