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Analysing the Supply Market for Effective Procurement

Knowledge about the related supply market in the industry is a vital part of every sourcing process. This knowledge can be gained by performing a supply market analysis which aims to identify market characteristics for specific goods or services, key suppliers, and the competitiveness of a market. The supply market analysis has a big impact on the success of a company’s procurement initiatives.

Analysing the Existing Supply Market Structure

This analysis can be done by defining the market segment into commercial, technical, and/or geographic segments which will help in targeting the relevant suppliers. Once the market segment is defined, the procurement team will determine the size of the total market in terms of sales and volume/turnover.

The size of the total market can be further broken down at an international, national or regional level. After that, the key suppliers and their respective market shared are studied. This is to determine whether the market is dominated by a small number of suppliers. The number, size, and distribution of suppliers in the market will affect the negotiating power of a company as a customer.

Swiss Watches: Estimated Market Share by Brand in 2019 (Retail Value)

Pie Chart
Pie Chart created by Eve Koo Fong Wei, SIPMM (2021). Reference from https://watchesbysjx.com/2020/03/swiss-watch-industry-report-2020.html

The analysis will also determine the number of other companies which are selling the identical product. This market concentration can be defined as Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly. The perfect competition market will require low concentration while the monopoly market will require extremely high concentration. The level of profitability of a product or service can be determined by the increase or withdrawal of the suppliers. An increase in the supply of a product or service may indicate high profitability.

Analysing the Product Characteristics

This analysis studies the cost-price analysis, product innovation, product trends, and product life cycle consideration. The cost-price analysis will investigate material-cost, direct labour costs, overhead costs, and the profit margin of the product. The product innovation is studied to supplement or complement existing product portfolios with the objective of forecasting future development and crucial for determining the market leaders. A product’s future development will be influenced by the product trend. The product life cycle will be taken into consideration because suppliers will imply different marketing strategies at different stages.

Analysing the Supplier Competition

This analysis studies the competition of suppliers in the market. This will provide essential information about the trend in the supply market such as the availability and pricing of products now and in the future. The features that the suppliers compete on are price, service, distribution, product types, and brand image. Some suppliers will compete heavily on pricing in the industry but may compete on quality in different industries. The type and level of barriers to entry and exit in a particular market will affect the competition among suppliers. Suppliers are likely to compete on product type and brand image when the barriers to entry are high, and price when the barriers to entry are low. Different strategies will be applied depends on the stage of a product’s life cycle, example suppliers will compete on the efficiencies and cost during growth and maturity phases. Examining the competition of suppliers can help a procurement team in making more informed decisions and plan more effectively.

Analysing the Supply Chain

A supply chain consists of all the parties involved in the process of creating a good or service from input through production, distribution, and marketing to the end-user. The purpose of this analysis is to determine what value is added by each layer of parties in the supply chain, the dependencies in the supply chain, the risk that the supply chain pose, and how these dependencies and risks can be managed now and in the future. As an additional layer of the supply chain will incur a cost, a procurement team will determine whether the value-adding is higher than the cost incurred. If the cost is higher, a company should develop a product in-house or directly purchase from higher upstream in the supply chain.

A procurement team will also need to be aware of supply chain dependencies and the impact if a dominant supplier restricts their supply or performance become unsatisfactory. This includes studying the handling, storage, and transportation of the product from harvesting/production to the end-user, the selection of transportation modes and routes, and the frequency of shipments. This analysis can assist a company in developing an effective procurement strategy for managing the supply chain value, risks, and costs.

Big Data Analytic for Procurement Decisions

Big supply chain data analytic uses data and quantitative methods to improve decision-making for activities through all supply chain stages. It analyses all the processes from purchasing the raw material to final delivery to the end-user. It aims to help a company to manage inventory intelligently, deliver to the customer efficiently, and minimize costs and delays. There are four types of supply chain analytics – descriptive, diagnostic, predictive, and prescriptive. In summary, the big supply chain analytic assists the procurement team track operation (descriptive), figure out the reason for the disruption in the supply chain (diagnostic), forecast how the operation will be in the future (predictive), and suggest what might be best solutions in procurement (prescriptive).

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Wong Kok Wei, DPSM. (2018). “Importance of Strategic Sourcing Skill for Effective Procurement”. Retrieved from SIPMM: https://publication.sipmm.edu.sg/importance-strategic-sourcing-skill-effective-procurement/, accessed 16/3/2021.

Eve Koo Fong Wei, DPSM
Eve Koo Fong Wei, DPSM
Eve Koo has several years of experience in the specialised field of purchasing, specifically for the stainless-steel industry. She holds an International Diploma in Business in 2017 and an International Diploma in Business Administration in 2018. Eve is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). She completed the Diploma in Procurement and Supply Management (DPSM) on March 2021 at SIPMM Institute.

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