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Case Scenario
The client has seen stagnant revenues and diminishing earnings for the past three years. The CEO thinks the solution to his issue is high-margin service companies founded on already-existing core competencies.
Key Questions
How would you analyse whether or not there are prospects to establish sustainable new service firms from a Value Chain perspective? Based on your assessment, create some viable business concepts
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Possible Recommendations / Approaches
Examining the value chain and recognising procurement as a critical capability are two skills the candidate must possess.
The company's procurement department, with its top-notch employees and procedures, is one of its key competencies. 2000 purchasers who work for its parent firm can also be accessed by it.
Large manufacturers like Caterpillar, John Deere, and others have a good working relationship with the corporation.
Large manufacturing businesses often purchase several hundred components (from around 500 vendors), but they also develop strategic alliances with the top 20 suppliers, including electronic links.
These strategic alliances have resulted in substantial cost reductions, but expanding them past the top 20 suppliers is not financially viable.
Conclusion
Based on the client's procurement capability, Deloitte Consulting suggested a new business model in this case, where it will handle suppliers that aren't in the top 20 for its main strategic clients. In order to cut costs and expedite the procurement process for components obtained from vendors outside the top 20, the client makes use of its web-enabled electronic connections. Planning is now taking place for the company.
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Frequently asked questions
How can value chain analysis help identify new service business opportunities?
Value chain analysis highlights core capabilities that can be monetized as services. In this case, the client’s strong procurement process and relationships offer a chance to serve other manufacturers by managing their non-strategic suppliers, leading to cost reduction and new revenue.
What makes procurement a viable high-margin service?
The client's top-tier procurement staff, scalable systems, and access to 2,000 parent company buyers create a powerful procurement capability. Leveraging this to manage indirect suppliers for large manufacturers can become a sustainable and profitable service offering.
What procurement gap exists for large manufacturers?
Manufacturers like Caterpillar and John Deere manage strategic relationships with their top 20 suppliers. However, managing the remaining 480+ vendors is costly and inefficient. This creates a service opportunity for third parties with strong procurement capabilities to fill that gap.
What is the proposed new business model for the client?
The new model focuses on providing procurement-as-a-service for vendors outside the top 20 of large manufacturers. Using existing electronic infrastructure, the client helps reduce costs and streamline operations, offering a high-margin service grounded in its procurement strength.
Why is procurement outsourcing a smart growth move?
Procurement outsourcing addresses inefficiencies in managing fragmented supplier bases. By offering procurement services to manufacturers for non-strategic vendors, companies can unlock a recurring revenue stream while helping clients reduce cost and complexity in their value chains.
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