9 June 2011 | Elaine Porteous

Conducting a supply market analysis for any given commodity is a skill every supply chain professional should master. Elaine Porteous provides some pointers

Question: Why do we bother to gather market intelligence on the strategic commodities we are sourcing? Answer: If we don’t, we could be exposed to unnecessary supplier risk and any competitive advantage we thought we had may be lost. Supplier risk can be present anywhere, anytime and with any supplier.

‘Supply market intelligence’ is a buzz phrase that’s currently gaining rapid exposure. It is essentially an upgrade of ‘supply market analysis’ and can be defined as the process of gathering, filtering, distilling and presenting information relevant to a company’s supply markets. Its specific purpose is to support accurate and confident decision making in the procurement process.

Where to start

Traditionally, supply market analysis has included developing a commodity profile, examining cost structures, researching suppliers, and identifying key market indicators.

A properly executed and insightful supply market study requires that significant and disparate amounts of research materials are collected through primary and secondary research.

Primary research is information gathered through interactions with other people typically through meetings, one-on-one structured interviews, focus groups, and surveys. This type of research with current and prospective vendors is often more valuable and insightful than secondary sources. The deluge of information available on the internet, both reliable and suspect, can be accessed equally by billions of users, which makes primary research an essential element to creating competitive advantage.

Secondary research is information collected from existing literature, publications, broadcast media, and other non-human sources. This is generally easier to gather than primary sources and is often valuable in relation to the effort expended.

Whether you are studying the market outlook for male personal hygiene products in southern Africa for the next five years or an in-depth analysis of future capital flows and investment trends in hospital construction, it is all ‘out there’. A recent report on the South African economic environment predicts that the pharmaceutical industry will grow much faster than other sectors as a result of a strong continuing demand for primary healthcare level drugs, such as generics, antibiotics and over-the-counter remedies. 

Commodity knowledge

Here are four steps to help you get to know your commodity:

1. Develop the commodity profile
Find out the international product classifications and document the commodity definition. Consult widely and get a clear understanding of the important technical and quality issues. 

2. Determine the cost structure
Over and above the usual adding up of raw material costs, labour, transport, energy, and overheads there’s more you can do to find this out. Listed companies are required to publish financial statements and hold presentations covering their business results. Scour this information for clues to their cost profiles.

3. Research all suppliers
This requires focus and effort and is an ongoing process. Establish if the global market is fragmented or consolidated, where the low-cost suppliers are, potential new supply channels and any pending mergers or buy-outs. This is an area where you may need help from specialist organisations that provide news and intelligence services, especially where they target unlisted companies. Customised dashboards are available that are designed especially to track activity within your commodity – but at a price.

4. Identify key market indicators
The good news is that most global and regional market indicators are frequent, reliable and free. Economic indicators track high-level commodity prices, production rates, inventories, GDP and employment statistics. You can even set up alerts so that you don’t miss any key events or developments.
Should your organisation be kind enough to provide you with analyst support or if you have excess time on your hands, you can delve into technical and detailed analyses for important commodities using SWOT analysis (strengths, weaknesses, opportunities and threats), Porter’s five forces (rivalry, the threat of substitutes, buyer power, supplier power, and barriers to entry) and PEST. It stands for ‘political, economic, social, and technological’ analysis and can be upgraded to PESTLE if you incorporate legal and environmental impacts. 
Whether you are based in Luanda, Lesotho or Lilongwe, you have access to the same market information as the rest of the world. The difference is that you may not have the opportunity or the financial resources to source from outside Africa, which limits your options. South Africa and Nigeria are the most developed markets and primary sources of supply for buyers in southern Africa.

Information challenges

Identifying high-risk suppliers is one of the major reasons we undertake laborious research into our supply markets. Risks can be mitigated to some extent through tracking and managing supplier performance issues and monitoring the changing financial status of key suppliers but this is not foolproof. It is necessary to have a back-up plan where you have already identified alternative suppliers to replace or supplement existing providers. Avoidance of supply chain disruptions as a result of supplier failure is vital for business continuity.

Information overload is a trap that it is easy to fall into, as is analysis-paralysis. Managing key suppliers by exception allows you to use your limited resources wisely. Continuous monitoring of high-impact suppliers through the use of scorecards, graphs and charts helps to ensure you can store and share current information and provides an early-warning system for senior management. 

Sourcing managers, especially in southern Africa, are doubly challenged because they are required to have a diverse supplier base. This can involve time-consuming supplier qualification and record-keeping processes. Government regulations and economic development initiatives that are designed to offer supply opportunities to micro-, small- and women-owned businesses need to be followed. And in most African countries, a percentage of local content is an important requirement. 

All of these issues add complexity to the maintaining of a good supplier intelligence database.

Competitive advantage

Focus your analysis efforts on heavily concentrated markets where there are a few large suppliers and also on highly fragmented markets where the financial instability of smaller vendors can cause supply interruptions. Tracking of key market indicators can provide insights in supplier cost structures, which helps determine if you are achieving the best possible deal.

An in-depth knowledge of the supply market dynamics in a commodity can reduce risk. By developing a comprehensive understanding of the number, type and structure of suppliers you can keep your options open and lower the risk of supply interruption.

Used within a strategic sourcing framework, a procurement professional’s strong primary research skills and the ability to track a commodity can deliver competitive advantage. If you are naturally inquisitive and like to follow trends, none of this will even feel like work.

☛ Elaine Porteous is an independent procurement consultant and HR professional based in South Africa