This document provides an overview of applying automotive best practices in commodity strategy development and supplier relationship management to the banking industry. It outlines tools and approaches for conducting a portfolio analysis, developing an ideal sourcing strategy, assessing gaps between current and ideal practices, and implementing action plans. Key aspects include conducting workshops to analyze spend and position commodity groups, developing strategies based on a hexagon analysis of power regimes, using matrices to select the best-fit strategy, and creating a standardized tracking tool to monitor progress.

1. ATR Consulting Limited
Category Strategy Development & Implementation
Tahir Rafiq
April 2013
Applying automotive best practice in the Banking Industry.....
Author : Tahir Rafiq
Project Start Date:
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2. Contents
Category strategies & supplier relationship management 1
Baseline :- Portfolio analysis 2
Ideal positioning (Using PFA) 3
Adopting a strategy based on power regimes (Hexagon Analysis) 4
Commodity strategy matrix using the hexagon analysis 5
Adopting a strategy based on power regimes 6
Developing the right commodity strategy 7
Assessing the gap between ideal sourcing strategy and current practices 8
Implementing strategy & action plans 9
Appendix A 10
Appendix B. Glossary 11
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3. Category strategies & supplier relationship management
Portfolio analysis workshop out put
Out put of workshop Category positioning matrix ( tool)
10.00
An analytical (excel) tool was used to Position the
material groups on the Portfolio Matrix.
9.00
Based on the following weighted variables
 Spend
8.00
 Number of Suppliers
 The level of competition
 Number of Buyers 7.00
 The Buyers Search Cost
 The Buyers Switching Cost 6.00
 The Suppliers Switching Cost Value ($)
of Spend
 Product Complexity 5.00
 Number of Substitutes
 Buyers Spend as % of Suppliers T/O
 The level of Importance to Supplier 4.00
A workshop was held with the Contracts
Department & The Purchasing Department to 3.00
determine the position of each material group
A workshop was held with the Contracts 2.00
Department & The Purchasing Department to
determine the position of each material group on
1.00
the material
This is an iterative process and this exercise should be
conducted on a regular basis i.e. The more times it is 0.00
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00
performed the more accurate the out put will be.
Supply Risk
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4. Baseline :- Portfolio analysis
Examining buyer – supplier power dynamics
Potential approaches to buyer supplier High
relationship management
B=S Buyer Supplier Inter-
B>S Buyer Dominance
2. B > S 3. B = S dependence
Leverage – Focus on Short Term Relationship
Use competitive tendering to reduce cost and
consolidate volume
Leverage Strategic
Strategic - Focus on Long Term Relationship
Ensure availability of supply, focus on relationship Buyer
Power
building, process integration and innovation
Tactical Bottleneck
Tactical – Focus on Short Term Quick Wins
Simplify and streamline purchasing process, reduce
number of suppliers and simplify ordering
B0S Buyer Supplier B<S Supplier Dominance
Bottleneck - Focus on Long Term Security of
Independence
Supply
Search for alternatives, seek new suppliers, reduce
dependency on current supplier Low
Low Supplier Power High
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5. Ideal positioning
Adopting strategies to optimize power
Adopt following strategies..... High
The best place to be 2. B > S 3. B = S
L
Maintain position
L S
S The second best place to be
Maintain position but shift
Long term to leverage
Buyer
Power
Consolidate with other
T
Material groups & shift up
B Reduce dependency on the current
Supplier base .
 changing the specification
 Finding alternative suppliers T B
 Encouraging new suppliers into the
 market
 Consolidating with other material
Low
 groups
Low Supplier Power High
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6. Adopting a strategy based on power regimes (Hexagon Analysis)
Example of typical levers have been identified for the various sourcing approaches
Exploit Buying Power Create An Advantage
Exploit Create An
Buying Power Advantage
Consolidation Specification
• Supplier Rationalization • Rationalise/standardise product(s)
• Consolidate volume across Business • Product Substitution
• Redistribute volume among suppliers • Apply product value analysis
• Combine volume from different • Apply product value engineering
commodity group • Use functional/ output specification
• Rationalize/standardise parts • Examine life cycle costs
Consolidation Specification
Cost Leadership Joint Process Improvement
• Benchmark prices regularly • Optimise physical material flow
• Renegotiate/rollback prices • Support supplier operations improvement
• Un-bundle prices Cost Joint Process
• Develop long-term contracts
• Use competitive bidding Leadership Strategy • Share productivity gains
Improvement
• Use commodity hedging/trading • Integrate logistics
• Compare total cost among potential • Cost reductions
suppliers • Product Innovation / Development
• Base pricing on profitability Global Relationship
Sourcing Mgt
Global Sourcing Relationship Mgt
• Expand geographic supply base • Analyse core competencies
• Examine new suppliers • Employ strategic alliances/partnering
• Capitalise on currency fluctuations • Co Investment
• Take advantage of trade incentives • Vertical Integration
• Low cost country sourcing
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7. Commodity strategy matrix using the hexagon analysis
Category strategy matrix
Strategy Core Activities 1 2 3 4 5
0-20 20-40 40-60 60-80 80-100
Consolidation a Purchasing is Coordinated through a central Point O √ √ √ √
b Percentage of Spend Negotiated by Volume Leverage O √ √ √ √
c Combining Volumes from Other Material Groups O O O √ √
d Redistributing Volumes Across Suppliers O O √ √ √
e Pooling Volumes Across Business O √ √ √ √
f Future Volumes through Demand Forecasting O O O √ √
Cost Leadership a Competitive Bidding √ √ √ √ √
b Total Life Costing O O O √ √
c Continuous Benchmark O √ √ √ √
d Renegotiate & Rollback Pricing O O √ √ √
e Unbundle Prices O O O √ √
f Commodity Hedging & Trading O O O O √
Global Sourcing a Multi Region Sourcing O √ √ √ √
b Taking Advantage of Trade Incentives O O O √ √
c Capitalising on Currency Fluctuations O O O O √
d Alternatives sourced from broad Gloabl Supply Markets O O O √ √
e Taking Advantage of Low Cost Country Sourcing O O √ √ √
Specification a Change or improve Specification O √ √ √ √
b Apply Product Value Analsysis O O O √ √
c Use of Out Put / Functional Specification O O √ √ √
d Standardise Specification O √ √ √ √
e Jointly Optimise Specification with suppliers O O O √ √
Joint Process Improvement a Level of Information Sharing O √ √ √ √
b Structured Improvement Process with 1/4 Reviews O O √ √ √
c Joint Process Teams working to reduce costs in SC O O O √ √
d Level of Support Given to Supplier Operations Improvement O √ √ √ √
e Integration of Processes & Systems O O √ √ √
f Integration of Losgistics O O O √ √
g Product Innovation & Development O O O O V
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8. Adopting a strategy based on power regimes
Typical levers identified for various sourcing approaches
Relationship Type Category Positioning 1 2 3 4 5
100 % 100 % 100 % 100 % 100 %
Transactional
No Supply Arrangements
No Contracts in Place
Spot Purchasing
Playing the Market √ O O O O
Short Term Opportunistic
Buying Power is leveraged to get Lowest Cost
Short Term Supply Arrangements are in Place
Exploit Market Competition
O √ O O O
Collaborative Relationship
Minimise Cost & Maximise Service Levels
Medium Term Relationship
Ensure Supply Continuity
O O √ O O
Partnering
Medium to Long Term Relationship
Maximise Benefits to Both Supplier & Buyer
O O O √ O
Interdependent Strategic Alliance
Long Term Relationship
Risk Sharing
Co Investment
Committing Volumes
O O O O √
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9. Developing the right commodity strategy
Selection criteria ( matrix)
Best Fit
Commodity Strategy Exploit Buying Power Create an Advantage
Scoring Matrix
5 = High value 1
= Low value
Tactical Leverage Bottleneck Strategic
Consolidation 3 5 1 2
Cost Leadership 5 5 2 2
Global Sourcing 3 5 2 2
Specification 1 2 5 4
Joint Process Improvement 2 2 4 5
Relationship Mgt 1 2 3 5
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10. Assessing the gap between ideal sourcing strategy and current practices
Gap analysis
Commodity A Current Approach Target Approach Gap Analysis
Consolidation 3 5 2
Cost Leadership 2 5 3
Global Sourcing 2 5 3
Specification 2 2 0
Joint Process Improvement 1 2 1
Relationship Mgt 2 2 0
Overall Score 9 21
Rating 43 %
Category Scale 20-40%
0% 0 – 20 %
Low gap Small Strategic Gap Ratio – All applicable approaches have been applied and
20 % 20 – 40 % have yielded considerable results already
40 % 40 – 60 %
60 % 60 – 80 % Large Strategic Gap Ratio – There are a number of applicable approaches
Very high which have not been applied, or which have been applied without success
80 % 80 – 100 % gap
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11. Implementing strategy & action plans
Standardized tracking tool
Example . Electrical Category
Material Joint Process Relationship
Group Sub Material Group Consolidation Cost Leadership Global Sourcing Specification Improvement Mgt
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
A C T C T T C C T A
Electrical Hand Tools
C C T C T A C T A
Electrical Automatic Hand Tools
C C T C T A C T A
Electrical Alkaline Batteries
C C T A A C T C T A
Electrical Rechargeable Batteries
A T C T C T T C C T C T
Electrical Accessories
T C A A C T C T C
Electrical LED Flash Light
C T C T C T T C C T C T
Electrical Flashlight
T A C T C T T C C T A
Electrical Standard Wires
C T A A C T C T A
Electrical Energy Savings Lighting
C T C T C T T C A C T
Electrical Switches
C A C T C T T C C T A
Electrical Diodes
C T C T C T C T C T A
Electrical Connectors
Current position Target Position Objective Achieved
A Achieved T Target C Current Position
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12. Appendix A
Action Plan (How to use the tool)
Conduct a Portfolio Analysis Exercise on a. The Material Group
Start Point b. On The Sub Material Group
For each Material Group / Sub Material Group determine the current approach against each of the six criteria in the Hexagon using
Step 1 “The Commodity Group Positioning Tool” This activity should be conducted jointly with SRS and Purchasing / Contracting
Determine the type of Supplier Relationship (Consult the Portfolio Analysis to see where the commodity is positioned) that you need to
Step 2 have with the supplier of this particular Commodity Group / Sub Group. Use the “Supplier Relationship Tool” to establish this.
Using “The Best Fit Strategy Tool” compare the current approach against each of the six criteria with Best Practice.
Step 3
Using “The Gap Analysis Tool” determine the size of the Strategic Gap, between the current approach and Best Practice.
Step 4
Using the “Commodity Tracking Tool” plot the current position, the target position and monitor the progress on a monthly basis.
Step 5
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13. Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)
Term Explanation
Supplier Rationalization Reducing the number of suppliers
Consolidate volume across Business Add all the requirements together from different parts of the business i.e. Manufacturing, maintenance, IT etc to increase the volume
of spend.
Redistribute volume among suppliers Change the level of spend with existing suppliers i.e. Split the business 75% to 25% between two suppliers to increase competition
Combine volume from different Adding together several related commodity groups to increase volume of spend, reduce the number of suppliers
commodity groups
Rationalize / Standardise Parts Reduce the number of parts , by using standard sizes / specs i.e. Use one standard bearing instead of several different bearings which
may all be similar. This will help to consolidate volumes and increase leverage when negotiating with the supplier base.
Cost Leadership Is when price is the main focus for a particular commodity group
Benchmark Prices Regularly Compare the prices on an annual basis by going out to the market and getting other suppliers to quote for the business
Renegotiate / Rollback Prices Renegotiate with existing suppliers, if the market conditions are hard and the company’s profit margin is being reduced. i.e. ask for
cost reductions. Rollback Prices, ask the supplier to reduce the costs so they are the same as two years ago for example.
Un-bundle Prices Ask the supplier to break the suppliers costs down into components i.e. raw material, logistics, manpower, admin, etc. This is so that
you can determine the level of profit they are making, if it is too much then they are taking advantage, if it is too little then they could
be making a loss.
Competitive Bidding Getting more than two suppliers to compete for the quote / business
Commodity Hedging / Trading Agreeing to buy from the supplier so much of a product, at an agreed price at a fixed point of time in the future. Trading is when you
buy a commodity for your own needs plus some extra, that you can sell to other buyers for a profit
Compare total cost amongst suppliers Comparing prices between several suppliers, based on the cost of goods, the maintenance and after care support, the servicing costs,
the replacement cost, the life and the usage of the product (i.e. How long will it last and how much use will get from it)
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14. Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)
Term Explanation
Base pricing on profitability Set a limit for an acceptable profit margin for the supplier i.e. 10% and agree that the supplier will only make 10% and no more. You
will have to be very careful and analyse the suppliers costs to make sure that he is making only the agreed profit margin and no more.
Expand Geographic Supply Base I.e. If you are only buying from one region, then you need to include other regions, i.e. From western province, increase to eastern
province. If you are only buying from one country in Europe increase the area to the whole of Europe.
Examine new suppliers Look for other suppliers, examine their products etc
Capitalise on currency fluctuations Look out for the exchange rates going up or down, it is best to buy when the exchange rate is high and in your favour, this way you will
have greater purchasing power (i.e. You can buy more things)
Take advantage of trade incentives Some countries have special arrangements with Saudi Arabia, i.e. They do not charge tax, or tariffs, they do not charge the
manufacturers export duties if they export to KSA etc. Or some other benefit, you need to investigate these benefits .
Low cost country sourcing Countries that have cheap labour rates, or access to cheap resources, that can manufacture goods at lower rates than other countries.
Product Substitution Change one similar product with another one, could be based on Brand, specification, or a different product altogether that does the
same job
Product value analysis Is looking at the function(s) of a product and the cost of achieving that function, the functions are broken down into primary and
secondary, primary functions are the ones that the product must have and the secondary ones are the one that we can delete as they
are not necessary , the ideas is that by deleting the secondary functions we will reduce also the cost.
Product value engineering Similar to the one above, but the emphasis here is on optimising the performance of the product, to increase its life, increase its quality
and also to reduce its cost, through technical / engineering teams.
Functional / Output Specification Only concentrate on what the product is required to do and the job it should perform and not the make up of that material, leave that
to the supplier, we are only interested in the use of the product.
Examine Life Cycle Costs Life Cycle Cost is the total cost of ownership over the life of the product, it includes, the acquisition cost, the logistics cost,
maintenance, repair, the amount of usage, etc.
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15. Appendix B. Glossary (Meanings of terms used in the Hexagon Analysis)
Term Explanation
Optimise Physical Material Flow Improving the coordination of logistics between us and the buyer, looking at how the material is passed through the suppliers
organisation and the transformation process (manufacturing process) then out to us and then how does it pass through our
organisation
Support supplier operations improvement Looking at ways of working with the supplier to improve their systems and processes together as a team
Develop long-term contracts Long term contracts are typically more than three years
Share productivity gains By working as a team with the supplier to reduce costs, or improve quality, or knowledge , the benefits should be shared with the
supplier.
Integrate Logistics Better coordination of transport of goods between us and the supplier
Cost Reductions Working with the supplier to reduce costs
Product Innovation / Development Working with the supplier to develop or design new products
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16. End of presentation
Tahir Rafiq
Feedback would be greatly received and appreciated
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