54 Tools for supply market analysis

Tools for supply market analysis

Collecting the data is just the first part of the research and analysis job. To effectively represent and communicate the market conditions, the Procurement function may employ a number of different data representation tools to portray and explain the current situation and potential suppliers. We shall discuss three tools here: Porter’s ‘Five Forces’, SWOT analysis and Supplier Analysis.

Porter’s ‘Five Forces’

Porter’s ‘Five Forces’, were created to describe competitive forces in a market economy. Refer to your textbook for Figure 2.9 on page 45 regarding Porter’s ‘Five Forces’ model. The ‘Five Forces’ are the forces that shape an industry.

Data for creation of a ‘Five Forces’ analysis requires a review of all the data collected from the different sources. It may also be necessary to involve deep market intelligence through focused discussions with key stakeholders and subject matter experts. The tool helps predict supplier and buyer behaviour in the marketplace and is a critical element in shaping supply strategy. It is also a helpful educational tool to lead stakeholders to understand current supply market conditions.

1.  Competitive rivalry

Higher levels of competition create more options for buyers. Factors include the following:

a.  Diversity of rivals

b.  Product/service differentiation

c.  Industry growth rate

d.  Fixed costs/value added

e.  Number of competitors

f.  Extra capacity in large increments

g.  Acquisition trends

h.  Exit barriers

i.  Switching costs

j.  Relative size of competitors

2.  Threats of new entrants

Examples here might be some other low-cost country manufacturers entering many of the traditional manufacturing strongholds. Factors include the following:

a.  Capital requirement

b.  Availability of skilled workers

c.  Economies of scale

d. Access to distribution channels, inputs or critical technologies

e.  Knowledge of market

f.  Expected retaliation

g.  Legislation or government action

h.  Differentiation

i.  Product life cycles

j.  Brand equity/customer loyalty

k.  Risk of switching

3.  Threat of substitutes

The threats of substitute products and services. For example, aluminium is replacing traditional tin-plate in beverage container industry. Factors influencing this include the following:

a.  Relative performance of substitutes

b.  Relative price of substitutes

c.  Higher perceived values of substitutes

d.  Ease of buyers switching

e.  Buyer propensity to substitute

4.  Bargaining power of buyers

For example, as buyers begin to consolidate specifications and develop industry standards, increasing power is created over suppliers in the marketplace. On the other hand, when the quality and performance of the buyers’ products or services depend critically on the suppliers’ inputs, the suppliers have the upper hand. Factors include the following:

a.  Buyer concentration

b.  Buyer volume

c.  Buyer switching costs

d.  Price sensitivity

e.  Product/service differences

f.  Brand identity

g.  Availability of alternative sources of supply

h.  Percentage of the total costs

i.  Impact on quality or performance

j.  Threats of backward integration

5.  Bargaining power of suppliers

As many supply markets begin to consolidate, fewer suppliers mean that a greater amount of supplier power exists in markets. Factors include the following:

a.  Supplier concentration

b.  Concentration of procurements

c.  Switching cost

d. Brand of supplier

e.  Threats of forward integration

f.  Significance of orders to suppliers

g.  Industry capacity utilisation

h.  Ability to pass on price increases

i.  Availability of key technologies or resources

Buyers need to take a high-level view of the marketplace and begin to brainstorm and review the implications of these changes in the marketplace with key stakeholders.

The ‘Five Forces’ can also be used to analyse individual potential supplier’s competitive position.

SWOT analysis

An analysis that examines strengths, weaknesses, opportunities and threats (SWOT) can provide insight even with limited data into a supply market or a potential supplier. As a strategic planning tool, the goal is to minimise weakness and threats, and exploits strengths and opportunities. Figure 3.2 shows the model of SWOT analysis.

Figure 3.2  SWOT analysis



Please read ‘strategic management’ on pages 42 – 50 from your textbook Procurement Principles and Management, 10th edn, England: Prentice-Hall, Pearson Education Limited by Baily, P, Farmer, D, Crocker, B, Jessop, D and Jones, D (2008).







Supplier analysis

1.  Establish benchmarks through industry databases — Benchmarking requires identifying the critical performance criteria that are being benchmarked and identifying relative competitive performance. Industry benchmarks involve comparisons of performance with firms in the same industry, whereas external benchmarks involve best practices and performance levels achieved by firms that are not within the same industry.

2.  Requests for information — A request for information (RFI) is a solicitation document that is used by organisations to obtain general information about services, products or suppliers and is generally used before a specific requisition of an item is issued. The procedure is generally used when a large or complicated procurement is being considered and the potential pool of suppliers must be pre-qualified to determine if the supplier meets the minimum standards needed to successfully bid on the project, and if awarded, successfully complete the project.

3.  Value chain analysis — It is used to help identify the cost savings opportunities that exist within the supply chain. The goal is to be able to understand, identify, and exploit cost savings opportunities that may have been overlooked by business unit managers or even by suppliers in bringing the products and services to the appropriate location.

4.  Supplier research — Supplier research is required to identify the specific capabilities and financial health of key suppliers that are in the supply base or that may not currently be in the supply base. Some of the key elements include the following:

a.  Cost structure

b.  Financial status

c.  Customer satisfaction levels

d.  Support capabilities

e.  Relative strengths and weaknesses (SWOT)

f.  Core competencies

g.  Strategy/future direction

h.  Culture and policies

i.  How the buying organisation fits in their business

Activity 3.4
Question to activity 3.4
Suggested answer to activity 3.4


BLC 304/05 Procurement Management Copyright © 2009 by Wawasan Open University. All Rights Reserved.


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