Know your supply markets through research and analysis

Roger OakdenProcurement, Supply Chains & Supply Networks

Supply markets knowledge

Obtaining a better deal.

Developing a skill in Supply Market Analysis should have the same level of importance within your organisation as obtaining quality-end user market intelligence.

While there is an established body of knowledge concerning end-user market research used by marketing departments, supply market research undertaken within Procurement remains a rare situation. But, the capability to negotiate a satisfactory deal is diminished if specific supply markets are not understood.

In my previous blog the elements that should form your Procurement Strategy were discussed. This blog discusses the element of Supply Market Analysis, which interacts with Strategic Sourcing as the two elements of Strategic Purchasing.

Supply Market Intelligence

To be effective, Supply Market Intelligence (SMI) must be designed to meet your organisation’s needs, as not all supply categories are researched on an equal basis. The wide range of information needed for supply market research and analysis requires data gathering from multiple sources to construct cost, technology, socio-economic and best practice information. Examples of common sources for data and information are:

  • Official government statistics
  • Market research and economic forecasting firms
  • Reference books and database
  • Internet search
  • Specialist magazines
  • Specialist conferences and seminars
  • Visits to trade shows and fairs
  • Chambers of commerce in specific locations
  • Supplier’s annual report
  • Suppliers promotion material and advertising

The value of information comes from the quality of its source; so government statistics in developed countries can be ranked high; Internet based data is very variable in quality and data provided by a ‘friend’ over lunch may be even less reliable (but should not be ignored).

The majority of publicly available market information is based on broad industry Standard Industry Classification (SIC) codes by country; however, an organisation’s sourcing activities are typically structured within specific item categories. These can be identified within either the United Nations Standard Product and Service Code (UNSPSC) or the NATO industry code. Work is therefore required to interface the information gathered through linking SIC and UNSPSC codes.

Supply market analysis

To provide valid information concerning a supply market requires analysis to identify what the data means. Procurement analysts must understand the category drivers and impact of events, such as potential material or labour shortages, current and future government regulations and technology developments.

Tools for supply market analysis include:

EPIC framework – ‘Economy, Politics, Infrastructure, and Competence’ is a methodology developed by the University of Tennessee. The framework measures and assesses the level of maturity of a geographic region with respect to its ability to support supply chain activities. It evaluates the maturity level for ten major trading regions that an organisation may operate within.

P.E.S.T.L.E (Political, Economic, Social, Technological, Legal and Environmental). A P.E.S.T.L.E analysis is a tool to analyse and screen the external environment (both end-user and supply markets) of your organisation, typically at the industry level. The explanation and examples available on the Internet only consider using the tool for end-user market analysis; however, it is applicable for supply markets. The six macro-environmental factors of PESTLE are interdependent, influencing supply chain performance and strategies.

Porter’s Five Forces for industry sector level analysis. Again, the explanation and examples available on the Internet only consider using the tool for end-user market analysis; however, it is applicable for supply markets. The five forces affecting a supply market are identified as:

  1. Supply market competitors – rivalry among existing organisations
  2. Potential entrants – threats and opportunities from new entrants
  3. Threat of substitute products or services and/or disrupting technologies
  4. Bargaining power of suppliers
  5. Bargaining power of buyers

LPI Report is published by the World Bank and identifies the Logistics capability by country. The main role of the LPI is to provide a broad indication of the largest gaps of a country compared with other countries, to create an awareness of the logistics situation. The index is calculated from six indicators:

  1. Efficiency of the clearance process in relation to the speed, simplicity and predictability of formalities by border control agencies
  2. Quality of trade and transport infrastructure
  3. Ease of arranging competitively priced shipments; indicating the availability of affordable international transport connections in a country
  4. Competence and quality of logistics services
  5. Ability to track and trace consignments when shipping to a specific country
  6. Timeliness, which indicates the frequency with which shipments reach the consignee within the scheduled or expected delivery time, thus measuring the reliability and predictability of the specific supply chain

These and other tools used for supply market analysis can become quickly outdated; therefore an organisation’s intelligence database requires updating on a regular basis i.e. a quarterly review.

Outcomes from using SMI

SMI within your organisation can be as basic or sophisticated as required, but the approach has been shown to provide a good return on the investment. Personal experiences from using SMI are:

  • Understanding the global physical market for copper and movements in the futures price on the London Metals Exchange (LME);
  • Identifying viable alternate shipping routes to overcome delays departing China in the pre-Christmas stock build period;
  • Knowledge of global R&D developments in long-life food packaging
  • Cost structure of the industrial packaging industry

In these examples, all the information gathered was publicly available, but to identify and structure it required diligent detective work. For this reason, SMI is a task best led by a specialist (librarians and retired intelligence agency analysts can be good,), with those who engage across the wider business community (such as Procurement and Sales) contributing supply market data and information. Research about individual suppliers should be a part of each buyer’s job.

Depending on your organisation’s needs, SMI can be undertaken with a long or short term view; it can be ongoing or project based and will use both quantitative and qualitative information gathered and analysed through desk and field research.

The output from SMI is to assist buyers in successfully doing their job, so it must be structured to achieve that objective. To enable each person involved in a SMI development to understand the objective, a briefing document (preferably one page) is required. This must identify:

  • How SMI will benefit the organisation and Procurement;
  • An indication about the range of information types available (but not a definitive list);
  • Access to internal information, external databases, specialist research firms, universities and public databases;
  • The weighting methodology for classifying accuracy of information

Establishing an SMI process does not automatically reduce procurement risks, but it does provide Procurement professionals with current information of supply markets and so strengthens their negotiating capability with current and potential suppliers.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...