Segmentation as a Purchasing Strategy

Segmentation as a Purchasing Strategy

The parts purchasing departments in manufacturing companies typically have a segmentation schema based on groups of similar parts like fasteners, electrical & electronics, and raw materials, depending on your specific final products. While these types of segments simplify process and task organization for similar parts suppliers, they’re missing important information necessary for your team’s purchasing approach and effectiveness.

From our experience in automotive manufacturing, we’ve found that there are four relationship-based segments which support the creation of a more effective purchasing strategy: Market, Make to Print, Supplier Designed, and Assemblies.

Segmentation as a Purchasing Strategy

1.  Market

Market parts are those where supply and price are determined by external forces. Standard fasteners and raw materials are the most obvious. Also in this category are simple stampings and injection-molded parts, since there are large numbers of suppliers and easy access to materials. Of course, this excludes complex parts and custom materials. The main price drivers are time, materials, and, to a certain extent, logistics.

Where materials, parts, and suppliers are plentiful, the strategy for a purchasing organization should be to have enough suppliers to create healthy competition and ensure that market price is achieved (remember to check the market from time to time with test quotes). Where materials, parts, or suppliers are limited, such as lithium, the market will determine the price, and the supply agreement becomes essential.

In either scenario, there isn’t much price negotiation needed if you closely monitor the market, and there are methods available to make some price adjustment automatic.

2.  Make to Print

Make to Print are parts designed, developed, and tested by your company and placed with a supplier purely to manufacture. These can range from complex stampings to electronic control units. In this case, the purchasing organization should focus on the supplier’s manufacturing and assembly capabilities for the respective component.

The negotiation should be focused on capital equipment, labor costs, overhead, burden, and material (unless you choose consigned materials, but that’s a topic for a future blog). The type of part will determine the number of suppliers in the competitive set based on capabilities, open capacity, and location.

By owning the tools and designs, the company, and therefore its purchasing team, has more control over manufacturing cost and the ability to source from another supplier should the current supplier become uncompetitive in cost, quality, and/or delivery. Here, the key is price transparency via detailed price breakdown from the supplier on the costs of manufacture plus the in-house ability to understand the price breakdown and price drivers.

3.  Supplier Designed

Supplier Designed parts are the ultimate model of outsourcing and require skilled supplier relationship management. The abilities required for purchasing these parts depends upon the degree of supplier ownership.

If a supplier is contracted to develop a unique part for your company where you’ll own the tooling and the intellectual property, then your focus should be on both price breakdown and the cost of engineering design and development (ED&D) to be provided by the supplier. Be careful including ED&D in piece price though, as it masks the cost of outsourcing engineering and obligates you to set a quantity-based reminder to know when the ED&D is paid off (or you likely won’t achieve those volumes and end up with a supplier claim for the balance).

Also, ensure design and tool ownership so that manufacturing may be transferred to another supplier, should the existing supplier fail in some manner. If the design and tooling is supplier-owned, then purchasing is focused almost entirely on relationship management to facilitate as “fair” of pricing as possible.

Keep in mind that Supplier Designed parts include the risk of design change and/or obsolescence without notification or recourse. This means that purchasing teams need to enter these types of relationships with an understanding that the supplier would have significant leverage of price and supply. In these circumstances, it would be wise to find alternate suppliers.

4.  Assemblies

Assemblies are complex parts which may include some combination of Market parts, Make to Print, and Supplier Designed parts. These are actually “sub-assemblies”, which are the result of outsourcing a stand-alone assembly of parts, which would then be assembled into your program’s final assembly (or into another sub-assembly as part of a larger assembly).

Sub-assemblies are some of the most challenging parts for a purchasing team to source because they require the orchestration of multiple sub-components to be shipped to the assembler in the right quantity and quality. Having multiple variations of assemblies makes this exponentially more challenging. Therefore, where possible, the purchase, logistics, and supplier quality management of the sub-components should be outsourced along with the assembly.

If more control is desired or required, then the purchasing, releasing, and payment methods could become extremely complex, so outsource as much as possible, and again, get price breakdowns from your suppliers and negotiate on facts.

Conclusion

We recognize that each of these four relationship-based segments may not be applicable for every organization and industry, but we hope this Segmentation as a Strategy method will serve as a valuable template to build upon, where you’d define segments relevant to your specific purchasing or program needs. In any event, the key is to design and develop a purchasing blueprint based on the relationships you have with your suppliers and the necessary elements to successfully manage these relationships, to ensure you’re getting the right parts at the right price.

-Karl