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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: 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: 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 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)