Profiling the Commodity
Current Contract Status
Supply Market Analysis
Key Cost Drivers and Total Acquisition Cost
Initial Opportunity Assessment
Early Opportunity Implementation Approach
The objectives of this phase are:
- To generate a commodity profile using a cross-functional User Intelligence Group approach
- To create thorough understanding of the commodity group in order to develop the commodity procurement strategy
- To understand and integrate the current and future needs of your organisation into the approach to market
- To provide options for dealing with commodities
Current Contract Status
It is necessary to review and understand the current contractual situation for the commodity to determine if there will be any issues in relation to the need to phase in new contracts over a period of time, or to investigate whether early termination of existing contacts is both possible and desirable. The contract should also provide details of the product specification, end users and other information which can be incorporated into the analysis of key commodity characteristics as described in the next section.
Use the Current Contract Status Template to record this information.
A detailed understanding of the current spend and likely future requirements of participating organisations is key to commodity strategy development.
In order to develop clear spend conclusions, it is important to gather current expenditure and demand data at the correct level of detail and to consolidate the information into a standard format.
The five key areas of analysis are:
- Total Expenditure and Volume
- Expenditure by Commodity and Sub-Commodity
- Expenditure by Division or Department
- Expenditure by Supplier
- Future Demand projections where possible
To assist with spend analysis many Scottish public sector organisations can access information on historical commodity spend via the Observatory, which contains many pre-defined reports and data that can be exported into MS Excel format. However, the data in the Observatory is not at line-item level. This means that the UIG will still need to obtain detailed spend information from suppliers, or where available, from purchase order systems. The Observatory can provide Departmental analysis if this was included with the original data supplied and can be used to identify possible transactional savings and collaborative opportunities.
Until systems become available that will provide the line item detail required for strategic procurement decision making, it is good practice to make the provision of such data as a condition of contract for suppliers.
Spend Analysis Example Templates
The UIG should also make an assessment of the organisation's future demand profile for the commodity, based upon the knowledge and expertise within the team and upon information gleaned from communications with non-team members. The Observatory can also be used to identify possible transactional and collaborative opportunities.
The purpose of this section is to clarify the commodity characteristics and to achieve agreement within the UIG and with other key stakeholders as to exactly what will be addressed (and, consequentially, what is out of scope) within this commodity. It also enables the characteristics to be commonly understood by the team as a whole.
First the team must define the scope of the commodity to be covered within this strategy by breaking the commodity down into classes or sub-commodities and validating the definitions for each segment. The diagram below illustrates an example of how this could be done for office equipment.
The key characteristics for each segment can now be identified and agreed:
- End User Requirements
- Wider Organisation's Requirements
- Future Trends
Templates for laying out the commodity tree and capturing the key commodity characteristics can be found attached below:
Supply Market Analysis
Supply market analysis enables the UIG to develop a detailed understanding of key trends, major players, and overall market dynamics that could influence the commodity and supply.
The elements constituting a Supply Market Analysis are described in the following sections and an Excel version of Market Analysis Templates is attached.
Early market engagement can be critical to success and it is vital to understand the key issues before starting, but it must be undertaken with care and in such a way as to ensure equal treatment and fairness to suppliers or potential suppliers.
The right people need to be present. From the user Intelligence Group, the Category Manager and possibly an expert end-user should be present. From the supplier side, someone who understands the organisation's needs and is willing to offer innovative solutions and constructive advice should be present. The UIG representatives must adopt the right attitudes: treating suppliers as equals, guaranteeing confidentiality and maintaining flexibility and openness.
The UIG representatives must be ready for the procurement exercise to be shaped by what the market can do and be prepared for, and actively encourage, constructive challenge by suppliers
The UIG should also consider the options for shaping the market: encouraging the market to develop in such a way that it can meet the organisation's needs in the future. Engaging the market provides an opportunity to ensure that services provided are at the forefront of those available.
The overarching theme of early market engagement is the organisation stating the outcomes it needs to bring about, and suppliers giving feedback on how these outcomes might be achieved. All discussions should flow from this theme.
The customer will 'bring to the table' the outcomes they wish to achieve, the main risks and issues foreseen, and thoughts as to how suppliers might be involved
Suppliers will respond with an indication of how the outcomes might be achieved, the risks and issues as they see them, along with feedback on timescale, feasibility and (perhaps) affordability.
The key risks should be explored as fully as possible, including such aspects as where customer and supplier see them arising, who should manage any identifiable risks, and what the implications are of any identified risks
Any discussions on costs at this stage should be indicative only, and this needs to be made clear to suppliers.
Market sounding means assessing the capability and capacity of the market to meet the customer's project requirements. It enables you to assess at an early stage whether your proposed project is feasible and can be delivered by suppliers. It also provides an early warning of your requirements to the market and enables suppliers to think about how they will respond to the OJEU notice and who they need to work with. The key aim of market sounding is to encourage the right suppliers with the right structure to respond to your OJEU notice. Market sounding brings supplier perspectives to procurement at an early stage, improving the focus of the project on what is achievable. It provides a much better understanding of the feasibility of the requirement, the best approach, the capacity of the market and the risks involved. It is particularly useful where there is uncertainty over what the market can provide, how to package the requirement, or the best way to work with suppliers. It can save effort later in the process and reduce procurement timescales.
There is no formal process for market sounding, but activities typically include researching and analysing the market as a whole and meeting selected suppliers for discussion. Supplier interest can be generated by publishing advance notice of likely requirements, for example through Prior Information Notices (PINs).
Market sounding brings learning into the public sector that is useful in a broader sense. Project teams need to have a better understanding of the relevant markets to assist in their appraisal of suppliers. Market knowledge can be invaluable to other projects and other organisations.
Market sounding involves gathering knowledge in these key areas:
Consider carrying out market sounding if the answer to any of these questions is 'yes':
is there doubt over the existence of a market for the identified business need?
assuming there is a market of some kind, are there doubts over its capacity, capability, maturity or competitiveness?
is first-hand in-house knowledge of the market superficial, incomplete or simply absent?
is there uncertainty about the level of suppliers' interest?
is the desired outcome likely to involve significant business change? is it unprecedented?
is there a need to manage expectations of the project?
is the requirement very unusual?
is the solution likely to be complex or innovative?
The key skill areas for market sounding are:
Shaping the Requirement
Market sounding can help shape the requirement so that procurement is focused on what the market can deliver. A poorly framed requirement can present major risks to the project.
The following areas are key:
keeping options open: avoiding the tendency to 'zero in' on particular options; allowing suppliers the freedom to suggest ways forward
considering business models: looking at all the options for how the arrangement between customer and supplier might work (organisationally, financially, in relation to risk management etc)
considering how the way market subsectors work within the target market might affect the project
considering whether the requirement might usefully be split in particular wayswhat are they in this market? How will they affect the project?
Questions to Consider
Enquiries at market sounding usually fall into particular areas. These are not questions to ask of suppliers, but rather questions that the UIG should seek to answer for themselves through dialogue with suppliers.
Maturity: is the market ready to deliver what's required?
Feasibility: will the market be technically capable of meeting the requirement?
Competition: how many suppliers provide what is required; will procurement be sufficiently competitive?
Capacity: are there enough suppliers, with sufficient capacity, to meet the requirement?
Working together: will the requirement bring suppliers from different subsectors together in a new way? How will this work?
Traditions and prevailing attitudes: what are they in this market? How will they affect the project?
Discussions with Suppliers
Talking to suppliers is at the heart of market sounding. It is crucial to talk to the right suppliers - ideally, those who have achieved outcomes of a similar nature and scale.
Some possible questions to open productive discussions with suppliers include:
Are you interested in this opportunity?
If not, why not?
Is the business model realistic?
Are the business aims realistic? Is the business attractive?
What do you see as the risks?
Can you give an early indication of cost?
Can you give a broad indication of the likely timescales?
Are there other, better approaches?
Market sounding should not be an isolated or project-specific activity. There are important contexts to consider.
Public sector contexts include:
strategic engagement with markets
market sounding links in with the general move towards a more proactive approach to markets in the public sector
organisational procurement strategies
these are bound to have an impact
existing framework agreements
the possibility that the requirement could be obtained through existing agreements
there may be other similar projects elsewhere from which useful lessons can be learned
it may be necessary to align the project with another department, organisation or sector's approach
the possibilities for collaborating with other organisations for mutual benefit
the wider benefits of documenting, sharing and embedding the knowledge gained from market sounding
The Market Trends Analysis provides information on what is happening in the commodity market in terms of, for example, current and future technologies, changing customer requirements or demands, new players, and mergers or acquisitions. This analysis is based on recent analyst reports, news items and information on current available products and future products advertised on the market.
External Sources for Supply Market Data
The following is a list of external sources for supply market data which may provide useful information required to develop commodity strategies. The sources are classified under the following categories; Purchasing Specific, Public Sector, News and Current Affairs, Economic Data, Market Research, Company Overviews and Category Specific. For future reference, make a note of the sources consulted in the corresponding section within your commodity strategy. Please note that the inclusion of a link to an external website or publication does not constitute any kind of endorsement by the Scottish Executive.
Analysing the Environment
The purpose of analysing the environment is to take into account in more detail the external and internal factors affecting the commodity and supply. The market trends analysis in section 3.4.2 could be used as an input for the analyses to follow i.e. Porter's five forces, SWOT and PEST analyses. Depending on the complexity of the commodity, all or one or two of these can be used as an input to the strategy. The results should lead to the identification of opportunities and risks.
Porter's 5 Forces
Porter's five forces constitute a framework for analysing a commodity or industry environment. Several important economic and technical characteristics are important to the strengths of each competitive force.
The SWOT Analysis provides information in matching the resources and capabilities of a commodity within the environment in which it operates. Environmental factors internal to the organisation can usually be classified as Strengths or Weaknesses and those external to the organisation can be classified as Opportunities or Threats.
The PEST Analysis is a framework that assesses the impact of four major factors that shape an industry and can be used to complement the two other analyses above. The analysis reveals key trends and issues in the industry, e.g. emerging/declining constraints or new rules of the game.
Supplier Market Share
The supplier market share provides an insight into the positioning of the main players within the market. From this we can also deduce factors such as industry attractiveness, competitive pressure and degree of market concentration/fragmentation
The steps towards drawing this picture can be outlined as follows:
- Identify the market size in terms of total turnover, sales, and number of customers, number of goods or units produced.
- Identify the main players within the market using the same parameters outlined above.
- Complete the template using one of the parameters to determine the supplier market share.
Existing and Potential Suppliers High Level Review
Following on from the analysis of the supplier market share, this template holds a high level review of existing and potential suppliers: key financial indicators, market share, customer base, locations, background and recent developments in technology, organisation or other news.
Key Cost Drivers and Total Acquisition Cost
Analysis of internal product ownership costs combined with external supplier costs provides a Total Cost of Ownership ( TCO) or Total Acquisition Cost ( TAC). This will lead to the determination of areas for improvement internally within the organisation and externally with suppliers. The total cost model creates a detailed understanding of purchase price and non-invoice costs.
In order to recommend the most effective way to manage the commodity going forward, it is necessary to analyse the current procurement process for the commodity. This will enable the identification of key cost drivers, total cost of acquisition and opportunities that can impact upon the total cost of ownership.
Internal Cost Drivers
There may also be opportunities for the buying organisation to make its own internal processes more efficient. Some of the key area to consider during procurement process are:
eProcurement Scotland is a fully hosted and managed 24 x 7 eProcurement service which supports the full purchase to pay cycle' providing a range of services including e-sourcing (electronic tendering and auctions) and transactional purchase to pay solutions.
Understanding Supplier Cost Drivers
The template attached below provides a guideline to typical supplier cost drivers. Combined with internal intelligence (e.g. existing supplier analysis, commodity characteristics) and external intelligence on the commodity (e.g. market /industry/commodity analysis) these can be used to determine the key supplier cost drivers for this commodity. In the same way as for the internal costs the impact of these on the total acquisition cost and limiting actions should be built into the commodity strategy wherever possible. Some tips on how to obtain supplier cost drivers:
- Ask the supplier:
- As part of the tender process
- Before placing the first order
- Before agreeing to a price increase
- Commodity data charts
- Newspapers, journals, Internet (labour, overheads)
- Govt. bodies e.g.. Central Statistical Office
- Other similar businesses
- Through clarification:
- Make your own assumptions (but be careful)
- Test the cost breakdown in clarification
- Adjust the cost breakdown assumptions if necessary
- Document the clarifications
- Use the supplier's own logic next time
Supplier Cost Drivers Example
Total Acquisition Cost
Once the key commodity cost drivers and total cost of acquisition have been determined, complete this TAC Template and insert it into the appropriate section in your commodity strategy document.
Initial Opportunity Assessment
The objective of this assessment is to identify high-level opportunities based on data already gathered. Strategic sourcing highlights opportunities in 3 major areas: Purchase Demand Management, Supply Base Management, and Total Cost Management. These are portrayed as the three sides of the 'Best Value Triangle'. For each of the potential opportunities on the triangle, the commodity team should assess and highlight those opportunities that could be exploited and determine how they could be applied to the commodity in question.
Early Opportunity Implementation Approach
Early Opportunities are defined as cost savings or total cost improvements which: -
- Can be implemented within 90 days
- Realise benefits within 6 months to 1 year
- Are relatively easy and straightforward to do
- They are often tactical and short-term in nature and must not impede strategic plans.
There are many factors that impact the ease of implementation of all opportunities as well as early opportunities:
- Time to deployment
- Cross-functional complexity
- Number of Geographies / Business Units involved
- Regulatory, Safety, Criticality, Legal, Specification Changes
- External Technology
- Customer acceptance
- Business Unit readiness --"pull"
- Supply market challenge
- Skills & knowledge
- Number of people involved in deployment
- Clear decision owner(s)
The opportunity assessment chart is an aid to quantifying and prioritising the opportunities into quick wins. In developing the opportunity chart, validate, or ensure that all commodity team members validate, all related assumptions. Ensure too that there is a clear audit trail from the finding to the opportunity i.e. so that it can easily be shown how the opportunity was found.