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Armed with these basics the next key item for any buyer is to
determine where their items fall in the overall market. This
understanding will allow the buyer to maximize the use of their
time. Commodities can best be isolated into four quadrants. The
strategic management is determined by the sector the commodity falls
in.
1. The first is where there are many suppliers but small amounts of
dollars expended. For these commodities the buyer should expend
minimal efforts, for the payback will be small. These may not even
require contracts. In some cases it may be useful from a lead
time and inventory standpoint to utilize distributors. Where
possible these items should be consolidated with suppliers of larger
purchases for price leverage. These items typically constitute only
5% of the dollars expended by a company.
2. The many suppliers and large dollar expenditure sector is the
area where most of the buyer's time should be spent. In this sector
such techniques as partnerships and quality supplier programs are a
must. This is also an area to utilize target costing and value
analysis as key thrusts to lower overall costs of the item(s).
Typically over 70% of a company's expenditures occur here—the area
where even small percentage cost improvements can lead to large
dollar savings. Commonly these are known as commodity items.
3. The third sector is where there are few suppliers, but a minimal
amount of dollars, generally less than 5% spent. These commodities
should be managed by multi-year contracts to minimize effort. Also,
due to the typically small expenditure for these items, it is
appropriate to carry large safety stocks in inventory.
4. In about 20% of the items we find large expenditures but few
suppliers. Again those should be m anaged with multiyear contracts.
In some cases these require larger inventories, perhaps having the
supplier carry them. These are the items that should be first on the
list to move to the category of many suppliers by redesigning the
materials. Where these are key components, the buyer, planner and
manufacturing must have a backup plan to assure continued supply.
To be Continued
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