Special Report: Better methods for supplier intelligence

Many companies profess to practice “category management” for key commodities or inputs, but taking category management to its fullest potential requires a dedicated and analytical approach founded on solid market intelligence. Supply chain category managers need to understand the market so they can help to contain costs and make long-lasting, strategic supply related decisions. In this regard, we have seen different organizations collect and analyze market data in many different ways. Unfortunately, many companies collect only the basics as reported in industry- and trade journals. For these companies, utilizing market intelligence more fully can help develop improved category strategies.

Levels of sophistication in the use and application of market intelligence vary in the global energy industry; however, three increasingly sophisticated approaches can dramatically improve category management practices – knowing the entire supply value chain, use of leading indicators, and using game theory to develop category positions. Each of these approaches relies on market intelligence. When done in this way, category management can earn a place as a valued collaborator in your company’s strategic decision making process.

The combination of supplier value chain analysis, leading market indicators and game theory creates a powerful toolset for category managers broadly described as “supplier market intelligence.” The power comes in the form of information that is forward looking, predictive, and constantly updated. This repeatable process creates a competitive advantage for those who have the discipline to invest the time and effort to truly learn about the supply market and competitors.  

Knowledge is power
True understanding of the market goes beyond merely knowing existing and potential suppliers’ capabilities. It requires an appropriate breadth and depth of knowledge of the entire category value chain. This level of market intelligence can be used to understand category and supplier economics, suppliers’ strengths and weaknesses, to set sourcing strategy and to help develop negotiation strategies with suppliers. It lays the foundation for a successful category management strategy.

For example, a review of a surface mining company’s sourcing and procurement operations revealed haul-truck tires as a strategic commodity. This made sense: not having tires prevents ore from being extracted. But there was no clear strategy around procurement. When pressed, it became clear that the lack of strategy was owed to a corresponding lack of understanding of the market’s evolving trends. Consequently, the company was put into a completely defensive position where adequate supply was at risk.

Certain information is critical to value chain market intelligence, including:

•    The supplier’s industry structure and dynamics. Gaining insights into the industry’s overall dynamics provides key intelligence around what is happening in the industry – e.g. which suppliers may be entering or exiting the market, whether voluntarily or involuntarily. New technologies that may affect a supplier’s industry are also important to recognize as they could change the way the sector works.

•    Familiarity with the entire upstream value chain (i.e. the suppliers’ suppliers). This knowledge can help identify potential problem areas where materials or services are in demand by multiple industries in the value stream. This should provide insights as to where the value chain needs to be monitored for supply.
 
•    Supply, demand, capacity, and associated economics. This is arguably one of the most important considerations for category managers to grasp. It will, in essence, help to combine industry understanding and structure with value chain activities.

Although an abundance of public information from various government agencies is usually available, obtaining it requires tenacity, creativity, and a strong analytical and business perspective from which inferences can be drawn to make business judgements. Other pertinent information often requires third party benchmarking and research.

Leading the way
Our experience suggests that thorough value chain analysis of leading indicators can provide category managers with one of the most useful tools in the market intelligence tool kit. Using this technique, skilled category managers obtain insights to develop a forward view as to when prices for their purchased goods and services could change.

This usually requires deconstructing the purchased product or service all the way up to the raw commodity inputs. This may require several iterations of a product’s inputs driven further and further upstream until the raw commodity levels are reached. A secondary requirement is to have an understanding of the speed with which price changes ripple through the system and the drivers that cause those pricing changes. Combining the upstream value chain with pricing sensitivities through the chain will set the base model for category managers to monitor.

Here’s an example of using leading indicators with manufactured steel products. Understanding the value chain for such a product quickly leads from fabrication facility to the steel mill, to the coking plant, to coal transportation to coking coal production. By monitoring the inputs as far upstream as possible and following the supply chain flow, pricing changes and sensitivities through to the final product, ascribing timing to these changes, the category manager can get an approximate view of when prices could change. Gaining this understanding can require a great deal of analytical effort. Sophisticated data analysis software can help to manage this workload, but due to the effort required, leading indicators should only be secured and analyzed for the most strategic of company inputs.

This knowledge can allow supply chains to take advantage of contract development, pricing, availability, and demand changes for products and services. The result is to change the thought process around supply chains, becoming proactive and leveraging the drivers of decision making to anticipate changes in input costs.

Game on
The final and most sophisticated use of market intelligence in category management is the deployment of strategic game theory, a set of mathematical tools that can be used to anticipate how organizations will interact with each other to further predict natural outcomes in which some players gain, and others lose, advantage. Subsequently, game theory can be used to proactively assess the desires of other players and predict the actions they will take and the sequence in which actions are likely to occur.

A basic requirement in game theory is to understand company competitors and suppliers in the market. Most companies already have a basic understanding but do not delve deeply enough to create a profile of the competitors’ or suppliers’ preferences for risk, capital spending, technology development, first mover advantage, and the like. Organizations also need to look inward to understand themselves, their decision styles, investment profile, and risk tolerances as well as the behaviours of their suppliers. External and internal insights are used to create scenarios that can help predict how changes to projects, products, costs, services, or suppliers’ capacity can affect the entire market, and, more specifically, your company.

Taking the plunge
Gaining market intelligence for category management purposes is hard work. It requires deep data gathering in the public domain and possible benchmarking on the industry, its players, suppliers and stakeholders to identify supply chain value drivers and decisions around how much market intelligence is actually required. The strategic importance of the category usually will drive that decision.
    
Now is the time to invest in market intelligence.  Although these steps sound simple enough, developing a sustainable market intelligence program needs to be a well-planned priority for the organization in order to realize its value. With the global economy showing signs of recovery, many companies will be looking to their growth plans trying to optimize their category strategies. An investment in market intelligence now may provide the critical knowledge necessary to capitalize on the market and competitors to create a truly unique value proposition for growth and sustainability.  

By Chris Lange and Shane O’Farrell, Deloitte
Chris Lange leads Deloitte Canada’s Supply Chain Consulting practice in its Calgary office. He can be reached at clange@deloitte.ca. Shane O’Farrell is a senior consultant in Calgary and can be reached at shofarrell@deloitte.ca.

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