Stage III Article-3: Sourcing and Purchasing in perspective

My client X has around 500+ customers and it uses 600+ suppliers to serve them. Average value of turnover per customer is £31500 without deductions while average value of purchase per customer £18110 (These figures are exclusive of Salaries and other benefits that employees receive). Add to these the cost of sales, depreciation of capital goods that are indispensible for servicing these customers, etc and you can gauge the value addition happening at X.

Average spend per supplier is   £9500, not a big number; combine to this that top 10 suppliers take away 40% of business from X and you see where we are heading. It is really difficult to leverage on the scale and scope of purchases for any individual company within the group.

The group, all companies put together, purchases over 1500+ unique items, purchasing across wide geographies nationally. A supplier with strong presence in Midlands might have no presence in North, and supplier holding bastion in North might have skeletal presence in South-East or East Anglia. Add to these complexities a purchasing officer’s conveniences, necessity to keep suppliers happy for the sake of contingencies, etc then you get the picture of what I am up against. Purchasing officer here could be a field technician, purchase coordinator in office or a project manager. Also a substantial part of revenue, about 33%, is generated from contracting division whose major procurement is sub-contracted manpower.

How do you design an optimal sourcing and purchasing (S&P) strategy for the consolidated group without compromising on Quality, Speed, Dependability, Flexibility & Cost factors? But more importantly how can S&P strategy make a difference to the bottom-line? How can S&P improve cash-flow conditions for my client? How can S&P strategy align itself with the company’s short term and long term objectives? And most importantly what can S&P strategy do to enhance value to my client’s customers?

Stage I Article-5: Hostile Markets

A hostile market can be defined as ‘one which is associated with over capacity, low margin, intense competition and management in turmoil’ irrespective of industry type these finding have been found to be true.

Hostile Market

Don Potter’s (and not Michael E. Porter of Porter’s Five Forces fame) report suggests that outbreak of hostilities is triggered by two major factors:

·         Fall in demand – Caused by external event/s that affects the industry’s customers; consequently there is sudden over capacity of supply

·         Competitive expansion – competitive expansion occurs because new opportunities prop up providing high margins and profits or because competitors undercut each other’s competitive advantage due to fall in demand

Below I will discuss the six phases of a hostile market identified in the Windemere study following which I will, in next few paragraphs, show you how this definition fits in the context of X.

The six phases of hostility that an industry experiences is mentioned below and they may or may not necessarily occur in the order mentioned:

1.       Margin pressure – Low profit margins resulting from predatory pricing. This situation leads to asymmetric power shift towards customer, giving large customers extra bargaining power. Eventually competitors start looking for niche areas that comes from higher-margin smaller customers.

2.       Share shifts – Three factors account for this shift a. Industry leader or leading firms in industry hold on to premium pricing under false assumption that superior offering and customer loyalty will sustain premium pricing only to loose market share and spoil brand reputation over time. b. Flight to quality. c. Acquisition driven by desperation to achieve economies of scale.

3.       Product/Service Proliferation – Competitors compete for market share by attempting to generate value for the customer through product/service proliferation. Firms resort to bundling or unbundling of their offerings in an attempt to find niche. Bundling is achieved by adding features or functions to existing service or product while keep the price constant. Unbundling removes some of the features or benefits from the product or service and are then offered at lower price.

4.       Self-defeating cost reduction: In an effort to maintain margin firms resort to cost cutting measures that scuttles investment in product/service or quality improvements thereby giving unintended lead to competitors.

5.       Consolidation and shakeout: As a consequence of these externalities industry is forced to separate chaff from the grain. Consolidation happens in three waves: first, firms work hard towards reducing overhead by right-sizing the workforce, closing and consolidating facilities and pruning businesses. Second, Strong firms take over weaker firms in the markets thereby reducing the competition. Third, larger firms begin to collaborate to beat the heat.

       6.       Rescue: This is a long drawn and arduous process which leads to few players controlling large      chunks of market share. And typically is based on shift in industries entry and/or exit barrier arising through industry innovation or external intervention reigniting demand.

X in a Hostile Market

A Cursory look at Mechanical & Electrical (M&E) industry in UK will reveal that it is highly fragmented.  The following table, table 1, from a well respected market intelligence company Mintel indicates the number of VAT registered companies that operate within the segment of M&E in UK as of early 2009.

Table 1.

Table 1 shows that the sheer number of firms operating within M&E sector erode any competitive edge that any single firm may try to bring to the market; also given that these firms are of different sizes any differentiation strategy adopted will be hard to sustain.

As indicated in market fragmentation definition the tables below, table 2 and table 3, proves the point that profitability is unrelated to size. Table 2 drawn from Plimsoll Portfolio Analysis for M& E contractor shows that the industry has firms spread across a broad spectrum of sales growth; some firms are experiencing high growth while others are experiencing severe negative pressure.  Table 3 shows that the Top 50 companies in terms of sales growth range in their annual sales figure of over GBP 500 million through firm with just over a million in their annual sales.

Table 2.

 Table 3.

Given the above hard facts combined with ‘not-so-bright’ macro-economic conditions, and the internal situation of the company it is pertinent that X look at multiple dimensions to sustain itself in this hostile market environment; and may be decide to embark upon growth strategy based on market penetration, service market expansion and if possible, based on X’s ability to manage risk and make long term resource commitment, also look at vertical integration and diversification. The final recommendations made to X will be discussed in later articles.

The business strategy presented here is an opportunity for X to bring together its holding companies and device a common marketing strategy accommodating them all. Implementation of this strategy will demand commitment from all stake holders - existing private owners, current management team, employees and sub-contractors, to see it through the end. The greatest pressure on resource will come in the form of pressure on time and motivation to manage this change.

Internal changes triggered by adopting customer centric strategic market management will not and cannot happen in isolation. Similarly any business strategy change cannot be oblivious to its perils of present in the hope that a great plan for the future will somehow make the current problems vanish. This is why managing cash flow is as important for a firm’s survival today as its plan to grow market share or sales turnover or net profit or profit margins in the mid to long term; a marked improvement in a firm’s overall performance. A structured growth strategy will prepare an organisation and give it the confidence it needs to undertake broader reform in its business strategy.

Stage I Article-4: X the client

If you have been following my articles for a while now then you would have encountered X many times by now and would be wondering ‘Who the heck is this X?’

X – An Introduction:

Imagine cold winters without a room heater to keep you warm or hot summers without air-conditions to keep you cool and to keep your cool. Hard to imagine isn’t it? Simple necessities of life like heat and light that many take for granted in today’s world. But have you ever wondered who creates that comfortable, welcoming environment in your homes or offices or shopping malls and all other places that are an integral part of human habitation? The answer is linked to Mechanical & Electrical (M&E) industry always. Although this could mean an electrician operating out of his van or an AC technician working out of his one man office or it could even mean a multinational company with multi-billion £ turnover and thousands of employees offering you its world class state-of-the-art services.

X is part of UK’s mechanical & electrical industry. The company offers many services within the mechanical & electrical industry sector including designing, building and project managing HVAC & Mechanical services, AC & Mechanical CAD services, AC & Mechanical installations, AC sub contracting, HVAC servicing & maintenance, Electrical installations, Electrical testing & inspection, fire alarm testing, Portable appliance testing and other specialist services of electrical, air-conditioning, heating, ventilation and allied areas.

Mechanical & Electrical companies typically compete in broad markets with differing customer size and needs that may be geographically dispersed and that may seek differing service benefits. Market intelligence publisher Mintel puts the number of firms operating within M&E sector in the year 2008 at over 27,000 of varying sizes operating within UK.

As limited resources restricts organisations from serving the wide variety in customer demand effectively it is imperative for them to target specific segment/s of customer base that provides greatest opportunity for success. Current economic climate and the future forecasts make this ever more relevant for X’s survival.

Strategic questions such as: Which criteria should be used to define the market segment? Which segments provide X with greatest opportunity? What combination of benefits & costs provide the target segment the greatest value add relative to X’s competitors?  In addition to operational decision pertaining to pricing, promotion, service delivery design and distribution can be addressed by understanding the market structure that X currently operates in and ultimately chooses to compete in.  In the Business Process Change Initiatives (BPCI) that I am working on (follow stage III articles) I am trying to align X’s internal process with its market demand. I am mainly concentrating on Purchase, Procurement and Supply-chain elements of operations in Stage III articles.

X’s History

The history of X goes back to 19^th century. The company started as electrical contractors, installing telephones, electric bells and generators. During the past century the company has also sold and serviced automobile (electric & petrol), radios, TV’s, record players, refrigerators, Kitchen and many other appliances.

X today is a holding company based out of Leicester, UK. It has three major functioning companies with in -  A, B and C.

The Organisation structure of X before the change initiative is illustrated below:

The top level flow of control within X is illustrated below:

 

The Organisation structure illustrated above has undergone a Brobdingnagian metamorphosis as a result of Change management that was undertaken. Refer to Stage III Article 1 of a quick view of new structure. The objective of Stage I is to gradually walk you through key elements of transformation leading to a change in X’s organisation structure, culture and ultimately its standing in market.

Stage I Article-3: Project Plan

With ‘foundation’ in place the next step was to put up a skeletal framework, a Project plan.

A project plan breaks down the project scope in to series of actionable tasks leading in to the set final project objective. In doing so a project plan sets a baseline for time and cost measures and facilitates communication between stakeholders.

Prince2 defines project plan as "...a statement of how and when a project's objectives are to be achieved, by showing the major products, milestones, activities and resources required on the project."

Risk Management plan and Project plan are Siamese twins. A project plan is incomplete without factoring the risks that could possibly confront a project.

The following shows Project plan and Risk Management plan that I drew up for this stage. Some data have been withheld to protect their confidentiality.

 

Project Plan

Risk Plan