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Analysis
4. Markets and products
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Program

Markets and market structures



Supply side
Demand side
Purchase of goods





Raw materials and commodities
Components
Maintenance, repair and operating supplies
Investment goods
Services
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Markets and market structure

External structure
a number of links in supply chains (companies, institutions) that are
connected via markets

Industrial branch
the horizontal relationship of organisations that experience each
other as effective competitors

Industry column
a series of companies and valuechains in which the consecutive
stages of production of an economic product take place – from
primary producer to a specific set f customers or consumers
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Markets and market structure
Raw Materials
Semi-manufactured goods
Components
Capital equipment
Final Consumers
Diverging Materials flow
Finished product of one link is the main or sole input for
the next production stages of various industry columns.
This applies to industries that process raw materials
Linear Materials flow
The finished product of one link is the main or sole input
for the subsequent link.
Converging Materials flow
Various finished products of links of various industry
columns are the input for the next link. This situation is
found in companies with assembly-oriented production
structures
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Markets and market structure
Supply side economics: four types of markets......
Pure competition
Neither the supplier nor the buyer can influence the product price, price
is a given
 Complete information is available
 Homogeneous product

Monopolistic competition
High degree of product differentiation
 Each supplier tries to make his product stand out in the eyes of the
customer in order to create a monopoly situation for himself
 No direct pressure on prices from competitors’ offers

© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Markets and market structure
Supply side economics: four types of markets......
Oligopoly



Limited number of suppliers and limited product differentiation
Very difficult to get foothold in the market, entry barriers
Various forms:
At price P1 and
quantity Q1, all
capacity is used:
price stability
There is a price
leader and this is
accepted
Price
agreements are
reached
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
At price P1 and
quantity Q1, one
party operates
below cost price
and starts a
price offensive
Markets and market structure
Supply side economics: four types of markets......
Monopoly




Presence of only one supplier of the product
Substitutes are virtually absent
Natural monopolies: the entire supply of raw materials or a
particular manufacturing process is owned by just one producer
Government monopolies exist when based on special licenses
that are required from the government or when based on state
law
Advantage:
It enables the supplier to dictate the price and other contractual
decisions to the market
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Markets and market structure
Demand side economics: three types....
Pure competition
Oligopsony


Oligopoly in reverse: a few buyers and a large number of suppliers
Co-operatives or buying consortia
Monopsony


One buyer versus a large number of suppliers
Very rare
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Markets and market structure
Number of buyers
One
Few
Many
One
Bilateral
Monopoly, çaptive
market
(spare parts)
Limited supply side
monopoly
(fuel pumps)
Supply side
monopoly
(gas, water, light)
Few
Limited demand
side monopoly
(telephone
exchanges, trains)
Bilateral oligopoly
(chemical semimanufacturers)
Supply-side
oligopoly
(copiers,
computers)
Many
Demand-side
monopoly
(weapons systems,
ammunition)
Demand-side
oligopoly
(components,
automobile
industry)
Polypolistic
competition
(office supplies)
Number of suppliers
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Raw materials and commodity
exchanges
Distinction between natural raw materials (cattle, corn, coffee, cotton
etc.) and minerals (coal, iron ore, copper and bauxite)
Commodity exchanges play a significant role in the purchase of raw
materials. The major commodity exchanges are in the USA. Locations
have their roots in history.
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Raw materials and commodity
exchanges
Criteria for the effective functioning of a futures market:
1. A logical geographical location: for transportation of the material
2. Liquidity of the article: material must be available in sufficient
quantity and in manageable units
3. Liquidity of the market: there must be sufficient parties willing to
participate
4. Political stability: there must be a certain degree of political
stability in the country where the exchange is established, because
of the huge financial interests connected with the futures trade
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Raw materials and commodity
exchanges

Futures trade is forward trade, which means that goods are
purchased to be delivered at a future time, to fulfill the contract by
settling the price difference between the original and a new
transaction

Participants always take an open position:
Long position
Short position
Situation in which a party
buys more of the product
than he has sold: positive
balance
Situation in which a party
sells more of the product
than he has bought:
negative balance
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Raw materials and commodity
exchanges
Futures market: some definitions…..
Clearing house: body that guarantees the contracts and takes care of
the financial settlement
Four groups participate….
 Producer: uses market to secure his crop revenues
 Trader: is both buyer and seller and is satisfied with small profits
over large positions
 Buyer: main goal is to limit the market or price risk
 Speculator: only goal is profit. Speculators provide the market with
dynamics
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Raw materials and commodity
exchanges
Futures market, when?



Raw material is an essential constituent of the cost price of
the finished product
It is almost impossible to translate a price increase on the
purchasing side in the sales price
The raw material that is used in the finished product cannot
be substituted by other products
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Buying components
Purchasing related characteristics….

Components are parts that are to be built in the final product, to
be sold by the manufacturer: standard or specific

Often for serial production

Quality aspects and punctual delivery play an important role
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Maintenance, Repair & Operating supplies
Purchasing related characteristics….





Very extensive article assortment
High degree of specificity
Low, but irregular consumption rate
User has substantial influence on the choice of the product
MRO articles represent 80% of product codes, and 20% of the
purchasing turnover
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Maintenance, Repair & Operating supplies
Typical purchasing agreements for MRO-supplies:



Call-off agreements: agreements that specify price, delivery terms
and conditions and the contract period. Orders are placed against
annual contact.
Systems contract: contract that covers a plant or department’s
requirements for MRO supplies. Supplier carries inventory and
makes regular and timely deliveries. Often supported by electronic
catalogues and/or e-Procurement systems.
Corporate credit cards: not only for travel and entertainment
purposes, but also for non-production buying and incidental
purchases. Often in form of Procurement Cards.
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Investment goods
The purchase of investment goods entails…..



The purchase of machinery, installations and services
Monitoring the progress
Ensuring the required quality and specifications
Project related purchasing organized through project team:

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

project leader
project engineer
planning engineer
project administrator
process engineer
project buyer
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Investment goods
Criteria for selecting suppliers:



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
Production: Project experience that the supplier has
Organisation: State of quality of the staff and the ability to
provide in all the required disciplines
Financial status: Financial reliability, state of liquidity and
profitability
Design and manufacturing capacity: The assembly
instructions, the material experience and the monitoring of costs
Quality assurance: Guarantees that the supplier provides and
the quality standards he adheres to
Experience and references: The references the supplier can
provide and the experiences of other clients it has worked for
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Investment goods
Some specific aspects….




Bank guarantees: to ensure that the supplier’s obligations are
fulfilled
Transfer of title: agreements about ownership of the material
Performance guarantees: Guarantee that the supplier will meet
specifications
Payment terms: Supplier usually wants pre-payment in several
terms
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Buying services
Several types of services……

Civil engineering and architecture

Machine construction, production equipment,
transportation and energy

Electrical engineering, instrumentation etc.

Offices, laboratories, computers, catering.
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Buying services
Capacity buying:
Buying services because of insufficient internal capacity
Specialist buying:
Buying services because of a lack of expertise
Open tender….
 With pre-selection: principal indicates which companies are
qualified and can submit proposals
 Without pre-selection: every supplier can submit a proposal
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)
Buying services
Advantages of outsourcing services

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

Investments can be focused on
core activities
Optimal use of knowledge,
equipment and experience of third
parties
Flexibility is increased; fluctuations
in workload can be absorbed more
easily
Contracting out leads to a more
simple primary process in the
organization
Input of an independent vision
prevents organizational
shortsightedness
Part of the company risk is
outsourced to third parties
Disadvantages of outsourcing services





Increased dependency on
suppliers
Constant monitoring of costs
related to contracting out is
necessary
Risk of communication and
organizational problems during
outsourcing of activities to third
parties
Risk of information ‘leaks’
(confidential information)
Risk of social and legal problems
in case of activities by third parties
© Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5)