CIPS L4M2 - Defining Business Needs

Explanation

In sales and marketing, market segmentation is the process of trying to understand clusters of cus-tomers in terms of their buying behavior and their buying characteristics. There are some traditional segmentation approaches: geography, demography, types of industry and the benefits. Then there are newer segmentation approaches: behavioral, situational, and psychographic.

Procurement professionals can learn market segmentation from sales and marketing. Segmenting the market can help them to shape and manage the supply market effectively. According to Michael Porter, a market can be segment with array of products and buyers.

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Source: Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 234). Free Press. Kindle Edition.

In the scenario, the products that Dana needs to source is distinct in their features. The best way is to segment the market by product varieties.

Explanation

Target costing is an activity aimed at reducing the life-cycle costs of new products, while ensuring quality, reliability, and other consumer requirements by examining all possible ideas for cost reduction at the product planning, research and development and prototyping phases of production. But it is not just a cost reduction technique; it is part of a comprehensive strategic profit management system.

Explanation

Over-specification can cause problems to buying organisation, include the following:

- Higher expense due to unnecessary features embedded into the product

- Stifle competition because higher requirements will lead to fewer suppliers in the market are able to supply

- Harder to evaluate the trade-offs between different features and attributes in the specification

Explanation

Break even point = Fixed costs/(Price-variable cost). In this case, break even point = 20,000/(100-60) = 500

Explanation

For straight re-buy, the specifications for the products are known. Generally, there will be an existing contract with supplier in place. The business need is challenged annually, only on the annual demand. So effective inventory control will help procurement successfully manage straight re-buy.

Explanation

In this scenario, the final product has vast range of parts. The second problem is lacking any part can cause disruption to the production process. So GE has 2 things to do: to reduce the part varie-ties, and secure the supply. Part standardisation is the best option here. It can simplify the range of parts or materials used, and simultaneously, it expands the supply base of GE. If a supplier fails to deliver the part, the company always has other options to replace.

Costs are also a concern, but bottleneck in production imposes a serious risk to the organisation. Driving down costs using market competition cannot be a foremost priority.

Increasing production may help to reduce bottleneck. However, it will also increase the inventory of finished products and unnecessary upkeep costs.

LO 3, AC 3.4

Explanation

The threat of substitution is a function of three factors:

• The relative value/ price of a substitute compared to an industry’s product

• The cost of switching to the substitute

• The buyer’s propensity to switch

Buyers with different circumstances and in different industries do not all have equal propensities to substitute when faced with a comparable economic motivation. Differences in their circumstances lead buyers to respond to a given relative value to price (RVP) and switching cost differently. While such differences might be treated as factors that modify RVP or switching costs, it is more helpful in practice to isolate them.

Resources. Substitution often involves up-front investments of capital and other resources. Access to such resources will differ from one buyer to another.

Risk Profile. Buyers often have very different risk profiles, the result of such things as their past history, age and income, ownership structure, background and orientation of management, and nature of competition in their industry. Buyers prone to risk taking are more likely to substitute than buyers that are risk-averse.

Technological Orientation. Buyers experienced with technological change may be less concerned with some kinds of substitution risks, while extremely aware of others that a less technologically sophisticated buyer would be oblivious to.

Previous Substitutions. The second substitution may be easier for a buyer than the first, unless the first substitution has been a failure. The buyer’s uncertainties over undertaking a substitution may have diminished if a past substitution has been successful, or risen if a past substitution has led to difficulties. In the soft drink industry, this seems to have worked to the benefit of aspartame.

Intensity of Rivalry. Buyers under intense competitive pressure and searching for competitive ad-vantage will tend to substitute more quickly to gain a given advantage than those that are not.

Generic Strategy. The RVP of a substitute will have different significance depending on the com-petitive advantage that industrial, commercial, or institutional buyers are seeking or the value of time and particular performance needs of the household buyer. A substitute that offers a cost saving will tend to be of more interest to a cost leader than a differentiator, for example.

Many of these factors that shape the buyer’s propensity to substitute will be a function of the particular decision maker who is involved in the purchase decision.

Porter, Michael E.. Competitive Advantage: Creating and Sustaining Superior Performance (p. 278-289). Free Press. Kindle Edition.