Welcome to week 2. This is going to be industry level. As you recall, last week we looked at the macro level. That's the strategic level. We used a tool called PESTEL that you've seen before our strategic sourcing. We're now going to go to the industry level, and we're going to basically look at three different tools to help us in the industry level supply market analysis. So the three are going to be supply market segmentation, five forces, and supply chain mapping. I'm going to go through all three of these in detail, just to comment on supply market mapping as we talked about it in the last course. This can be used to look for opportunities, but also looking for risks. So in the risk management area, you can use the same tool to identify in a particular industry, what some of the risks are, or in a supplier. So let's go ahead and get started. So this is supply market segmentation, and what you typically do is you have a list of criteria that you want to look at, maybe yourself or a team or a cross-functional team, and you're going to try to do what we call two-by-twos, looking at various criteria. So in this case, we're going to look at product line versus geography. In the area of product line on the left-hand side, we're going to look from niche players up to full service players. On the geographic side, we're going to look at local versus global. Now, if you ask what you can have all sorts of criteria. You have to decide which ones you want to look at and what the range will be, i.e., local to global for each one of the criteria. I should tell you up front before we go through the example that there are softwares out there that will do this and suggest various criteria for it. So take a look on the Internet and just look under supply market segmentation and you can utilize that software to do this for you. So in any case, let's look at a real example to try to understand. So this is maintenance, repair, and operating supplies, otherwise known an MRO, very common that you would have things like this in the support manufacturing. So in this particular analysis, you or the team decided to look at product breadth from a single product line to a full MRO line suppliers, and you looked at it similar to the last chart, geographic scope, local versus national. You can see here that if you look at single product line and local, you got people like Kern Electric and I don't know them, but Dooley Tackaberry, these are local suppliers. On the other end of the spectrum, in the upper right-hand corner, we have full market MRO and national suppliers, people like Grainger and McMaster Carr. If you work in plants, you probably know these names. So you can take a look at these segment dimensions or look at others. You and the team can just plot just by now. This one, a particular segmentation goes a step further, and color code is hard to see here in the black and white photo. Color codes the different type of suppliers, not all suppliers are equal. Some of them, for example, might be good PVF suppliers, other might be full Internet type suppliers. So whatever you're looking at, you can color-code and go take it a step further. So you might say, "Well, what's the right answer here?" Like I always do, it depends. If you're looking for a local supplier down the street, you would be able to get something in five minutes. You might want to go with a local supplier like Kern Electric. I don't know. On the other hand, if you want to write a national agreement for all suppliers in the United States, you might want a national supplier that has a full service, people like Grainger or McMaster Carr. So you and the team need to think about it, but by plotting them like this gives you a pretty good idea what the supply market looks like. So the next one is Five Force analysis. As I mentioned earlier, this is called Porter's Five Forces. Teach it very commonly in MBA schools, and it's generally used on a customer-facing analysis, but it all equally well has works in procurement, it's just the reverse. So people have adopted the five force analysis that they used in marketing or business strategy courses, and used it in supply chain and procurement courses. So what your goal here is to try to determine what's the potentials in the market and what are the risks. We're going to go through each one of these individually. So the first one, bargaining power of the suppliers. So how many suppliers out there? Is there a lot of competition? Is it difficult to switch from one supplier to another? So what you're looking for here is that the lower the bargaining power of the suppliers, the better off you're going to be. So basically, if the suppliers don't have a lot of power, you're going to be in the driver's seat. So that's something you want to know. So every commodity and raw material and services are different, but it's worth to take a look at. The next one is threat of new entrants. So for example, are there patents that new people can't come in? Are there a lot of capital investments? Or is it relatively easier for new suppliers to come in? A good example would be in the last decades. Look how easy it has been for the Chinese people and foreign suppliers to enter our market with low costs for a lot of different reasons that we talked about, but you want to be able to do that. So if their lower barriers to entry, i.e., a lot of people can come in from China, as an example, the better off you're going to be as a buyer. Makes sense? Then you're going to look at the bargaining power of the customers. In this case, it's us, the buyers. Buyers and customers are the same. So you're going to want to look at, was there a lot of buyers buying the stuff? Is there any network you can leverage? Sometimes there's consortiums and those types of things. But again, the thing here that's important is the higher the bargaining power of the buyers, the better it is for you. You're going to move into substitutes. Is there a lot of substitutes for this product, where a lot of people can use different types, commodities are normally like this. Is there a switching cost from one to another relatively low? Is there a standardization? I mentioned palm oil earlier as an example. That's a standardized global specification. Lots of people can enter that. All that specification is exactly the same. Conversely, triclosan, you remember that story. There's only one supplier and it was a product that nobody else made, so you couldn't do very well. But the point here would be, the more substitutes, the better for you and that plays to you as a buyer. Lastly, let's take a look at the overall intensity of this overall rivalry, taking everything into account. So when you do this, the more rivalry there is in the market, the better off is for the buyers. More competition, the better off [inaudible]. So you can take all these things and do a industry supply market analysis, which generally help you eventually pick better suppliers. The last one, industry supply chain mapping. I mentioned this before when we're talking about risk management, but it also works equally well in trying to look for risk and opportunities in the supply market. This particular example is for garments. Very complex. So you as a company are buying garments. You have somebody that's sewing them together, manufacturing. You might have somebody that has dyes. The dyes are used to color the fabric, and the fabric comes from raw materials such as cotton, if you understand. The best way to do this in my mind is to ask your suppliers to map them. They should know, and they'd be very helpful. You can pay people to do it, but their suppliers can do it relatively easy. You want to look for where are the opportunities? For example, maybe you want to write a deal with one of these suppliers of suppliers to cut you an overall deal from multiple suppliers. Or conversely, to find out there's a risk. There's only one supplier in the whole world. Let me give you an example. So we talked earlier about the Japan earthquake and tsunami came through and basically took down that nuclear power plant, and the whole area was cordoned off and you couldn't use any suppliers near because the nuclear wastes had basically contaminated everybody. So they found out that there was one black pigment supplier, not a paint supplier, but a pigment supplier in the whole world that made black pigment that was used in black paint for cars and he was out of business. Basically, there may not have been any black cars the next couple years. But the industry actually got together, all the car manufacturers, and said, "We need to develop a new pigment supplier outside of Japan. They did and eventually we got black cars. Thank goodness. We wouldn't have black cars. Only joking, but the point would be is that if they would've done the supply chain mapping, they would have found out that the black pigment, maybe one or two tiers down, could have been out of business and shut them down and they didn't do it, they didn't know. So it's a very powerful tool for supply chain mapping as well as opportunities. So what are the takeaways of supply market industry analysis? I think you find these are pretty simple tools and I went through them relatively quickly, but very simple, you can use them. If you do the segmentation, you can look at materials and commodities and services, trying to look for potential suppliers that meets your company needs, that meets your stakeholder needs. As I said earlier, it might depend on what you want as a company or stakeholder, but this is a way to get at it. The Five Forces, Porter's Five Forces that we talked about. Who has the power? Suppliers, customers, threatened new entrants, etc. Basically, what are the opportunities and the potentials and risk in the market? You can look at that overall and make a determination for what the supply market looks like. Lastly, a simple thing to do is go ahead and map your suppliers and take your markets and take a look at it and look at individual suppliers, how they look, and you can look at risks and opportunities. This can be used both in the supply market analysis as well as risk management. So with that, we're wrapping up week 2 and heading into week 3. See you next week.
