Market knowledge power in procurement

SECTORS such as the stock exchange have tight controls on information since it can distort the market. On that understanding, information power in business can be used to influence others’ decisions and behaviours.

Effective procurement management also requires that procurement managers approach their roles with a high level view of supply markets and components that affect them. This is especially important because the role and nature of supply chains is evolving and players are increasingly embedded in complex and globally dispersed supplier networks. The supplier chains are increasingly multi-tiered and the buyer-supplier relationships are sharing multi-faceted relationships.

Satisfying organisational needs require proactive and planned analysis of supply markets that leads to effective selection of suppliers. The objective of the exercise is to deliver solutions that meet agreed and predetermined levels of organisational needs. Understanding supply markets becomes a very important piece of information for strategic sourcing.

Porter’s five forces is an effective tool for market analysis. The proactive procurement manager has to acquire extensive knowledge of the degree of competition in the market. Supply market structures range from monopoly to perfect competition and the structure of the market has a bearing on the availability of close substitutes and the power of the supplier or the buyer. Markets structures also influence the ease of entry and exit in a particular sector.

Procurement Management Concept on the Mechanism of Shiny Metal Gears.

High degree of competition creates more options for the buyers. More options, however, do not come on a silver platter, this implies more work for the buyer in the selection process, where it may be difficult to separate wood from trees and trees from forests. Another element attributed to high degree of competition is the option proactive buyers benefit from factors such as the speed of industry growth that promotes innovation that increases products quality and at the same time reducing costs.

Industries in competitive markets have a high capacity utilisation rate that facilitates easy absorption of overheads reducing the overall costs of production. Proactive and informed procurement managers understand their main product ranges in terms of matters such as diversity of the competition that influence switching costs in some instances.

Supply markets from the West are feeling the pinch from Eastern low cost manufacturers such as China and India. The traditional consumers of Western products are shifting focus to the East. The low cost manufacturing strategy of the East has eroded the competitiveness of traditional markets from the West.

Substitute products and services have given buyers more options. The options have also provided the much needed inclusion of environmental and social issues in procurement decisions making process. A good example is in the manufacturing of transformers, where the technology of porcelain bushing is being replaced by synthetic rubber that is more durable, easy to handle, since it is not brittle and has less weight reducing the ultimate price of transformers and hazard posed by porcelain when it breaks to the citizens.

Buyers also leverage the market when requirements are consolidated, industry standards emerge and bargaining power is inevitably increased. Buyers struggle in monopoly markets where there are fewer suppliers limiting the buyers’ options.

To gain from market knowledge, buyers must have an overall understanding of their annual purchase volume in relation to the overall market produce. This assists in the determination of the buyer’s control and power in a specific market. The information on annual spend also assists in the analysis of risks in the supply markets and buyers can effectively craft appropriate strategies to mitigate them.

●Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback:; Skype: nyasha.chizu

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