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From the coalface

From the coalface - an industry perspective on understanding the supply market and its implications
Hello, my name’s Neill Carruthers. I’ve been a contracting and procurement professional for 25 years, working in a number of different sectors. In that time, I’ve always held the view that the set of skills that you acquire within that can be applied to a number of different categories, a number of different industry sectors. And the first step I’ve always considered is getting that clear understanding of what it is that you want to buy. Put quite simply, tell me what you want to buy, and I can try to buy it for you. The detail within that is obviously the challenging part.
And that really comes through working with people within the organisation, within the stakeholder group from people who are involved, to understand what that internal analysis, that demand requirement, might look like. What represents these sources of value to people, often characterised as perhaps a trade off between time, cost and quality. And within that balance of those different factors, often lies the challenge. So being able to work effectively with internal colleagues to understand what their demand requirements are, how that may play out into the market, in terms of what the market can offer, is an important point.
So when considering sourcing procurement strategies for any given category of spend, it’s important to try and understand what that organisational context is, what those primary drivers of value may be. And those naturally will vary from organisation to organisation and sector to sector. But typically, a lot of the areas to think about will be risk, complexity, often value for money is a phrase we hear a lot about. But it’s sort of very much like beauty, it’s in the eye of the beholder. You know what does that really mean? What constitutes value for a different organisations? And different sectors, as I say, will vary according to that.
You can look at some which are related to retailing, oil and gas, where the drivers may be all about time to market propositions. People will be prepared to pay more for being able to realise revenues quicker. In other sectors, margins may be somewhat tighter, so as a result there they might be a more proportionate focus on input costs as a result. So having considered some of those high level value drivers, it’s then important to consider what some of the factors are that start to drive that, that informs the approach you adopt. And then a big element of this is obviously the very different nature of markets in which you may be sourcing. So a number of things to consider there.
To what extent is there… what’s that buyer supplier power situation there? Is this a buyer’s market? Is this a seller’s market? Some different markets will exhibit different characteristics. And indeed, those markets will very much change over time. They’re very dynamic in nature. To share an example of one of the projects I was involved in was a big 1 and 1/2 billion pound plus fixed telecoms network. The time that we were procuring for that, it was either side of the peak of the market back at the early part of the 2000 decade. And the market very much fell from being a seller’s market to a buyer’s market.
Now that can have its advantages, but it also highlights the nature of which markets move very quickly and then that you have to respond. And whilst on the face of it that might appear to be a very beneficial situation from a buyer’s perspective. It’s not without risk. Because what you’re looking to understand is what those market implications are for the security of the suppliers that you may have. So that’s one element to consider. I think also it’s also understanding how the degree of intensity of competition that exists within the marketplace that you’ll be looking to buy in and indeed you perhaps are operating in as an organisation yourself.
So some of the other factors that start to come into that then, it may be a competitive market, but what’s the ease with which you can potentially bring new suppliers into those markets? And one of the factors to consider within that may be the regulatory conditions under which you’re operating. There could be organisations who actively provide these goods and services in other parts of the world. But if there are regulatory hurdles, obstacles, or issues, processes through which you have to go through to be able to introduce those organisations, then that’s a factor to consider.
Also looking at some of the nature of the goods and the services that you may be buying, what’s the degree of ease with which you could substitute one of those for another? So in lots of sectors, that is fairly high. You can look at aspects of civil engineering, for instance, and say, this is where we could bring people in from highways to look at building bridges and tunnels, perhaps in other industrial sectors. However, as you start to get into perhaps some of the more of the systems related elements, those are likely to be less straightforward in which to be able to introduce new technologies with different systems, integration and validation issues that have to be considered.
So one of the concepts that lots of people talk about is this idea of segmenting perhaps different relationships. Now that’s focusing on those which are going to be these primary drivers of value. So one of the ways in which to look at that perhaps is the degree of spend. Naturally, you look at focusing your efforts on those where you can obtain your greatest return. So targeting those high value elements will be a way, in which if you can make single figure percentage reductions there, it’s naturally going to create a greater benefit than perhaps it is in other areas where the spend levels are relatively lower. It’s not always as simplistic as that.
Because what you actually may find is that some components are more critical in nature, the fact that there may not be as plentiful a range of supplier of those. And you may feel that you have to focus a disproportionate amount of effort. And these all have different implications for then how you might contract for those different aspects. I think another interesting thing to consider as well is the impact on your business operations of disruption perhaps in some of the supply of these different goods and services. Some will have a more direct impact on your service offering to customers than maybe for others. I spent a lot of my career in the railway industry.
You could look at some of the disruptive elements there that would have an immediate impact on day-to-day train operating conditions and that would naturally have a great degree of focus in the organisation around reputational risk, as well as financial issues. You can look at other sectors and those would be more of a medium to longer term issue, for instance, about building more capacity. So again, strategically still important, but they won’t necessarily have that same impact on day-to-day operations. So having considered some of the internal analysis and the demand requirements, it’s then important to consider how to best prioritise resources to focus on some of that.
And one of the ways to do that is to look at grouping those requirements according to some of those factors that we’ve spoken about, in terms of value, risk, complexity. And understanding the criticality of some resources more so than others. What’s also essential then is to really understand those markets in which you’re operating. Now that can be done through some supply market engagements, supply market intelligence gathering, knowing who those sources of supply are from industry associations, as well as that knowledge that you already have and trying to build that picture through that engagement process of what the aspirations of different suppliers may be in that market.
Where it then becomes quite fascinating is how that feeds through into the strategy development, how you actually want to go and buy those various goods and services. Do you want to have a range of different contracts operating independently with different companies? Or do you actually want to look at more multiple sourcing activities where companies are providing an integrated service offering to you? And that will also feed into the ability and capability of your own organisation to be able to manage contracts in different ways. And in certain industrial sectors, and particularly the infrastructure one, in which I’ve spent a lot of time operating, those are very critical decisions.
In effect, they’re thinking about make or buy decisions as to how they manage some of those contracts. And that would feed in to then, am I in a position to manage six different contracts? Or do I really only want to be able to manage one contract and have people provide that coordinated service to come through? So bringing all of those things together, in terms of market conditions, in terms of the organisation’s ability to manage across perhaps different interfaces, thinking about risk, thinking about value, that starts to feed into how one might go about contracting for that.
So one of the ways to think about is, what’s the degree of risk transfer perhaps that you’re looking to transfer to the supply market? Because the greater that may be, that’s going to have implications for the principals reimbursement, the pricing mechanisms that you may look to operate in. Again, reflecting on some of my experience in the infrastructure market, the nature of that often is that you’re approaching the market at a time where there are still significant degrees of uncertainty around aspects of the project.
And what I’d say is that what you don’t necessarily want to be doing in that situation is looking at excessive risk transfer contracts where perhaps you may be paying a hefty premium for the transfer of that risk. One of the other factors to consider as well is that need for a responsive supply chain, being able to cope within sectors which inherently there is quite a dynamic demand position, coping with emerging requirements. So some of the things to be thinking about within those situations are how that information is shared in such a way that allows, what may be quite complex supply chains, to be able to adjust and to respond to those situations.
And again, that will have implications for your contracting arrangements, and for how your looking to manage those situations. So a further factor to consider is the importance of being able to adjust to changing demand requirements for any organisation and the implications for its supply chain. An example from a manufacturing point of view, which I was closely involved in during my career, was one following a particular rail incident, Hatfield in the early part of the 2000 decades. The net effect of that was the organisation having to double demand for a lot of manufactured rail components in a very short period of time. And that was a significant challenge for the organisation and for the supply industry.
For one thing, what it showed is that there was a lack of understanding about the multiple levels and some of the constraints within the supply chain within that organisation and how they had to step down a tier into the supply chain to be able to effectively control and manage that. And when you looked at a lot of the materials, requirements issues associated with that, communicating that through the supply chain, putting in the necessary arrangements to mobilise the resources to meet that demand. Also feeding back into the business criticality aspect for the organisation, recognising that there was that prioritisation process whereby components would have more value in being deployed more quickly in parts of the network in some areas than others.
And that was primarily driven through numbers of passengers, line speeds, capacity type issues. So getting a supply chain of multiple tiers distributed throughout the UK, responding to that doubling of demand, was a significant challenge. But I think an interesting case study for any organisation looking at how it can cope with emerging and changing demand requirements in a dynamic environment. So we’ve explored a number of different aspects from the perspective of the internal organisation and the demand requirements, how those might change according to the operating circumstances of the organisation. We also explored some of the nature of different markets, how the degree of competition that might exist within those different markets.
And what all that does, then, is come together, in terms of how you can make strategic choices as to what the different approaches are. So the conclusion, from having examined a lot of that in terms of the value and the risk tradeoffs, is that there are some opportunities which you can exploit fairly straightforwardly in the marketplace. There’s not a great deal of senior management focus that needs to go onto it. The degree of competition is healthy. In other areas, there might be a case of their significant buyer power. And what you can actually do is use that competitive market to good effect. Equally, there may be situations where it’s very constrained.
And for small values of purchases it’s a criticality of supply issue. And perhaps there what you’re looking at doing is trying to tie in those suppliers to longer term agreements, open book costing, understanding and trying to manage those different risk elements and provide the comfort to those particular suppliers that they need, but equally securing the long term future in those critical supply areas for yourselves. And then you’ve probably got that area where the nature of the agreements is going to be more strategic. And perhaps that takes on a partnering or collaboration focus. That might involve a greater degree of joint risk sharing, both in terms of opportunity and threat issues.
Perhaps a longer term nature, a more integrated management arrangement, in terms of the delivery model that helps to align the interests of the different parties. So hopefully that’s given you a range of different things that you can think about when trying to marry those different market environments in which you may operate alongside your own demand requirements.

In the above video Neil Carruthers, a strategic sourcing practitioner, talks about the supply market and relevant factors under consideration.

Building on understanding the nature of value (what needs to be bought) Neil introduces aspects of supply market risk and complexity, which act as key inputs for shaping the sourcing strategy.

Talking point

  • How would your approach differ to understanding the supply market for a simple low cost item vs. a high cost complex or bespoke item?

After hearing from Neil, consider how much effort would you expend, and what range of topics or issues would you want to understand in determining supply market risk and complexity, and any other factors as an input to the sourcing strategy decision?

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Supply Chains in Practice: How Things Get to You

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