How to select the right suppliers for your supply chain? (Part 1)

Published by Ngoc Tran on

Model of sourcing information by Lysons

To answer this question, the article will base on the model of sourcing information (see above Figure 1) by Lysons (2016). It will focus on phase 1, 4, 5 and 6. Part 1 of the article discusses over the combination of phase 1 and 4, while part 2 will go into the other phases.

#1: The market maturity curve (representing phase 1 and 4)

This model is used commonly in sales (Figure 2); however, we can use it in the way to determine which suppliers suit for each market phase. The horizontal dimension indicates elements such as product take-up, degree of competition and new entrants, while the vertical axis means the position of a good/ service in the perception of its customer base. Let’s look closer to each quadrant.

Marurity curve
Figure 2. Market maturity curve model (Booth, 2010)
  • Pioneer (Low-Low)

This illustrates an immature market and risky business venture (e.g. start-up). Suppliers in this market tend to be very strategically aligned to your visions and strategies. They are not necessarily scale players, so they may be niche providers. What you want is to form your contracts in short-term, with reward structures aligned to joint success, and only pay for what you use.

  • Land grabber (High-Low)

This market is relatively immature, but you know you have an expansion plan for it. Thus, you will be looking for suppliers who can help you dominate the market when it becomes mature. Suppliers in the pioneer phase can be growing with you, but you need to re-evaluate them in order to see which one still suits your needs, which one will fulfil your needs much better with your support, and which one should be removed. At this point, your contracts are longer-term and reward structures should still be aligned to joint success.

  • Hunter (High-High)

As seen in the model, Hunter market has matured, and your organization is still a dominant player. Your next move is to probably conduct all activities that enable you to maximize your margin and market share such as market segmentation, new regions/ products, and/or product differentiation. Who could help you achieve these missions? Your ideal suppliers here will be those who can keep your offers fresh and appealing to the market; discover the market itch and support you to fulfil the latest market demand. So, for example, you will not only focus on product differentiation but also choose to follow cost leadership simultaneously, because you have just segmented your customers into different categories like social status, income, jobs, etc. This eventually helps your organization increase the market share and competition against entrants, substitutes, and competitors. Your contracts then now vary (short/long-term) depending on your suppliers and strategies.

  • Farmer (Low-High)

The market has reached its maturity and is on its way of saturation. Your customers become more demanding and smarter while opportunities for earning profits get smaller. What you want is to develop a low-cost and operational excellence strategy. In other words, lowering your costs since you cannot charge a higher price to gain profits or breakeven anymore. You tend to evolve your products rather than investing in R&D here. At the same time, you want to manage your production processes to ensure that you are cost-competitive. Thus, your right suppliers should be cost-advantaged, meaning they are able to cut their prices and so reduce the cost for their buyers. Also, you can think about outsourcing to suppliers located in developing countries, or contracting the whole production to another firm.

Case study: How Intel utilized the market maturity curve in its sales strategy?

Intel, one of the largest semiconductor chip manufacturers, invented the first commercial microprocessor chip in 1971. By the early 1980s, the market had commoditized which made it become a “farmer” market. This, together with the growth of the PC market, encouraged Intel to shift its focus to microprocessors development, meaning to enter the “land grabber” market. However, the key challenge of that time is unreliable manufacturing of complex integrated circuits. Since it is a critical component with supply scarcity, many buyers contracted with several suppliers. Conversely, Intel followed a dual strategy where it tried to improve the quality of manufacturing (in-house production) and simultaneously stopped licensing its designs to other manufacturers. This is some kinds of a “hunter” strategy. In contrast, Intel’s first personal computer – classmate PC is manufactured by other producers around the world. The product is marked “Intel Inside”, but the brand name is named after the producer and its peripheral specifications vary. This is again “land grabber” market as Intel wanted to expand to local regions to meet the demand of billion school children and gain the suppliers support via their factories, distribution channels and regional expertise.

Your turn: Can you think of any other case studies that have applied these strategies in terms of procurement?

To sum up, the analysis maybe not true for every business, but the key here is that you must tailor your supply and contract terms at all levels throughout the market maturity curve to develop opportunities.

Have you learned something new today? Share with me and the community about that! Thank you for reading and see you at the next part of this topic!

Recommended reading:

SC digitalisation, procurement and inventory management


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