Supply market analysis is a crucial step in the business development process.  When supply market analysis is effectively executed, it will identify whom procurement professionals will want to bid on their requirements.

What is a Supply Market Analysis?

Supply market analysis is a technique used to identify market characteristics for specific goods or services. Basically, it provides information that is critical to developing effective procurement strategies in the context of planning for significant procurement.

What is the Importance of Supply Market Analysis?

The goal of supply market analysis is to assess the current state of the supply market and identify opportunities and threats. This is done by analyzing information from various sources, including reports and statistics, suppliers and trade fairs, and expert opinions. The information gained in this step is useful for understanding the risks and rewards of a potential investment.

Understanding the supply market is crucial for the development of strategic sourcing plans. A clear understanding of the market and the characteristics of the different stakeholders will help the organization determine the best sourcing strategy. This type of analysis also sheds light on the organization’s position in the market. Supply markets have grown significantly over the past several decades, and many companies face globally dispersed supply markets.

The Components of Good Market Analysis

The process of supply market analysis can vary from company to company, but it generally consists of the following steps:

  • Identifying current suppliers

The obvious first step in figuring out who can bid on your requirements is determining who you do business with today. This may be easy in a centralized procurement environment where the category of goods or services is narrow. This may be difficult in a decentralized procurement environment where the category of goods or services is broad. In either case, manipulate your data dump to determine which suppliers you are currently using.

  • Finding new sources

For the most part, finding new suppliers can be challenging. There are many sources available for finding potential new suppliers. You can search the Internet or speak with other procurement professionals at different companies. Likewise, you may review literature sent to you by interested suppliers, search supplier directories, etc. In almost every category, there is usually some level of competition that will allow you to find at least one supplier with whom you have never done business. Also, don’t forget to consider international suppliers at this point. The cost difference between domestic and international products or services is significant for certain categories.

For example, IT services have been reported to be slightly under three times less expensive in India than in the United States.

  • Identifying opportunities for special categories of suppliers (disadvantaged, local, etc.)

Many large companies have a program that encourages doing business with diverse suppliers (also called disadvantaged business enterprises). Diversity suppliers are loosely used to describe businesses primarily owned by minorities, women, or veterans and businesses located in certain economically distressed locations designated by the government as Historically Underutilized Business Zones (HUB Zones).

Some companies actively promote doing business with small businesses and local businesses. If your company deems it important to consider special categories of suppliers in its sourcing activities, be sure to expend reasonable effort to identify potential suppliers in any of these categories. Consider whether a dual award or subcontracting opportunity for these special categories of suppliers is available through your sourcing initiative.

  • Identifying key supply partners

After you have listed all the suppliers who you will consider pre-qualifying, identify any of them that you would consider “key supply partners.”

Key supply partners are those companies who, throughout the years:
  • Have given your needs the highest priority
  • Have performed flawlessly in challenging situations

However, it is best to determine exactly how much emphasis you will place on historical performance relative to price, delivery, and the other criteria before bidding.

  • Conducting Porter’s Five Forces analysis

In planning your sourcing initiative for a particular category of goods or services, you must evaluate the state of the industry for that category.

That is to say, you will essentially want to answer the question, “How competitive is the market in this industry?”

When a market is highly competitive, it means that:

  • There are a lot of available suppliers.
  • Suppliers are eager to get business.
  • Suppliers are willing to cut prices.
  • Buyers have more bargaining power.

The number of suppliers in a market depends on several factors: “barriers to entry.” Barriers to entry are essential factors that make it difficult for suppliers to begin competing in a market.

An Example of a barrier to entry is a requirement to have expensive assets in order to compete. “Low barriers to entry” means it is easy for new suppliers to begin selling products and services in the market. So, the airline industry would have higher barriers to entry than the consulting industry because you need expensive assets (i.e., airplanes) to become an airline. Still, you need very few assets – maybe just a computer – to become a consulting firm.

Porter’s Five Forces asserts that the following characteristics of a market determine the pricing structure in that market:

  1. Rivalry among existing competitors
  2. The threat of new entrants
  3. The threat of substitute products or services
  4. Bargaining power of suppliers
  5. Bargaining power of buyers

By analyzing these market characteristics, you will be able to get a feel for your ability to drive down prices. While basic Porter’s Five Forces analysis can be conducted very informally, it is a good idea to incorporate it into every sourcing process. Unquestionably, doing so will enable you to set realistic savings targets and determine the best approach for forthcoming negotiations.

Note “red flag” suppliers.

As you progress with supply market analysis, you may encounter “Red flag” suppliers. Simply put, “Red flag” suppliers are those suppliers who have exhibited poor performance in the past and have created the expectation of poor performance in the future.

If selected as the successful bidder in your sourcing initiative, a red flag supplier’s poor performance could disrupt operations and a higher total cost of doing business. Having said that, identify these suppliers early on. If practical, do not allow red flag suppliers to bid. If you must allow red flag suppliers to bid, communicate and document your concerns and have those concerns available when your team is ready to make a decision

  • Pre-qualify suppliers

Supply market analysis paves the way to prequalifying suppliers. That being said, the worst time to find that a supplier cannot support your requirements is after you have signed a long-term, high-effort, high-visibility contract with that supplier. Particularly with Strategic Sourcing Opportunities, you must be careful with supplier selection. As such, ferret out incapable suppliers early – it only gets more difficult later.

Determine whether a supplier is capable of supporting your needs:

  • Analyzing Financial Statements
  • Checking References
  • Conducting Site Visits
  • Seeing Samples of suppliers’ work

Recommended Reading

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