Commodity Strategy - how to ask the right (internal) questions
Creating a commodity strategy - part 1

Ep. 013 – Creating a commodity strategy (internal focus)

A decent commodity strategy is key to any strategic buyers success. This episode of the podcast focuses on the internal questions one might ask.

So what is a commodity strategy? Here's what KB Manage has to say about it

... commodity strategies (sometimes referred to as 'commodity sourcing strategies') are purchasing strategy plans that refer to commodity goods...

Introduction to the commodity strategy episode

So here's the episode about how to come up with the internal view on your material field strategy:

Phil:                       Welcome to episode number 13 of procurements and how to create a commodity strategy. Hi Phil. Hi Tanya.

Tanya:                   How's it going? I'm very excited today about our topic.

Phil:                       I am too. So would you like to tell what we're doing today?

Tanya:                   Yes. Well it's a little bit of a special kind of concept. We're trialing this episode today because it's a three part episode. It's a three piece focusing on how to create a commodity strategy.

Phil:                       Cool. So the first part today we'll cover a internal view or a demand focused view of the commodity strategy.

Tanya:                   Part two, which will come shortly. We'll cover the external view of your material field strategy. So the market forces and what we look at externally.

Phil:                       Yes. And part number three will be all that theoretical knowledge applied to a real world case for all you listeners and your audience here to enjoy. So internal view, Tanya, demand focused view. What are your thoughts about this?

Focus on internal first

Tanya:                   I mean I think to be honest, you need to start internally. I think firstly it makes sense to determine when you're looking at a commodity. I think the first question is, is it still required to have this commodity strategy?

And then from there determine what information is required. And then from there you can compare it with the external market forces, marry those together and then create a strategy.

Phil:                       Cool. That sounds great. So what would you say are usually the first steps that you take when you align with your internal stakeholders?

Tanya:                   Well, I think the first thing we need to do is ask them, is this still required or are we substituting products or materials. So for example, it doesn't really make sense to create a strategy, if next year we are launching a new product and the key commodity that is part of those materials or those bill of materials is no longer required or the demand will be halfed.

So I think it's really determining what type of demands do we have, what are the deal sizes and is the need still there to look at this from a commodity strategy point of view?

Phil:                       That sounds great. And I like this idea very much because sometimes I feel that we are a little bit perceived, like we're always coming up with new ideas, but that is like a business reasoning for that. So we of course put our tasks into the overall connection to the whole business, so to say.

We do not just look at it from a procurement perspective, but we're adding value by weaving it into the overall product strategy with the material field strategy we have. So I liked this one very much.

Roles and Responsibilities

Tanya:                   Yeah, exactly. You're right. Exactly right. And I think that, you know, from a procurement perspective, we have two kinds of roles. The first one is to really look at our stakeholders and to determine and to meet their requirements. But at the same time it's to challenge them and to determine what is really a want and what is really a need. And, is this really our material field strategy from a holistic or overall perspective?

I mean sometimes as you know, feel that management have a very different view of what needs to be achieved than other people in the organization. And so it's really about trying to get the best balance to meet their requirements but at the same time meet our commitments to management.

Phil:                       And I liked that you mentioned roles here because I think that's quite important. I mean we covered this throughout the whole season that we're talking about. We always have like early involvement is an overarching topic that always like influences our episodes. And again it is relevant here when we talk about mandates and roles. Of course on the one hand side there is very operational role view like who says what when, but also explain that it is in our very own mandate and we're mandated to do this kind of strategic view on topics and also to explain it to our demand owners, to our stakeholders to explain why this makes sense.

2 ways to see it

Not only like from a product and material point of view but also like from financial point of view. And how it helps them to achieve their goals for example. I mean you could mention that topic in nearly every one of our episodes explaining our mandate and our roles. But I think especially when it comes to major strategic tasks like commodity strategies, I think it's even more important. What do you think?

Tanya:                   Yeah, absolutely. Agreed. I don't think there's anything much more to add there. I think that the, from a commodity strategy perspective, there's so many different influencing factors, but your stakeholder needs to be on board.

What's important for "them"?

You need to also consider what are the stakeholders aims or the stakeholders aims cost reduction and the stakeholders aims the speed to market. Is it the speed for delivery? Is it quality? I think that's really important to determine from them. And then that also dictates our strategy or potentially could dictate our strategy moving forward.

Phil:                       And also like innovation, it's usually a big topic. I mean it's like when you want innovation, you have to pay a price for that. If everybody is aware of that, perfectly fine. But we just have to just like chisel it out. Out of these all these kind of assumptions, simply make clear what is the overall goal that we're trying to fulfill here? And we can help with nearly every goal in this regard I would say.

Tanya:                   Yeah, I think that sounds, I think you've put that really well on. Yeah, absolutely. Agreed.

Can we bundle?

Phil:                       So also, I mean, one other topic that I usually ask and sometimes where we're getting, yeah, how can you say that with some somewhat confronted, maybe that's a little bit too offensive, but confronted with very, very small demands and I just look at it from like a strategic perspective and say, so in that commodities strategy evaluation in the internal view, is there a chance to combine small and medium demands?

Or is it one huge project that we're talking about? Multimillion project? I don't know. So about what timeframe and so on. So it's quite interesting to see what is the demand structure, the demand nature, so to say.

Tanya:                   Yeah, absolutely. And I think that also plays a part in what you're buying and in your overall supplier strategy and whether you have one big supplier to manage everything, whether you break it down into a panel kind of relationship or where you decide if for some sort of reason your commodity is so diverse but you decided to break it up into into smaller sub commodities. I think that that's really important. I agree with you to determine what type of demands we have.

It's all about size ...

What is the deal size? Getting the stakeholders involved is an understanding as the product still required. And then also I would say looking at the appetite for change and the willingness of the stakeholder to consider other factors. I think that's also very important. So for example, if cost is a big factor, would they be willing to look at offshoring capabilities? I mean, I know everybody's kind of, you know, in the offshoring game at the moment, but at the same time it still does give advantages if you were talking about high cost countries.

So it's really very dependent on what you're buying to dictate your commodity strategy. But at the same time it's really important to first look internally.

Phil:                       Perfect. Yeah. And I like the term appetite for change really, really very much because I mean, and that could be also like a very direct question, dear Mr or Mrs. Demand Owner what is your appetite for change? Are you very risk averse? Are you open to potential risks which could favor bigger gains. Let's talk about this. Okay.

Tanya:                   Yeah, exactly.

Who's in the game?

New Speaker:    but I think that there is looking at it and looking at the internal view on the demand focused here, I think there is more than than aligning with the business. Right? I think it's also like we need to review what current supplier base do we have? What landscape is already there? What is established already? So what are your thoughts on this, Tanya?

Tanya:                   Yeah, I think that's probably the second step first. So first you talk about first you understand, you know, what we actually doing and what do we actually want to buy from a commodity perspective. And then we need to look about, well what are we actually doing now? So you need to do a demand analysis if you haven't already, you know, map the process. If there's a certain process, if, if you're buying a logistics services, look at your current suppliers and determine how much it actually costs to create a, to create the product or the service. Um, and also looking at your internal costs.

A classic: Total cost of ownership

Really determine a make or buy situation and you don't have all the information now because you haven't looked externally and you haven't looked at down market forces, which will coming out in episode two. But at the same time you're aligning with the business, you're looking at your current supply base and you'll really determining wells. Does it still make sense to make the product or does it make or does it or are you still considering buying it cheaper from elsewhere or I should say potentially could be cheaper but buying it from elsewhere I should say

Phil:                       And I liked the idea of reviewing the internal costs as well because I think it keeps, we could leverage the knowledge of our, especially when it comes to technical expertise, we could leverage the knowledge of our technical colleagues here and just at least come up with a ballpark number of what could it cost or what should it cost the product or service we are buying.

We talked about this several times. I am personally in a services business and I have a rough understanding as you mentioned offshore what is paid to a potential resource in an offshore country. And of course I do not the exact salary but I have rough understanding. So if the price that gets back to me is like 12 times as high, I would say hmm, maybe there is room for improvement negotiation wise. And you could do the absolutely the same with the internal costs of products. Right?

Let stakeholders help you

Tanya:                   Yeah, absolutely. I think that like by understanding what you've currently got by, by understanding what you're currently paying by like getting your technical colleagues to, to review the breakdown of costs. Um, absolutely. Shows, shows what we should pay and what we could pay. And then if you, if you align that with the market forces, it really gives you a better position in order to negotiate your pricing or your, um, or your deals to suppliers. Because as we all know, that knowledge is power.

So we've looked at that and I think the next thing is, you know, you're looking at the current spend. So what have we spent in this commodity, how many suppliers I'll be spending it with, is all of the spend contracted. I think that's also very important to know. So if you know, for example, you have a commodity whereby it's very fragmented and you've got, I don't know, 30 suppliers and only 50% of our supplies that you've contracted and negotiated with.

Firstly, that's a great opportunity. But secondly, what does it tell you about your existing supplier base? I mean, maybe that performance isn't up to scratch. Why are they going outside of agreed topics and that also helps you dictate the commodity strategy. What do you feel, I mean, looking at your current supplier base from a commodity strategy, is there anything that we, we've forgotten?

What is the relationship?

Phil:                       Nope, absolutely not. And it's like, I, I see it exactly the same way as you mentioned it. And um, it has, it offers some opportunities here and there, um, both situations, even if we have contracts or if we don't, I think one thing that we need to cover here also is like, what is the relationship? Do we have a longer relationship or is it very new to that want to prove themselves? Are we important to them as a customer?

I like the idea. I mean, that's the general idea about procurement. It's a combination of both, um, psychology on the one hand side. Like what is the relationship like and numbers and figures and facts on the other hand, which is maybe a little bit more dry so to say, but the combination of both is really where the magic begins.

Tanya:                   Absolutely. And I think that relationships are really important and, and when you dictate a commodity strategy, we can't forget the impact of the relationship on, on the strategy. So for example, if as as we just discussed and we had a, um, a fragmented supply base and we were all decided to move it onto one banner, obviously that will come in in, in part twos and threes. What is, what is the impact on the relationship with our current vendors? Do we need to consider that in any way? Will that impact their financials? What will be the impact of out of our decisions?

Relations are key

Phil:                       Exactly. And I think um, relationship is a, is a key term here because sometimes we're in a quote on quote relationship not only to our suppliers but also like to our customers, meaning the markets or the industry. We are, we are acting in as an enterprise. There are several industries that have special, how do you say? Special limitations. For example, the healthcare industry, which I worked in in the past has several demands towards its market participants and indirectly though also to our suppliers, if we are a market participant in that market, financial markets are another example and that may be different than, for example, discrete manufacturing.

Which may have, again, other influencing factors, but that may may also like influence our internal view, especially on the supplier landscape, which we will cover in the next episode more in detail and the external forces, but also like it will have an influence on our internal demands, which we cover in this very episode.

Compliance

Tanya:                   Yeah, I agreed. So you're also talking about policies and procedures exempt for example. Right. So I'm not sure where all of our listeners are based, but just as an example, you know, some countries and therefore some companies can not do business with Cuba or they can't do business with North Korea or anything like that. And

Phil:                       because you're in the u s you will not do business with Cuban companies. So if you're listening to from the u s you should very, very well listen to this podcast.

Tanya:                   Yeah, exactly right. And so that's obviously important as well. So what kind of policies do we have in place or procedures do we have in place? Either Regulatory, which is kind of an external market force, but also the policies internally that that dictate what we can and cannot do within reason.

Obviously government is also heavily regulated there. They have a lot of probity kind of topics that they need to adhere to. Usually everything is very open from a communication perspective and that always dictates what what we might and might not be able to do strategically and um, and when dealing with our supplies.

Commitment

Phil:                       Absolutely. And I think we're coming a little bit to the end of the internal view I would say. So I think it's quite interesting also to, to um, factor in some other, other more like standardized factors. So one, let's say standard question that we usually always ask or that I usually always ask is like, do we want to give any commitments? Can we give any commitments? And, and um, because of this, this would always like influence potential negotiations or potential strategic lever is that we then utilize later on in, in executing our strategy. Right?

Tanya:                   Yeah, absolutely. I think that commitments is something that is required from, from a full costing perspective. Um, it helps us dictate where we want to go. The commitment is, you know, is, is something that's, that's critical to, to basically understanding your business better and then having to communicate that when you put your strategy on paper, the community can definitely help that because it determines, you know, where your time and effort should be spent.

Standards

Phil:                       Absolutely. And I, one other question I would say or one other topic out of this list of standard questions, so to say, um, is, is there a chance that we can standardize the demands we want to couple without commodity strategy? So is is there a chance that we put it into a certain service framework or can we standardize products or parts that we buy? Are there any norms that we may want to hear adhere to because that would, I think always work in our favor because it makes it also easier to compare potential suppliers and their offerings later on.

Tanya:                   Yeah, absolutely. I think that standardizing demands is something that's, you know, that's the old question between, you know, procurement and sales. So procurement wants to standardize everything and sales once you sell, why one topic is better than the other, or one by product is better than the other.

Plus the age old debate, the age old debate that maybe we should have a podcast on one time in the future, but really at the core, at the core, you, you need to determine what is a want, what is a need and if your needs are met, then, then we can get into other topics. So, absolutely, at the very least, we should standardize out our demand and determine, um, and, and determine what's the main crux of, of what we're buying. Yup.

Conclusion

Phil:                       And I think that covers pretty much, uh, a rough overview about how we should approach a potential commodities strategy creation from an internal point of view or from a demand focused point of view. And as we said, what will we cover next to a next time

Tanya:                   external market forces. So really looking externally. So we've looked internally and we've aligned with our business. Do we still need this commodity strategy? Yes. You know, why do we need it? Can we influence one way or the other? And what's the willingness to consider other factors? Um, we've also reviewed our current situation.

So far we've looked at

  • ... our current supplier base,
  • ... our costs,
  • ... the performance
  • ... how many suppliers we currently have
  • ... our relationship,

Then we really need to marry that together with the external market forces. And then from there, determine a timeline or roles, what you actually want to do. So all the exciting meaty stuff. Yeah,

Phil:                       Absolutely. And again, as we said before, we will not only cover the external view on a theoretical point of view, we will also marry those two together in the third part of this mini series on creating a commodity strategy where we will lead you through these theoretical guidelines so to say while executing,

What's next?

Tanya:                   while executing what we want to deliver I guess. Yeah, yeah, yeah.

Phil:                       While working on a real world case study and so you can really see this applied in action.

Tanya:                   I think that's, yeah, I'm looking forward to seeing how it goes and I think that, you know, maybe we should even distribute that afterwards on our, on our website and obviously we'll have the shirts now, but I think we can create a commodity strategy that will hopefully help a lot of people and they can download the templates and things like that and, and utilize what shouldn't be used and then hopefully, um, show it to their stake holders presented to their management and implemented into their businesses.

Phil:                       Yes. And as always, if you have any questions, we are very happy to hear from you. What are your thoughts about this internal view on how to create a commodity strategy? You could always reach us @ procurementzen dot com slash ask a-s-k for the word Ask and we're happy to get in contact with you. Also hear what your thoughts are and yeah, I would say for today, a little bit of a shorter episode. That's it from my point of view, short and sweet. Absolutely. And Crisp as we always are, at least at least how we try to be. All right, everyone. Bye Bye. Bye.

Phil Kowalski

I am passionate about helping other to achieve more in their negotiations. I love to prep, design and execute successful negotiations. With more than 15 yrs procurement experience I sometimes feel like the Obiwan Kenobi behind this blog and my podcast.

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Ep. 014 - Creating a commodity strategy (external focus)