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Develop Commodity Strategy

A commodity strategy is the purchasing plan for a specific product or service (commodities) that facilitates the management of the supplier base, avoids and/or proactively solves potential problems, and is the basis of future Postal Service business practices surrounding a purchase of the commodity involved. The competitive market demands that the Purchase/SCM Team develop focused concepts and methods and apply them to purchasing behavior. A commodity strategy is based on the commodity sourcing strategy plan (CSSP) that ensures the use of systematic processes for developing strategies to achieve supply chain management goals that fully support objectives. Strategies, as their name implies, should be strategic and focus on standardization and innovation, not just on technical and tactical support. Strategies are developed by establishing goals and specific baselines that are generated by a thorough understanding of the external supplier environment and the internal Client reality. Every year, strategies are reviewed in face-to-face meetings with the Purchase/SCM Team and the Vice President, Supply Management (VP, SM). The most crucial factors and points of reference for all category strategy planning are:

Best value

Reliable partnerships - mutually beneficial business relationships

Improvements and enhancements in operational efficiency

Sourcing Strategy (whether leveraging spend and demand are best addressed through a single or multiple source strategy and provide a best value decision)

Centralization (the strategy does not stand alone, but considers the other Category Management Centers [CMCs] in a collaborative and shared approach)

Operational benefits and functions of product/service to the Postal Service

Profits, results, Client satisfaction generated

Early, detailed, cross-functional strategic planning is an essential component in meeting supply chain goals. Obtaining cross-functional involvement ensures a more holistic view of the purchase process and enables Supply Management to better meet its goals and its Clients' goals. Collaboration among the CMCs as an overall strategy requires:

Open, continuous, and timely communication

Use of best practices

Alliances that will be manifested internally and externally

Constant steps toward innovation and improvement

Market research

Cost and price understanding (Price Analysis)

Awareness that strategic issues with suppliers have impact on other CMCs

Realization that total cost is more important than the immediate price when making purchasing decisions (Total Cost of Ownership Analysis)

Use of feedback from stakeholders and Clients

Collective knowledge sharing of the Purchase/SCM Team regarding appropriate functional areas (e.g., divulged expertise surrounding engineering designs, manufacturing methods, quality controls and measures, and inventory planning)

Each Category Management Center (CMC) Team is required to develop and maintain a written commodity strategy (including input from applicable Clients) for each major spend category for which the Team is responsible. The CMC Team has a composition similar to that of a Purchase/SCM Team and comprises buyers, Market Analysts, Price Analysts, and Item Managers with expertise and experience specific to each commodity. The CMC Team applies supply chain management (SCM) business practices to both strategic sourcing and individual purchases and examines demand trends, the marketplace, and the supplier community to determine how to achieve best value for the Clients and which practices will be of the greatest significance.

The strategies developed by the CMC Team will focus on planned objectives, as well as the tactics and resources necessary to achieve Client satisfaction and business success in the supply category in the coming year. It is especially important that the CMC Team, when developing commodity strategies, identify the technological nature of the commodity (if any) and what technology is needed to support the purchase throughout the life cycle. Goals are translated into specifics and sequentially broken down according to:

Volume and volume normalization:

- By location

- By Client

- Usage seasonality

- Historical data

- Sourcing trends

- Usage forecast

- Spend analysis


- By location

- By Client

- By supplier and logistics channel

- Price seasonality

- Historical data on price

- Forward pricing (the establishment of prices now for future transactions)

- Total cost of ownership analysis

Product specifications:

- Functional specifications

- Design and quality specifications

- Level of customization

- Level of standardization

- Specification of ownership

Current purchasing process:

- Process trigger points

- Specification process

- Supplier evaluation

- Negotiation

- Buying decision

- Performance monitoring (quality, reject rate, technical support, and service provided)

Constraints and restrictions:

- Mandatory Sources

- Client requirements (e.g., supplier list, local content restrictions)

A commodity strategy is developed by evaluating, considering, and leveraging data about the following:

Requirements of the Client

Value and risk assessments (quadrant analysis)

Marketplace and market research

High-level logistics support

Final goals and benefits to be realized

Quadrant approach


The CMCs within the Postal Service are ultimately responsible for the purchase of goods and services that allow the Postal Service to function. As explained in the Define Requirements topic of the Decide on Make vs. Buy task of Process Step 1: Identify Needs, every Client and every CMC has specific requirements for the products and services that they purchase, and this information must be known throughout every CMC. When developing category strategies, the actual requirements and objectives of the Client are the basis for any planning. Analyzing and understanding the Client's needs (once identified) are the foundation of any category strategy, as explained in the Define and Understand Client Needs, Goals, and Strategies topic of the Conceptualize Need task of Process Step 1: Identify Needs. These objectives are used to develop a category strategy.

Spend analysis is also used to discover what financial requirements exist and to plan for the eventual allocation of monetary resources. Spend analysis (which is generated from data that describe the amount spent, number of suppliers used, clients served, purchasing locations, and commonality of suppliers) is properly carried out in the Conduct Spend Analysis topic of the Develop Sourcing Strategy task of Process Step 2: Evaluate Sources. Spend analysis is an extremely important tool that must be leveraged to understand what dollar amounts are spent on each commodity and, inherently, on each Supplier. In supply chain management, knowing what financial resources are required for purchases is extremely important to developing category strategies.

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Quadrant Analysis Tool - Value and Risk Assessment

All commodity purchases are pertinent to SCM, facilitate the achievement of Postal Service objectives, and can be mapped to a Quadrant Analysis (see Figure 1). This Quadrant Analysis is different from the Quadrant Approach used throughout the rest of these Supplying Practices. The Quadrant Approach classifies all Postal Service purchases into four categories, depending on their impact on Postal Service core competencies (noncore versus core) and complexities (standard versus custom). The Quadrant Approach assists in identifying key considerations for various practices in each of the four categories. The Quadrant Analysis below identifies commodities according to value and risk, and determines the most appropriate supply management strategies.

The Quadrant Analysis tool was developed by Postal Service SCM Strategies to assist commodity teams in performing quadrant analysis and to standardize the analysis process across the entire Supply Management organization. This tool provides a list of questions that serve as the criteria for evaluating each commodity. Based on the inputs provided by the user, the tool performs a weighted calculation to determine the overall relative value and risk of each commodity and graphs the results on a quadrant chart. Category strategies must consider the value and risk of commodities. For example, a low-value/low-risk item is treated with routine planning and does not require the attention and line of attack that a high-value/high-risk item requires.

Value is the relative importance of the commodity to the Postal Service. Factors in assessing value include:

Criticality to business operations

Importance to profitability

Importance of product or service quality

Spend amount

Percentage of total spend

Relationship to strategic goals

Risk is the degree of supply challenge. Factors in assessing risk include:

Number of suppliers

Availability of qualified sources

Availability of alternate or substitute products

Complexity of specifications

Use of new technologies or untested processes

Pricing scenarios (assignment of probabilities to possible outcomes)

Figure 1

Quadrant Analysis

Drawing of Quadrant Analysis

Strategic commodities are characterized by complex specifications, few qualified supply sources, and typically large individual expenditures. The quality of these products/services is critical. These commodities tend to be highly important to profitability and operations.

Bottleneck commodities have characteristics that include complex specifications requiring complex manufacturing or service processes, few alternate products available, and few qualified sources of supply. These commodities may impact ongoing operations or maintenance or may involve new technology or untested processes.

Leverage commodities include high expenditure levels, many alternative products/services, numerous suppliers, and readily available sources of supply.

Routine commodities include many existing alternate products/services, many sources of supply, relatively low value items, and many small individual transactions that are easily purchased. These commodities are often items of everyday use.

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Marketplace and Market Research

The Postal Service relies on market research, the continuous process of gathering data on product and service characteristics, to enhance strategic thinking, research, analysis, and decision making and to sharpen competitive advantages. The most important insight gained from market research is an understanding of potential suppliers. All Supply Management (SM) portfolios must perform and regularly update existing market research in a cross-functional and collaborative manner by conducting a quarterly market analysis, the commodity-based assessment of supplier segmentation, trends in supply and demand, economic factors, volatility, and risks, which identifies the current supplier market, industry trends, and market trends. Suppliers should be ranked by percentage of market share, using the Supplier Analysis Worksheet, which should be leveraged when the market analysis is generated. Information regarding suppliers is then used to help identify key suppliers and show the Postal Service how to create competition. The development of category strategies will be tailored to these key suppliers.

Market research should focus on areas and market issues, including, but not limited to:

Current and projected availability of products or services

Extent of competition in the market

Range of product or service performance characteristics

Future industry, technology, and macroeconomic trends

Price trends and current market prices (establishment of target price)

Supply base assessment (e.g., industry structure)

Types of available distribution and management systems

Benchmarking should also be used to compare a given CMC's present performance (e.g., quality of outputs, success level of operational methods, process innovation) against the performance of other CMCs (as well as that of external organizations in the industry). Benchmarking should be performed as part of market research and is discussed in detail in the Conduct Market Research and Benchmarking Analysis topic of the Decide on Make vs. Buy task of Process Step 1: Identify Needs. Benchmarking demonstrates whether the strategies focused on the general approach to the development and management of the core competencies, innovations, and change that are already in place are functional or whether requirements and the market necessitate more extreme innovation (the development of completely new category strategies). Benchmarking offers competitive intelligence on what already exists and indicates what is achievable in future transactions with suppliers. When competitive intelligence demonstrates that little is achievable in future transactions with suppliers, the category strategy must reflect that in-house manufacture of the commodity is warranted.

Another important element of commodity strategies is an understanding of Postal Service capabilities (e.g., innovation level of internal methodologies, patent protection) assessed by the strengths, weaknesses, opportunities, and threats (SWOT) analysis. By understanding which strengths to exploit, which weaknesses to improve, which opportunities to pursue, and which threats to negate, the Postal Service can develop realistic plans that are tailored to Postal Service circumstances and can strategically approach the purchasing process.

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High-Level Logistics

As already mentioned, CMCs will have overlapping strategies. Ultimately, high-level logistics will play a crucial role in supply chain support, ensuring that requirements get to the relevant Clients accurately, at low cost, and "in sync" with commodity strategies. For more information regarding high level logistics see the Develop Logistics Support Strategy topic in the Decide Make vs. Buy task in Process Step 1: Make vs. Buy.

Finalization and Benefits of Category Strategy Development

The various requirements of the commodity, logistics support options, value and risk of the commodity, and the marketplace allow for the actual development of a strategy that incorporates business considerations and impedes risk. An effective commodity strategy identifies priorities and key areas surrounding the purchase, such as:

Costs incurred and pricing

End results and delivery on commitment

Innovation and improvement

Distribution, storage, and transportation methodologies

eBuy availability (e.g., the availability of a commodity on eBuy, electronic data interchange [EDI] compliance of the existing supplier pool)

Information management

Operational efficiency and systems management

Necessary skill sets

An effective commodity strategy also has the following benefits:

Identification of Postal Service core competencies, capabilities, and capacities

Increased negotiation power (information that can be leveraged)

Reduced time-to-market cycle times for new products and services as a result of expanded organizational flexibility and alignment

Increased agility in addressing the market and technological trends/changes

Increased Client satisfaction with reduced response times and costs

Reduced operating expenses

Reduced transactional costs

Enhanced product and service quality

Elimination of unidentified risks and proactive risk management

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Quadrant Approach

A quadrant approach classifies all Postal Service purchases into four categories, depending on their impact on the Postal Service core competencies (noncore versus core) and complexities (standard versus custom). These four categories are not the same as the categories within the meaning of Category Management Centers (CMCs). The quadrant approach, used throughout these supplying practices to explain product/service competencies and complexities, is different from the quadrant analysis discussed above, which is used specifically for category strategy development, and which identifies commodities according to value and risk (and determines the amount of attention and strategic approach that must be afforded to types of purchases). The quadrant approach should be leveraged by the Purchase/SCM Team; VP, SM; and SM Operations Specialists to develop strategies that are specific to each category (quadrant) and to each Category Management Center (CMC).

The Quadrant Approach is extremely useful when establishing how the purchase process, in general, should be addressed and the steps that should be emphasized and prioritized, as shown in Figure 2.

Figure 2

Quadrant Approach

Drawing of Quadrant Approach

Quadrant I: Noncore/Customized Purchases

CMCs in Quadrant I require the overall management of suppliers. The Contracting Officer must ensure that Postal Service personnel are in compliance with purchase policies and procedures and help resolve questions or concerns. The CMCs in Quadrant I are:

Environmental and MRO

Professional, Printing, and Creative Services


The Contracting Officer must ensure that supplier continuity is encouraged and promoted. The Purchase/SCM Team should try to fulfill requirements with more standard products or services in the hope of decreasing the uniqueness of the purchase.

The Contracting Officer should develop as many contract renewals as possible with the suppliers and develop competition.

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Quadrant II: Core/Customized Purchases

CMCs in Quadrant II require the coordination of supply and continuous innovation. Clients must help install leading-edge usage practices. The CMCs in Quadrant II are:

Delivery and Industrial Equipment

Material Handling

Mail Transportation Equipment (MTE) and Spare Parts

Stamp Printing (subcategory)

Products and services that will be purchased by Clients from CMCs in Quadrant II have restricted sources because they are customized. In addition, they are core and essential to the business operations of the Postal Service and are therefore of high value. Stronger and more mutually beneficial working relationships with suppliers should be forged. Strategically, the Postal Service must continue to select innovative sources of customized and core products/services. Innovation is integral to the Postal Service remaining efficient and competitive. These characteristics must drive the strategy that will be developed for each category/portfolio in Quadrant II.

Because of the high value of these products and services, discussions and negotiations are encouraged to maintain prices at a fair level. The Contracting Officer must continuously consult the Market Analyst and Pricing Analyst in regard to the availability of potential sources, the availability of similar products and services, and the current prices being charged for similar products and services.

Quadrant III: Noncore/Standard Purchases

The purchases pertinent to Quadrant III CMCs require the overall management of the entire supply chain. Market leaders with lowest costs/prices and self-checking improvements are sought out. The CMCs in Quadrant III are:

Information Technology (IT)

Office Products and Utilities

Travel, Retail, and Temporary Services

Commercial Printing and Packaging and Containers (subcategory)

Products and services that will be purchased by Clients from CMCs in Quadrant III have many sources and provide the Postal Service with many options in terms of supplier selection. The presence of competition means that the Postal Service must aggressively pursue lower prices and award contracts to suppliers with past successful performance and on-time deliveries. The Postal Service must attempt to reduce the costs associated with administration and evaluation to realize cost savings. The CMCs in this quadrant should look for opportunities to centralize and concentrate purchasing to realize savings through leveraging spend.

The Contracting Officer must leverage the talent of Contracting Officer's Representatives and delegate administrative tasks to them. In addition, the Contracting Officer should try to minimize attention to negotiation while focusing high expectations on the evaluation of submitted proposals (both solicited and unsolicited).

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Quadrant IV: Core/Standard Purchases

As with the purchases in Quadrant II, the Purchase/SCM Team must coordinate supply of core and standard goods and services for CMCs of Quadrant IV. Market leaders must be sought out, and innovation must be encouraged and leveraged. The entire Purchase/SCM Team must work closely with the Client to ensure that the products and services purchased are specifically appropriate to the CMC's needs because their activities are essential to Postal Service business. The CMCs in Quadrant IV are:

Air Transportation

Surface Transportation

Transportation Asset Management


Products and services that will be purchased by Clients from CMCs in Quadrant IV have many sources and provide the Postal Service with many options in terms of supplier selection. As with products and services in Quadrant III, the Postal Service must maximize commercial advantage (e.g., aggressively pursue lower prices and award contracts to suppliers with successful past performance and on-time deliveries). The CMCs in this quadrant should look for opportunities to centralize and concentrate purchasing and realize savings through leveraging spend. The Purchase/SCM Team must regularly reassess the market and maintain flexibility (e.g., be willing to switch suppliers frequently, although the products/services remain the same).

Other Topics Considered

Define Requirements topic, Decide on Make vs. Buy task, Process Step 1: Identify Needs

Define and Understand Client Needs, Goals, and Strategies topic, Conceptualize Need task, Process Step 1: Identify Needs

Conduct Market Research and Benchmarking Analysis topic, Decide on Make vs. Buy task, Process Step 1: Identify Needs

Develop Logistics Support Strategy topic, Decide on Make vs. Buy task, Process Step 1: Identify Needs

Conduct Spend Analysis topic, Develop Sourcing Strategy task, Process Step 2: Evaluate Sources

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