Many organizations find that as their business grows, they release more products that require a greater volume of component parts. In this scenario , especially where supplier selection processes are not closely managed, it’s not uncommon that businesses find their supplier base grows. The symptoms for a business with lots of suppliers can be easy to spot and includes:
• Commodity groups with many suppliers
• Many suppliers providing the same part
• A Multitude of prices and contract terms to manage
• Overly burdened bought ledger department
• Large numbers of purchase orders
• Significant numbers of “administrative” order raisers
But is a large supplier list really a problem – surely it promotes choice?
The thing is with suppliers is you should only need enough to meet the needs of your business. Supplier selection should be a carefully managed process (true strategic sourcing). Your supplier network should be rich with suppliers that add value to your operation.
The typical trigger for supplier rationalization is a supply chain that is perceived to be slow and expensive. Organizations then attempt to shed suppliers and appoint ‘champion’ suppliers with long term agreements or contracts. Whilst in many industries this is not a bad way to go how do you know if you have too many suppliers and could a supplier development process be a better way to deliver the same results?
Needlessly taking the axe to your suppliers can promote a significant risk – one in which without due consideration you remove suppliers that help your competitiveness or add value that can’t be simply replaced.
Many businesses flourish with strategic supplier relationships (not axing) where both organizations developing opportunities post contract (supplier development does not stop on contract award). Given this a simple slash and burn approach is unlikely to work.
The foundation for strategic management is an appropriate supplier development program one which will typically deploy performance measurements (usually along the Quality, Cost and Delivery route) that businesses can utilize to help shore up many of the issues resulting from poor supplier performance (over stocking, multiple providers for the same commodity etc).
Supplier rationalization will always be a common project that businesses will utilize to reduce cost and facilitate performance however – purchasers must be aware that there is more than one way to solve the problem.
Assessing the market, during strategy development, is often a key task but one that can be complex due to the myriad of influencing factors and participants. Utilizing modeling techniques that can provide insight into market competitiveness and the relationship of its various players and stakeholders can offer vital insight when decision-making.
The Six forces model supports a thorough analysis of the strategic position inside the market, delivering an understanding of the completion and potential profitability. When utilized as a strategic tool, utilized up front without committing resources and strategy deployment it can offer valuable insight into complex highly competitive markets. The results can often facilitate a move to less competitive markets that might offer greater profitability and success.
The model does have its weaknesses, the original five forces model received criticism for various reasons significantly that factors within the market, such as competitors and buyers do not join together. In adapting the five forces model the result builds on its parent through analyzing the markets complimentary aspects.
Unsurprisingly the model should be utilized as part of a broader strategic planning procedure and as such be regularly assessed (at least once a year) due to changing factors and stakeholder that can influence the market.
The model analyses six key attributes:
• Competition- How much competition is present within the market? Which stakeholders are key players and hold dominant positions?
• New entrants- How easy is it to join the market whilst being competitive?
• Buyer- Can buyers influence pricing? Can buyers operate as a group? Do they hold greatly dominant positions over suppliers within the market?
• Suppliers- consider the status of the seller network? Are there huge numbers of suppliers? Are there a few dominant ones or an even smaller number operating monopolistically?
• Substitutes- duplication/substitution can be a key issue in highly competitive markets – what is the position of the product/commodity and how easily is it to bring about a change.
• Complemetors- Products or services that are complimentary can sometimes influence the market.
Whilst its often used in developing business strategy, the six forces model can be utilized as a planning tool facilitating a detailed assessment of the market. Importantly, it can be used very effectively in developing sourcing strategies as it provides key insight into factors that influence suppliers and their pricing.
The model can be utilized either as a direct alternative too or in conjunction with the more commonly known SWOT analysis tool. The six forces model has some distinct advantages over its compatriot SWOT tool: specifically it is a little more detailed in the area of analysis pin-pointing the key factors driving the market rather than just reviewing external opportunities and threats.