Notesale: Turn your study into money

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Leverage Items
What are they?
Many suppliers & the item is readily available
Standard item
Your annual expenditure on the item is high
The item is low risk to your company
Your relatively high expenditure makes your purchases
attractive to suppliers
ITC

M4:U5:5
...
1-2

Leverage Items
Supply strategy options depend on:
The volatility of the market
Your knowledge of the supply market
The degree of price variation amongst suppliers
The level of “switching costs”

ITC

M4:U5:5
...
2-1

Switching costs
Can be:
Costs related to negotiating a contact
Re-training of staff
Changes in processes & design
Obsolescence of old stock
Penalties for terminating the previous contract
Inefficiencies in start-up phase, etc
...
2-2

Action Point

5
...
2-3

Switching costs
Suppliers may try to build in switching costs by:
Offering benefits & discounts for customer loyalty
Developing strong links with your executive
and/or technical staff
Providing free training and other services

ITC

M4:U5:5
...
2-3

Switching costs - part two
Think of a purchase for your organisation that would be very costly
to move to a new supplier
...
2-5

The relative bargaining position of buyers and
suppliers changes over time…
Supplier

High

Bargaining

Buyer

power

Low
Contract
being
negotiated
ITC

Early part
of contract
term

Middle
of contract
term

Contract
becoming due
for renewal
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2-7

Price variation
Reasons:
Products may be differentiated
Suppliers are operating at different levels of capacity
Suppliers exploit the market ignorance of buyers
Suppliers’ costs are different
(e
...
, distribution)

ITC

M4:U5:5
...
g
...
3-2

Supply strategy for leverage items
Case 3: High price variability & low switching costs
Number of suppliers:

Many

Nature of relationship:

Arms-length

Type of contract:
Type of supplier to seek:

ITC

Spot (purchase order)
Lowest cost at time of
purchase

M4:U5:5
...
3-4

Action Point

5
...
3-5

Operational Strategies
for Leverage Items
E-commerce
Benchmarking against industry norms
Demand forecasting
Process re-engineering /automation forecasting
Use of purchasing cards
Delegation of call-off responsibility to end users
Consolidated billing
Inspection
Customer account manager
ITC

M4:U5:5
...
4-2

Which operational strategy to use?
(Cont ’d)

Strategy
Process reengineering

Supply targets

Circumstances

• Availability (lead- time) • High frequency of transactions
• Cost of acquisition

Consolidated
billing/
purchasing
cards

• Cost of acquisition

Inspection

• Cost of acquisition

• When items are non-standard or sensitive
to quality/quantity variations

Customer
account
manager

• Responsiveness

• Where emergency requirements or
support may be required

ITC

• High number of invoices to process
• Risk of purchasing card misuse is low

M4:U5:5
...
4-1

Operational strategies for leverage items
Operational
strategy

Demand forecasting

Currently using
the strategy

Benchmarking

Would benefit
from the
strategy

E-commerce

ITC

Leverage products
or services:

Issues involved in applying
the strategy

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...
5-1

Buyer Characteristics
Strong negotiators who are comfortable with
arms-length relationships (spot purchases and
when entering into term contracts)
If switching costs are high, the person
managing the contract need to be good at
establishing and maintaining a co-operative
relationship

ITC

M4:U5:5
...
6-2

One-time or infrequent purchases
of Leverage Items
Spot buy focusing on price
Try to use e-commerce (e
...
, electronic
auctions)

ITC

M4:U5:5
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8-1



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