Need Criteria in the Value Proposition

Need Criteria in the Value Proposition

 

The management of supply is concerned about the value proposition (benefits versus the cost) for specific needs acquired from suppliers.  The criteria for deciding what, in a particular instance, represents good value fall into three levels: strategic, traditional and additional current.

 

  • Strategic Criteria – The overreaching question concerning any organizational requirement deals with the strategic impact.  Is this a strategic requirement or not?  One  potential and frequently use attribute is the financial implication or impact of the requirement a breakdown of any organization’s acquisition needs according to an ABC analysis (Pareto Analysis) in which about ten to twenty percent of the number of separate needs account for seventy or eighty percent of the dollar value of the total corporate spend.  Aside from financial impact other strategic criteria include risk reduction, access to new technology or new markets, assurance of supply, revenue enhancement, potential competitive benefits, corporate image, or reputation improvement.

 

  • Traditional Criteria – Traditional criteria for supply management compromise the traditional value proposition of quality, quantity, delivery, price, and service

 

    • Quality – Quality covers both functionality “Does it do the job we want done?” and conformance to specification “Does it fit the specification agreed to?”  Meeting quality standards is a first a minimum demand on suppliers.
    • Quantity – The quantity supplied has to be sufficient meet the demand.
    • Delivery – The timing of the delivery has to meet the company’s needs.  It can be fast or slow, but must be as promised.
    • Price – The price of the need must be competitive enough to win the business.  Charging the right price has many attributes, but is based on market forces, competitive strategy, price elasticity of demand, and customer preferences.
    • Service – Service may include design, recordkeeping, transportation, storage, disposal, installation, training, inspection, repair, advice, as well as a willingness to make satisfactory adjustments for misunderstandings or clerical errors.

 

  • Additional Current Criteria – Other criteria for need include financial, risk, environmental, innovation, regulatory compliance and transparency, and social and political factors.

 

    • Financial – Financial criteria beyond price include improvement of the corporate financial statements (balance sheet, income statement, and cash flow statement), raise the company’s attractiveness in the eyes of investors, revenue enhancement, working capital (accounts receivable and inventory) reduction, cash flow improvement and any other initiative that improves return on assets or investment, raises the share price, or lifts the company’s financial ratings.
    • Risk – Every firm looks to reduce risk in any operation or activity.  Supply chain risk can be classified into seven main categories:
      • Operational – people, processes, systems, and external events which can interrupt the flow of goods and services.
      • Financial – these are supply chain situations which can impact a firm’s ability to earn revenue and make a profit.
      • Market – these are situations which can impact the price of a good which is purchased.
      • Liquidity – these are situations which impact a firm cash flow and ability to meet its obligations when due.
      • Reputational – risks that can impact the image of the firm through how it acquires goods or in how its suppliers behave.
      • Regulatory – risks that could impact the firm in the form of fines, regulatory violations, and contingent actions (lawsuits).
      • Strategic – risks which could affect a firm’s market position, they way it competes, and the way it provides its products or services to its customers.
    • Environmental – this relates to the risks mentioned above.  Environmental issues to consider include disposal of hazardous goods, the amount of energy and water used, transportation and pollution, as well as handling systems and distances traveled.
    • Innovation – refers to determining the best value in the pursuit of continuing improvement.  Firm expect current suppliers to provide suggestions for value and TCO improvements over time.
    • Regulatory Compliance – this relates to the risks mentioned above.  All agreements have to comply with the relevant laws and regulations.  Failure to comply can damage the reputations of the parties involved and can result in fines or citations.
    • Social and Political Factors – Corporate social responsibility regarding suppliers, promotion opportunities for impacted groups, and new opportunities for small business is a plus for a supply organization’s image.

 

The collective set of strategic, traditional, and additional criteria for need identification and supply chain decision making makes for a complex analysis in which judgment plays an important part.