The procurement approach for procuring the goods and services to be adopted by the procurement organization is decided by various factors of the market like supplier’s position, consumer behavior, position of the organization in the market, supply chain, etc. Here the organization procuring the goods or services is being referred as the procurement organization. There are various tools and techniques to analyze the market which are discussed as follows:
Porter’s five forces analysis;
Supply Positioning and Supply Preferencing;
Supply Chain Analysis;
Let us discuss these tools & techniques one by one.
SWOT (Strengths, Weaknesses, Opportunities & Threats) analysis is the evaluation of internal and external factors of an organization to access the position of the organization in the market. Strengths and weaknesses are the internal factors over which the organizations have control. Opportunities and threats are the external factors which are beyond control of an organization. The organizations should be aware of various factors, positive or negative which may influence the delivery of goods and services. Based on various factors the procurement approach is decided by the procurement organization. The figure below demonstrates the pictorial representation of the SWOT analysis.
Porter’s Five Forces Analysis
Porter’s Five Forces Framework is a method to analyze the competition of a business in the market. It analyses a company’s competitive environment. If there is less competition in the industry, then the profitability will be more and more will be the attractiveness of any business. An industry having pure competition will be less attractive to start a new business. According to Michael E. Porter, there are following five forces which determine the completion in any industry. Porter’s Five Forces Analysis is used to analyze the position of a company in any business environment.
- Threat of new entrants
- Industry Rivalry
- Threat of substitutes
- Bargaining power of suppliers
- Bargaining power of Buyers (Consumers)
More on Porter’s Five Forces Analysis can be assessed here.
PESTAL stands for Political, Economic, Social, Technical, Legal and Environmental. These are the external forces that affect the market place and the suppliers working in that market place. PESTLE analysis helps the procurement organization in understanding how the different external factors can influence the organization and based on the analysis, the organization may decide its procurement approach.
Supplier preferencing is a tool that analyses the behavior of supplier towards the procurement organization and it determines the degree of attractiveness of the procurement organization for the supplier. The outcome of this analysis should allow a Borrower to establish the factors listed below and design a procurement approach to maximize market interest, and actual participation in the procurement:
a) What changes the Borrower needs to make to be more attractive to the market?
b) How to motivate the market to bid and provide a good solution to meet the Borrower’s requirements?
c) How to engage with the market to optimize the level of supplier participation in a bidding process?
Supplier preferencing focuses on the value the supplier is getting from the business. It also estimates overall attractiveness of the business to the supplier. Using these dimensions, the Supplier Preferencing Matrix is prepared by simply classifying attractiveness and relative business value as low or high.
Supply Positioning and Supply Preferensing
Supply Positioning is a procurement tool that is used to assess the criticality of the goods, services, and works to the Borrower by evaluating Project risk and value.
Supply Positioning also provides an overview of the procurement arrangements and mitigation measures, segmented by the Supply Positioning categorization that a Borrower should consider in developing its procurement approach. Below table outlines the typical procurement approaches applicable to each Supply Positioning segment.
|Strategic Security Security of Supply
|Low –cost goods/services/works Strategically important Shortage of reliable suppliers
|Long term contractsBuild reserve of stockConsider alternative products
|Strategic Critical Security of supply at a good price
|High cost specialist goods/services/works Limited number of suppliers
|Med/long term contractContingency planning
|Tactical Acquisition Purchasing efficiency
|Routine purchases goods/services/works Low value/ low risk goods/services/works Many potential suppliers
|One-off contracts/purchase ordersE- purchasingProcurement cards
|Tactical Advantage Improving value through leverage tactics
|High –cost/ low- value goods/services/works Many potential suppliers
|Drive tactical advantages
|Short term contractsOngoing active sourcing for Competitive price
Supply Chain Analysis
Supply chain analysis is a useful tool for identifying potential risks the procurement organization may face while procuring the particular goods or services in future. The supply chain is typically a network of suppliers involved in the final delivery of goods right from the procurement of raw materials to final delivery. Understanding the supply chain is critical for designing the procurement approach for any organization. Mapping the supply chain evaluates the risk areas and the procurement organization may take measures to mitigate the risks. The supply chain moves in two directions. Upward supply chain extends from procurement organization to the suppliers for supply of goods who themselves procure raw materials from other suppliers. The downward supply chain extends from the procurement organization to the final destination of goods or services. The longer the supply chain, greater will be the risk. Also the procurement organization will have less control in case of longer supply chains because of more dependency on suppliers. The figure below illustrates the supply chain map.
Therefore, before designing the procurement approach, the procurement organization should thoroughly study the supply chain and its operation. In case of complex procurements where more risk is accessed, the procurement approach should be designed in a manner that that it incorporates maximum supplier involvement right from the beginning.
Besides the risk analysis, the second purpose of mapping the supply chain is do the value analysis. It is necessary to analyze how much value; each step of the supply chain is providing to the procurement organization. There may be inefficient suppliers in the supply chain adding unnecessary cost to the organization. The purpose of value chain analysis is to remove inefficient suppliers form the supply chain for greater efficiency.
The combined supply chain and value chain analysis is focused on reducing threats (risks) and taking advantage of the opportunities.