Procurement 101

Strategic Sourcing: Understanding the Supply Market

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5 minute read

Written by

Logan Price

Strategic Sourcing: Understanding the Supply Market

Conducting a Supply Market Analysis is a very important step in your strategic sourcing process. Through a supply market analysis, procurement teams are able to understand how the supply market works. Using the information the analysis uncovers, your business can improve its sourcing strategy, shape its tendering processes, and align its behavior in order to achieve increased value for money, reduced prices, and improved service quality.

The main goal of performing this analysis as a part of your strategic sourcing process is to identify potential global and local suppliers your business may work with.

What is a Supply Market Analysis, and Why is it Important?

A supply market analysis is a comprehensive assessment of the current market with the goal of gaining the valuable insight needed to develop effective procurement strategies.

Since supplier relationship management is maturing and businesses need to reduce risks and increase savings, supply market analysis has become a strategic business requirement.  Using supply market analysis, you can identify the characteristics of a market for a specific service or product. The analysis offers valuable insights into how to plan large-scale procurement efficiently. It offers strategic knowledge of:

  • How the market works
  • Where the market is going
  • The competitiveness of the market
  • Market trends
  • Price variances
  • Supplier capacity and capability
  • Key suppliers

Analyzing supply markets also helps management manage risk by identifying whether the market is more favorable for buyers than suppliers, as well as the likelihood of a supply market failure.

Among the key outcomes of a supply market analysis are:

  1. Increased value for money
  2. Identifying and managing supply-related risks
  3. Improved Supplier Relationships

Market Analysis for Procurement

Market analysis plays a pivotal role in steering successful procurement strategies. Understanding the market landscape is crucial for businesses seeking optimal sourcing, cost savings, and vendor management. Let's explore the essentials of market analysis in procurement and its significance:

Market Trends and Dynamics

Conducting a thorough market analysis involves examining current trends, market dynamics, and the competitive landscape. Identifying fluctuations in pricing, supply and demand patterns, and emerging industry trends helps in making informed procurement decisions. Analyzing market dynamics aids in foreseeing potential challenges and opportunities, allowing businesses to adapt their procurement strategies accordingly.

Supplier Evaluation and Selection

An integral part of market analysis in procurement is evaluating and selecting suppliers. Understanding the market helps in identifying potential suppliers, comparing their offerings, and assessing their reliability. Through market analysis, businesses can assess suppliers' stability, quality of goods or services, pricing structures, and their responsiveness to market changes. This process enables businesses to make informed decisions in selecting suppliers that best align with their needs and goals.

Risk Mitigation and Strategic Planning

Market analysis serves as a crucial tool for risk mitigation and strategic planning in procurement. By comprehensively analyzing the market, businesses can identify and mitigate potential risks, such as supplier instability, market price fluctuations, or geopolitical factors impacting the supply chain. Additionally, it assists in developing strategic plans that align with the market trends and dynamics, ensuring resilience and adaptability in procurement strategies.

Steps to Conducting a Market Analysis

In order to source an appropriate product or service, it is necessary to identify the key cost drivers. Some of these cost drivers include the growth in the supplier market (whether the supplier market is growing or shrinking), the raw material costs, as well as the labor and transportation costs. Having a comprehensive understanding of this information will mean purchasing managers are better positioned to negotiate the best deals with suppliers.

You will need to understand the supplier's marketplace trends and dynamics in order to have a clear overview of risks and opportunities.

The four dimensions of a supply market analysis are:

  • Market Structure

In this process, the various market segments of the particular product category are identified. The size of the global and regional markets is also determined. You will discover the major suppliers in the market, as well as the various market shares of these suppliers. A profitability factor is also determined for each supplier.

  • Competitive Analysis

Studying the competitors is part of the supply market analysis. In this process, the supply-demand trends are evaluated and analyzed to determine how the various suppliers in the market compete. At this phase, the pricing trends for the goods and services are also determined, as well as the future trends. Planning is more accurate this way.

  • Supply chains

An analysis of the supply chain helps businesses understand the costs involved at different stages of the supply chain, the value of the various segments, and the risks involved. Managing those risks is also facilitated by the analysis. A good procurement strategy requires a thorough understanding of the supply chain.

  • Alternate goods and services

It is essential to analyze substitute goods and services. This helps determine how the demand can be met in the event that a supplier cannot meet your needs. If there is a monopoly in the market, this part of the SMA framework is vital.

Benefits of a Market Analysis

The advantages of supply market analysis are numerous. The following points illustrate why key stakeholders in so many organizations so often talk about supply market research:

  • It helps identify market opportunities
  • It helps guide interactions with suppliers
  • It can help reduce expenses
  • It improves efficiency

Sourcing Analysis in Procurement

In the realm of procurement, sourcing analysis is a strategic and systematic approach to evaluating potential suppliers and sources for goods and services. This multifaceted process involves a thorough examination of various factors, including supplier capabilities, pricing structures, quality standards, and reliability. Sourcing analysis aims to identify the most suitable suppliers that align with the organization's procurement goals and operational requirements. By considering factors such as geographical location, production capacity, and historical performance, procurement professionals can make well-informed decisions to optimize the supply chain. Sourcing analysis is instrumental in mitigating risks, maximizing cost-effectiveness, and fostering long-term, mutually beneficial relationships with suppliers. It is a critical step in the procurement cycle, ensuring that businesses secure reliable and strategic partnerships to meet their evolving needs and contribute to overall supply chain efficiency.

To improve your supply chain management and procurement processes, visit the Tradogram website to find out more about how e-procurement software can streamline your procurement efforts.

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