Chapter 4 Strategic Sourcing Methodology

The CPO’s Guide to
The CPO’s Guide to

Strategic Sourcing
Strategic Sourcing
A 9-step guide to strategic sourcing
A 9-step guide to strategic sourcing
implementation
implementation
www.deltabid.com
Chapter Four
Strategic Sourcing Methodology
Chapters 1-3 covered all preparation needed before deciding on a strategy

to get the most out of the savings opportunities you identified. By now
you’ve analyzed your spend and established your strategic suppliers and
also explored possible alternate suppliers. You are almost to the strategy
selection stage of the strategic sourcing cycle, but before you dive into it,
you will need a better understanding of the methods we’ll be applying.
Our guiding question for this chapter:
How do I build up a sourcing strategy?
Chapter 4 is a brief overview of the theoretical methods that will provide

us with a base for building our sourcing strategy.
The methods we will cover:
1 Porter’s Five Forces
2 A.T. Kearney’s Purchasing Chessboard®
Copyright © 2015 DeltaBid 2 www.deltabid.com

Method #1 . Porter’s Five Forces
Michael Porter’s Five Forces method helps us to understand and evaluate

competitive forces within our industry and the supplier’s industry. Every company
has customers, suppliers, and competitors in the industry. Understanding your
position and the power relationship between these forces gives you valuable
knowledge about how to implement your strategy.
Michael Porter described five competitive forces: supplier bargaining power, buyer
bargaining power, industry internal rivalry, threat of new entrants, and threat of
substitutes. The procurement function is most interested in supplier power and
buyer power.
Fig. 1 Porter’s Five Forces
Let’s take a closer look at these powers. A typical high supplier power situation
occurs when the supplier can increase prices, and the buyer can do nothing about it.
On the other hand, buyer power is high when the buyer has multiple alternative
sources and can push purchase prices down.
Imagine your company at the center of these five forces and analyze your position.
Your company is sustainable if it can find a balance between these forces. However,
sustainability is not always enough. In order to be successful, you also need to have
the power to push the system out of balance, but only if you can do it for your own
benefit.

Next, think of your supplier in the middle of these forces and weigh your power
against his. You’ll have to consider several of the factors I mentioned in the previous
chapters, namely how much of your spend accounts for what part of the supplier’s
revenue and how dependent you are on an individual supplier for certain
manufactured components or specific services. I suggest you use Porter’s method
to think about and understand these competing forces every time you are preparing
a strategy to use with your key suppliers.
Competitive power can change at any point in time, especially when there are
changes in the market. During boom times, the supplier usually has the stronger
bargaining power, but during a recession, the opposite occurs and customer
bargaining power increases.
If you are interested in learning more about Porter’s Five Forces, I suggest you check
out the Five Forces tool from MindTools. This tool can be used in a variety of
business situations, but you can also use it as a guide during your sourcing analysis.
Method #2. A.T. Kearney’s Purchasing Chessboard®
Porter’s Five Forces is great for a high-level, theoretical analysis. It can provide you
with a broad understanding of your market power, but it doesn’t outline the actions
you should take once you have this knowledge. That is where A.T. Kearney’s
Purchasing Chessboard® comes in. It’s a practical tool designed specifically for
procurement.
The Purchasing Chessboard® is another matrix but one with 64 fields, like a regular
chessboard. Buyer bargaining power is located along the horizontal axis, and on the
vertical axis, supplier bargaining power.
The Purchasing Chessboard® is made up of three layers. The first layer is divided
into four general purchasing strategies: manage your spend, change nature of your
demand, seek joint advantage with supplier, and leverage competition among
suppliers. These are the proposed main strategies for the large product categories
as introduced by Kraljic in his matrix and that we also touched on in Chapter 1
“Internal Research.”

Fig. 2 A.T. Kearney’s Purchasing Chessboard®
The second layer has four approaches for each high-level strategy, coming to a total
of 16 strategy approaches. These approaches give you a better focus going into the
next level of methods. The second layer helps you clarify the purpose and the long-
term goals of the methods below each approach.
The third and bottom layer has four methods for each approach, for a total of 64
strategy implementation methods. There are quite a few methods, so you have a lot
to choose from if you have to find the proper method at once. Drilling down from
layer one to three helps you find your way to the strategy that best fits your situation.
In the next chapter, I will describe how exactly to use the Purchasing Chessboard®
and go through a practical exercise. In the mean time, you can go to to their website
to explore this method more in depth. They even have a Purchasing Chessboard®
LinkedIn group if you want to ask questions of experienced practitioners.

3. Summary
I am a mechanical engineer, and I like structure. I had a eureka moment the first time
I saw the Purchasing Chessboard®. It was so logical and self-explanatory. Like most
of you, I found several of those methods to feel quite familiar. But at the time, I felt
lost as to what methods to use when and what should the next step be after one
method has already been carried out. Then I said, “Eureka!” when I saw for the first
time a system behind the approach and methods that can be used one after another.
The main idea of the Purchasing Chessboard® is to increase your bargaining power.
The goal is to move step-by-step towards the bottom right quadrant. In Chapter 4, I
will try to explain how I use this great tool from A.T. Kearney to find and execute a
comprehensive sourcing strategy.
About the author: Peep Tomingas

After graduating from Tallinn University of Technology with a degree in Mechanical Engineering, Peep received a
master’s degree in International Business Administration from the Estonian Business School. Peep spent five years at
Ericsson Estonia as logistics manager, and then worked as a supply chain manager for the Baltic States at ABB until 2015.
Peep has been a board member for Estonia's Purchasing and Supply Chain Management Association Prolog since 2014,
and he is currently their CEO. He is also an advisor at DeltaBid, specializing in supply chain management, strategic
sourcing, and supplier relationship management. LinkedIn Profile


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The CPO’s Guide to

The CPO’s Guide to

Chapters 1-3 covered all preparation needed before deciding on a strategy

Our guiding question for this chapter:

How do I build up a sourcing strategy?

Chapter 4 is a brief overview of the theoretical methods that will provide

The methods we will cover:

1 Porter’s Five Forces

2 A.T. Kearney’s Purchasing Chessboard®

Copyright © 2015 DeltaBid 2 www.deltabid.com

Michael Porter’s Five Forces method helps us to understand and evaluate

Fig. 1 Porter’s Five Forces

Copyright © 2015 DeltaBid 3 www.deltabid.com

Method #2. A.T. Kearney’s Purchasing Chessboard®

Copyright © 2015 DeltaBid 4 www.deltabid.com

Copyright © 2015 DeltaBid 5 www.deltabid.com

About the author: Peep Tomingas

Copyright © 2015 DeltaBid 6 www.deltabid.com

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