In this article, I will review the original HBR Purchasing must become supply management written by Peter Kraljic in 1983
In 1983 kraljic write that purchasing (as it was known then and not procurement) was carrying out activities routinely. These days we call it tactical purchasing. Do we negotiate with our suppliers and our established network in the same way? How much has really changed since 1983?
Purchasing has evolved to become procurement but we most definitely do carry out supplier relationship management or contract management.
It is more important than ever to have a relationship with our key suppliers because the world of work has changed a lot since 1983. We have globalisation and the emergence of IT changing the supply markets and intensifying a competitive landscape. Today’s top company can become redundant if they are slow to embrace change and a new company can become the next big brand upsetting more traditional and established companies.
As part of the supplier relationship management have you implemented actions to answer questions in the original article?
- How do you safeguard against disruption in the supply change and cope with changing currency fluctuations and opportunities brought on by new technologies
- Do your top suppliers operate a supply chain, if yes do you understand what the steps are including the risks, of parts of the supply chain fails?
- Are your suppliers innovating to reduce cost?
Does your company require a supply strategy in the first place?
- The importance of the product
- The complexity of the supply market
Drawing below from HBR article linked above
Exhibit I Stages of Purchasing Sophistication
- Are you working with key suppliers to make use of opportunities? Even if your organisation operates a centralised procurement or purchasing function, some suppliers can work directly with different stakeholders. Work with your supplier to understand all contracts they have and consolidate them into one master contract and leverage the buying clout to get better pricing or value add. Also, review the supplier’s ability to supply and look at category options by bundling similar requirements into a single contract when it makes sense.
- Work with your suppliers to identify any expected supply bottlenecks and potential disruption before it becomes a real problem.
- Build a risk register for all of your key suppliers, what happens if they fail.
- Contracts shouldn’t be evergreen but should some contracts be for a longer period than the default period of 4 years if there are bigger savings to be made because of longer term commitment.
- How do you determine if a make or buy policy is the best option
- Are there options to work with suppliers or even competitors to maximise return on investment
- Is your accounting system supporting the correct classification to enable you to pull off accurate spend reports? If not what can be done to complete a data cleansing exercise? Without knowing what volumes are purchased it makes it difficult to negotiate with clarity.
Exhibit II: Strategic (high-profit impact, high supply risk), bottleneck (low-profit impact, high supply risk), leverage (high-profit impact, low supply risk), and noncritical (low-profit impact, low supply risk).
Exhibit II Classifying Purchasing Materials Requirements
Strategic suppliers use analytic techniques, including market analysis, risk analysis, computer simulation and optimization models, price forecasting, and various other kinds of microeconomic analysis.
Bottleneck suppliers use specific market analysis and decision models for resolution, work with vendor for value analysis, price forecasting models and leverage materials.
Noncritical items focus less time on supplier relationship but make sure the contract is ticking over unless the spend is a non-critical but high value or high risk.
Remember to monitor or quadrants of the supplier positioning within the Kraljic Matrix because supplier positions might move to different quadrants over time due to shifts in supply and demand.
What is the supplier power?
(see Exhibit III).
Exhibit III Purchasing Portfolio Evaluation Criteria
Consider the supplier break even point. A supplier that has a lower percentage threshold at 70 % capacity has more room to negotiate compared to someone who breaks even at 80% utilisation.
If the supplier has a unique product review new entrants to the market as competition will follow if others can make or offer the same product or deliverable for cheaper.
Where are you in a position of strength and weakness?
(see Exhibit IV).
Map out your key suppliers and assess the supply risks. Use your strength to push for more out of supplier relationships as their key client. Where you are weak, diversify.
Exhibit IV The Purchasing Portfolio Matrix
On items where the company plays a dominant market role and suppliers’ strength is rated medium or low, a reasonably aggressive strategy (“exploit”) is indicated. Because the supply risk is slight, the company has a better chance of achieving a positive profit contribution through favorable pricing and contract agreements. Even so, it has to take care not to exploit the advantage so aggressively that it jeopardizes long-term supplier relationships or provokes counterreactions by insisting on rock-bottom prices in times of market discontinuity.
On items where the company’s role in the supply market is secondary and suppliers are strong, the company must go on the defensive and start looking for material substitutes or new suppliers (“diversify”). It may have to increase spending on market research or supplier relations or even consider backward integration through major investments in R&D or production capacities. In short, the company needs its supply options.
For supply items with neither major visible risks nor major benefits, a defensive posture would be over-conservative and costly. On the other hand, undue aggressiveness could damage supplier relations and lead to retaliation. In this case, a company should pursue a well-balanced intermediate strategy (“balance”).
Usually, a company will find itself in different roles with respect to different items and suppliers. When it can bargain from a position of strength, it should press for preferential treatment. Bargaining from weakness, the company may have to offer inducements—longer-term contract obligations, for example, or higher prices—in order to ensure an adequate supply.
Each of the three strategic thrusts has distinctive implications for the individual elements of the purchasing strategy, such as volume, price, supplier selection, material substitution, inventory policy, and so on (see Exhibit V).
Exhibit V Strategic Implications of Purchasing Portfolio Positioning
Alignment with business objectives
Procurement can only hold the purse strings of an organisation if it’s set up correctly. An organisation may prefer a centralised or decentralised function and most often the best is to have a hybrid of both.
The organisation needs to decide whether if it wants purchasing clout or flexibility. Procurement professionals who understand the need for flexibility and who have the gravitas to get buy in to lead large centralised contracts get the best of both worlds. It’s a tricky set up to navigate but if done well reaps enormous rewards.
If you can get the buy-in from your internal stakeholders apply, work with external suppliers to understand where they believe they fit in.