Practically Applying Sourcing

Grids for Risk Management:

Supplier Positioning, Portfolio Analysis, and the Perception

Model

Conducted and Developed by

Thomas L. Tanel, C.P.M., CCA, CISCM, President and CEO

CATTAN Services Group, Inc.

© Copyright 2011

65th ANNUAL SOUTHWEST SUPPLY MANAGEMENT CONFERENCE

“Strength of Networking…Power of Knowledge - SWSMC Delivers”

Agenda

• Supply Relationship Management and Spend Analysis—How Is Your Supply Base Categorized?

• The Kraljic Purchasing Model—Use of Matrices, Portfolio Analysis, and Sourcing Grids

• Supplier Perception Model—How Is Buyer Viewed?

• Strategic Sourcing Approaches with Different Types of Buys—Using a Sourcing Grid in Risk Management

Supply Relationship Management and Spend Analysis

How Is Your Supply Base Categorized?

Categories of Suppliers

Preferred Supplier

Certified Supplier

Ship-to-Stock Supplier

Qualified Supplier

Vendor

Supplier Relationship Hierarchy

Alliances

Partners

Suppliers/Contractors

Vendors

Supply Base Stratification Pyramid

Strategic

Preferred

Transactional

DEPEDENCY

RELATIONSHIP

The dependency on fewer suppliers increases while the need for a long-term relationship diminishes.

Supply Base Stratification Tiers

Stratification

Tier

Number of Suppliers

Supplier Relationship

Strategic Market Leader Highly Dependent

Preferred Few Suppliers Leveraged

Transactional Many Suppliers Spot or P.O. Basis

Porter’s 5 Force Model to Assess Market Complexity

GOOD PRACTICE RATIONALE PORTER’S 5 FORCES

Focus of Strategic AttentionIndustry orBusiness

Types ofCompetitive Advantage

Low Cost orDifferentiation

Basic Unit ofCompetitive Advantage

Activities

Porter’s Five Forces—Applied to Supply Base and Relationship Management

• According to Porter, these five forces shape the profitability of an industry and determine how attractive the industry is.

• Analyzing the forces in relation to your industry can help you decide strategy for your organization

• Porter’s Five Forces are:– Internal Rivalry: Who are the existing competitors in the industry, and

what’s the level of competition?– Entry: How hard is it for new firm to enter the industry? What barriers

exist to discourage new entry?– Power of Suppliers: Who supplies the industry’s inputs, and how easy is

it to negotiate with them?– Power of Buyers: On the other end, who’s buying the industry’s

products or services, and how easy is it to negotiate with them?– Substitutes: What products/services exist that take the place of the

industry’s products or services, and how does this affect industry demand?

Porter’s Five Forces—Application

• Increasing availability of information from other sources, e.g. World Wide Web, as search engines such as Google and Yahoo continue to mature and Wikipedia products develop.

1 Low

2

3

4

5 High

IT Example

• Some suppliers have unique content which cannot be bought from other sources

• Continuing to invest money in new tools and in developing content.

• Some suppliers pursuing a full-service, one-stop shop model.

• Greater awareness of pricing policies putting pressure on suppliers to be more flexible with pricing.

• Beginning to manage demand and negotiate more effectively.

• Individual departments within a company can band together to leverage buying power.

• Opportunities still exist to switch suppliers.• Buyers are increasingly able to purchase

services tailored to their needs.

• Industry is continuously changing and this will bring potential opportunities for new entrants.

• New entrants need deep pockets and strong strategy

• Opportunities still exist in Asia-Pacific• Most products are web-based, therefore main

differentiator will likely be ease of navigation.

Threat of New Entrants (2)

Bargaining Power of Buyers (4)Bargaining Power of Suppliers (3)

Threat of Substitute Products or Services (2)

Industry Competition Rivalry Among Existing

Firms (3)• Mature industry with a small number of large, powerful

suppliers is pushing suppliers to be more responsive with their pricing policies and terms & conditions.

• Less competition due to industry consolidation, but buyers can still switch suppliers

• Information aggregators are forming alliances that enable them to provide value-added content analysis such as reputation management and other services

Source: AT Kearney

Porter’s Five Forces—Effects of Environmental Factors

THE SUPPLIER

THE SUPPLIER’S COMPETITORS

The Market

Those Who Influence the

Market

Those Who Create the

Market

NEW ENTRANTS &

TECHNOLOGY

THE SUPPLY PIPELINE

THE BUYING COMPANY &

COMPETITORS

Profile Sourcing Group

PercentageA B C

Annual Total Purchasing Expenditures/Buys

70-85% 10-25% 1-20%

Annual Total Number of Suppliers

5-20% 20-30% 50-60%

Annual Total Number of Services, Products, and Materials

10-20% 25-30% 50-60%

Annual Total Number of PO Transactions

5-10% 15-25% 50-70%

A-B-C Purchasing Classification of Value

Range of Purchase Order Transaction Information Grid

PO $Range

# of POs% of

Total POs% of Total

$ Value

Average$ Value Per PO

0-250

251-500

501-750

751-1,000

1,001-2,500

2,501-5,000

5,000 or more

Key Spend Categories for Expertise—Example

Information

Technology

Information

Technology

FacilitiesFacilities

Business Resources

Business Resources

• Business Services• Education• HR Benefits Programs• Market Intelligence• Consulting• Other Personnel• Technical Sub-

Contract• Engineers• Programmers• Admin Services• Secretarial• Call Centers• Mail Room• Reprographics• Travel / Entertainment• Airlines• Hotels• Car Rentals• Transportation

Services

• Computer Equipment

• DASD / Storage• Printers• PC Workstations• Peripherals• 3rd Party• Maintenance• Telecom

Equipment• Phone• Switch Equipment• Pagers• Cellular Phones• Audio & Video• Networking

Equipment• Maintenance• Software

Development• Software

Commercial• Mainframe• Applications

• Facilities Management• Janitorial• Site Maintenance• Engineering• Security• Cafeteria / Vending• Utilities• Construction• Environmental• Engineering Services• Hazardous Waste• Laboratory• Real Estate• Leases / Rental• Furniture• Business Equipment• Fax Machines

• MRO / Office Supplies

• Mill Supplies• Electric Supplies• Pipes, Valves,

Fittings• Chemicals• Manufacturing

Equipment• Services• Supplies• Maintenance• Material Handling • Equipment• Build to Print• Non-Product Parts

and assemblies

• Marketing Communications

• Advertising (TV, Radio, Print)

• Direct Marketing• Business / Trade

Shows• Promotional items• Interactive meetings • and events• Public Relations• Sales Promotions• Printing Services• Pre production• Paper• Forms / Envelope

Printing• Commercial Printing• Letter shops

Marketing & Communication

s

Marketing & Communication

s

Human Resources

Human Resources

Supplier Relationship Management (SRM) Classifications

Strategic

Distinctive

Off-the-ShelfCommodity/Supply/Service

Generic

Understanding Supply Base RiskType of Risk Case in Point

Strategy • New geographical region with unfamiliar suppliers• Wrong sourcing supply strategy for supply chain stream • Lack of end-to-end visibility in one integrated system

Demand • Over specification, excess inventory and demand volatility• Reduce design latency and develop a pull-based signal • Inability to ramp up or ramp down for changing needs

Market • Market exposure for constrained supply industry capacity• Sudden and unexpected changes in customer policies• Inability to monitor and assess market conditions

Implementation • Poor supplier qualification and selection criteria• Supplier labor availability, cost, and quality issues• Failure to execute supply assurance strategies, if needed

Performance • Supplier relative to others providing similar items/services• Potential supplier financial solvency and bankruptcy• Continuous supply disruption impacts and incidences

The Kraljic Purchasing Model

Use of Matrices, Portfolio Analysis, and Sourcing Grids

Kraljic Matrix

• The matrix was developed by Peter Kraljic and first published as part of an HBR article in 1983

• The core of the model is to rank suppliers on two dimensions (high or low)

1. The amount of company spend with the supplier

2. How vulnerable a company is to a supplier’s failure or disappearance

Original Kraljic Model Grid

SecurityCategory 2

CriticalCategory 4

AcquisitionCategory 1

ProfitCategory 3

Supplier Positioning & Strategic Approach

Purchase Spend with Supplier

Supplier Vulnerability

High

Low High

Purchasing Portfolio Model Grid—CIPS

SecuritySupply important,

cost less so as value small

StrategicBoth supply and cost important

Manage Process

Because both risk/value are low

LeverageCost important, supply less so

because risk low

The Purchasing Portfolio is model which enables an organization to decide the best approach to the purchase of individual goods and services. It

involves categorizing each purchase in terms of risk and value and then positioning it in the following matrix.

Purchase Category Assessment Positioning

VALUE

RISK

High

Low High

LeverageCategory 3

Cost important, supply less so

because risk low

Manage ProcessCategory 2

Because both

risk/value are low

StrategicCategory 4

Both supply and cost important

SecurityCategory 2

Supply important,cost less so as value

small

Purchasing Portfolio Model Sourcing Grids

• Portfolio Analysis is one of the most powerful techniques used by the purchaser, despite its simplicity.

• It is a simple ‘grid’ tool that charts the amount we spend on products or services and the complexity of its acquisition.

• Portfolio Analysis helps us define our sourcing strategy and the best sourcing techniques to use depend on the position on the grid.

Purchasing Portfolio Model Sourcing Grids

• It also defines the relationships we need to have with our key suppliers and gives us an insight in how the key suppliers may see us.

• It allows you to organize your time and resources for maximum benefit and it encourages strategic thinking and analysis to reduce cost, add value, and minimize risk.

• Portfolio analysis allows you to select the most effective methods to apply which will maximize the control and management of key work streams

Purchasing Portfolio Model Sourcing Grids

• There are real dangers if suppliers are more important to us than we are to them, and real opportunities if the balance of power is in our favor!

• It is important to identify their perception of us and tailor our actions accordingly.

• If there is clearly a mismatch in the level of commitment between buyer and supplier, the relationship can be disrupted.

Purchasing Portfolio Model Sourcing Grids

• When used within the application of SRM, it is necessary to ensure that the resources are used efficiently and attention is directed appropriately.

• Portfolio Analysis can be used to help decide which elements of the supplier portfolio to focus on when constructing the Sourcing Grid and corresponding strategy.

Purchasing Sourcing Model Grid

Capital Equipment& Fixed Assets

Category 2

Raw Materials& Commodities

Category 3

Miscellaneous Indirect Purchases

Category 1

Standard Goods& ServicesCategory 4

Centralized Procurement Activity in a Sourcing Group Portfolio Business

Benefit From Category Management & Aggregation

StrategicNature,

Complexity & Value ofPurchase

High

Low High

Capital Equipment& Fixed Assets

Category 2

Raw Materials& Commodities

Category 3

Miscellaneous Indirect Purchases

Category 1

Standard Goods& ServicesCategory 4

Capital Equipment& Fixed Assets

Category 2

Raw Materials& Commodities

Category 3

Miscellaneous Indirect Purchases

Category 1

Standard Goods& ServicesCategory 4

Capital Equipment

& Fixed AssetsCategory 2

Raw Materials& Commodities

Category 4

Miscellaneous Indirect

PurchasesCategory 1

Standard Goods& ServicesCategory 3

Purchasing Sourcing Model Grid

LeveragedPurchasesCategory 2

CriticalPurchasesCategory 4

SpotPurchasesCategory 1

StrategicPurchasesCategory 3

Purchase Category Assessment Positioning

Category’s Supply Market Complexity

CategoryBusinessImpact

High

Low High

Purchasing Sourcing Model Grid

CoordinatedSourcingCategory 2

CollaborativeSourcingCategory 4

Other Sourcing Options

Category 1

Site SpecificSourcingCategory 3

Sourcing Approaches Based on Spend Volume

Category’s Mission Criticality

Cross Business

UnitOverlap

High

Low High

Purchasing Sourcing Model Grid

BottleneckCategory 2

StrategicCategory 4

RoutineCategory 1

LeverageCategory 3

Sourcing Approaches Based on Strategy

Volume of Purchasing

Supply ChainRisk

High

Low High

Source: Adapted from Hogeschool van Arnhem en Nijmegen

Purchasing Sourcing Model Grid

Core/PreferredSuppliersCategory 2

StrategicAlliancesCategory 4

Commodity/Spot MarketCategory 1

Monopolies/OligopoliesCategory 3

Sourcing Approaches Based on Buyer’s or Seller’s Market

Market Control/Risk

Product Criticality/

Quality of ServicesRequired

High

Low High

Source: Adapted from Dr. Edward Marien in SC Digest

Supplier Base Management Improvement and Leverage

Strategic SourcesStrategic Sources

Preferred E-Procurement SuppliersPreferred E-Procurement Suppliers

Services Procurement ContractorsServices Procurement Contractors

Competitive Incumbent Goods SuppliersCompetitive Incumbent Goods Suppliers

Spot Purchasing VendorsSpot Purchasing Vendors

Purchasing Purchasing Supplier Supplier

InteractionInteraction

Total Total Spend Spend

ManagementManagement

Supplier Base Management Improvement and Leverage

Supplier Source

Type

Purchasing Supplier

Interaction

Total Spend

Management

Strategic

Sources

Key suppliers and long-term sources of supply of goods and services

Majority of purchase spend by sourcing group and most opportune for negotiation

Preferred

E-Procurement Suppliers

Preferred Internet-based suppliers of standardized goods and services

Significant purchase spend and leverage opportunity

Services Procurement

Contractors

Key suppliers of purchased services that are usually non-traditional areas

Previous uncontrolled spend and opportunity for cost reduction

Competitive Incumbent Goods Suppliers

Qualified or approved suppliers of goods without a long-term commitment

Controlled purchase spend that may lend itself to possible consolidation

Spot Purchasing

Vendors

Random access on an as needed or required basis for goods or services

Insignificant, disparate purchase spend and no leveraging opportunities

Supplier Perception Model

How Is Buyer Viewed?

Supplier Perception Model—How Is Buyer Viewed?

Source: Capacent and OGC

How Is Buyer Viewed?—Supplier Perception Model

Source: Capacent and OGC

Portfolio Analysis from Buyer's Perspective—Kraljic Model

Capital Equipment& Fixed Assets

Category 2

Raw Materials& Commodities

Category 3

Miscellaneous Indirect Purchases

Category 1

Standard Goods& ServicesCategory 4

Centralized Procurement Activity in a Sourcing Group Portfolio Business

Purchasing Spend

Degree of

Market Complexity

High

Low High

Capital Equipment& Fixed Assets

Category 2

Raw Materials& Commodities

Category 3

Miscellaneous Indirect Purchases

Category 1

Standard Goods& ServicesCategory 4

Capital Equipment& Fixed Assets

Category 2

Raw Materials& Commodities

Category 3

Miscellaneous Indirect Purchases

Category 1

Standard Goods& ServicesCategory 4

Technical

Category 2

Strategic

Category 4

Acquisition

Category 1

Leverage

Category 3

Relative Power and Sourcing Techniques

• Category 1-Acquistion there is no power to speak of. The price of the items is less significant, as it is often less significant than the total cost of acquiring the goods. The key activity here is simplification of process and standardization and/or elimination of requirements.

• Category 2-Technical the lack of choice (whether due to the complexity of the items or the lack of competition in the market) and the low buying power means that the supplier is firmly in control and can charge whatever they can get away with. Buyers are stuck paying these prices because the cost to switch suppliers is high.

• Category 3-Leverage the relative simplicity of the items, the degree of the competition and the large spend means the buyer is firmly in the driving seat and the market sets the price.

• Category 4-Strategic the buyer and the supplier are both interdependent; therefore, power is shared and prices are mutually agreed (based on some type of open book costing or cost transparency). The relationship is more important than the a particular deal. The approach is long-term contracting that is partnering or alliance oriented.

Leverage Value Using Strategic Sourcing—Anadarko Petroleum Corporation Example

Supplier Perception Model—How Is Buyer Viewed?

Source: Capacent and OGC

Workflow for Strategic Purchasing/Sourcing—Exense’s View

Strategic Sourcing Approaches with Different Types of Buys

Using a Sourcing Grid in

Risk Management

Strategic Sourcing Transformation—Where Are You?

Transactional Strategic

Followers Leaders

Buyers Internal Consultants

Poor Reputation

Reputed forResults

Reactive Proactive

Strategic Sourcing Hexagonal Goals

Global Sourcing Expand Supply

Base

Lowest Overall Cost

Evaluation

VolumeConcentration

ProductSpecificationImprovement

JointProcess

Improvement

RelationshipRestructuring

StrategicSourcing

Gemstone Map

Strategic Sourcing Primary Benefits

Competitive Sourcing Methodology—NGIS View

Strategic Sourcing Scorecard to Measure Success—KPMG View

Strategic Sourcing Model Grid

LeveragedPurchasesCategory 2

StrategicPurchasesCategory 4

Non-Critical PurchasesCategory 1

BottleneckPurchasesCategory 3

Strategic Sourcing Approaches Assessment

Category’s Supply Market Complexity

CategoryBusinessImpact

High

Low High

Different Strategic Sourcing Approaches Fit Better With Particular Types of Buys1 Low Value2345 High Value

Supplier Requirements Matrix for Doing Business—Littlefuse (LF)

Company Example

Supplier Requirements Matrix for Doing Business—Littlefuse Company Example

THANKS—Questions???