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Supplying Principles and Practices > USPS Supplying Practices General Practices > 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
• Price:
- 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.
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
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.
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.
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.
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
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
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
• Facilities
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.
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.
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).
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
• Vehicles
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).
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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