Practically Applying Sourcing Grids for Risk Management
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Purchasing and supply management have never been easy. The past several years have caused many executives and professionals to lose more sleep and gain more gray hair (or lose more hair) than usual; therefore, the next decade requires upgraded skill sets to survive. 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 dependent upon the position on the sourcing grid. It also defines the relationships (supplier positioning) we need to have with our key suppliers and gives us an insight in how the key suppliers may see us in perception model. 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.
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Practically Applying Sourcing Grids for Risk Management
- 1. 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”
- 2. 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
- 3. Supply Relationship Management and Spend Analysis How Is Your Supply Base Categorized?
- 4. Categories of Suppliers Preferred Supplier Certified Supplier Ship-to-Stock Supplier Qualified Supplier Vendor
- 6. Supply Base Stratification Pyramid Strategic D E P E D E N C Y R E L A T I O N S H I P Preferred Transactional The dependency on fewer suppliers increases while the need for a long-term relationship diminishes.
- 7. 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
- 8. Porter’s 5 Force Model to Assess Market Complexity GOOD PRACTICE RATIONALE PORTER’S 5 FORCES Focus of Strategic Attention Industry or Business Types of Competitive Advantage Low Cost or Differentiation Basic Unit of Competitive Advantage Activities
- 9. 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?
- 10. Porter’s Five Forces—Application Threat of New Entrants (2) • 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. IT Example 1 2 3 Industry Competition Rivalry Among Existing Firms (3) Bargaining Power of Suppliers (3) • Some suppliers have unique content which cannot be bought from other sources • Continuing to invest money in new tools and in developing content. • 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 • Some suppliers pursuing a fullservice, one-stop shop model. 4 5 Threat of Substitute Products or Services (2) High Bargaining Power of Buyers (4) • 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. • 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. Source: AT Kearney Low
- 11. Porter’s Five Forces—Effects of Environmental Factors Those Who Create the Market The Market THE BUYING COMPANY & COMPETITORS THE SUPPLIER’S COMPETITORS THE SUPPLIER Those Who Influence the Market THE SUPPLY PIPELINE NEW ENTRANTS & TECHNOLOGY
- 13. A-B-C Purchasing Classification of Value Percentage A 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%
- 14. Range of Purchase Order Transaction Information Grid PO $ Range 0-250 251-500 501-750 751-1,000 1,001-2,500 2,501-5,000 5,000 or more # of POs % of Total POs % of Total $ Value Average $ Value Per PO
- 15. Key Spend Categories for Expertise— Example Information Technology • 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 • Facilities Management • Janitorial • Site Maintenance • Engineering • Security • Cafeteria / Vending • Utilities • Construction • Environmental • Engineering Services • Hazardous W aste • Laboratory • Real Estate • Leases / Rental • Furniture • Business Equipment • Fax Machines Human Resources • Business Services • Education • HR Benefits Programs • Market Intelligence • Consulting • Other Personnel • Technical SubContract • Engineers • Programmers • Admin Services • Secretarial • Call Centers • Mail Room • Reprographics • Travel / Entertainment • Airlines • Hotels • Car Rentals • Transportation Services Business Resources • 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 • 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
- 16. Supplier Relationship Management (SRM) Classifications Strategic Distinctive Off-the-Shelf Commodity/Supply/Service Generic
- 17. Understanding Supply Base Risk Type 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
- 18. The Kraljic Purchasing Model Use of Matrices, Portfolio Analysis, and Sourcing Grids
- 19. 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
- 20. Original Kraljic Model Grid Supplier Positioning & Strategic Approach Security Category 2 Critical Category 4 Acquisition Category 1 High Profit Category 3 Supplier Vulnerability Low High Purchase Spend with Supplier
- 21. Purchasing Portfolio Model Grid—CIPS 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 High RISK Security Category 2 Supply important, Supply important, cost less so as cost less so as value value small Strategic Category Both supply4and Both supply and cost cost important important small Manage Process Manage Leverage Category 2 Category 3 Process Cost important, Because both Cost important, Because both supply less so supply risk low risk/value are low becauseless so risk/valueare low Low because risk low VALUE High
- 22. 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.
- 23. 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
- 24. 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.
- 25. 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.
- 26. Purchasing Sourcing Model Grid Centralized Procurement Activity in a Sourcing Group Portfolio Business High Strategic Nature, Complexity & Value of Purchase Low Capital Equipment Capital & Equipment Fixed Assets & Fixed Assets Category 2 Category 2 Raw Materials Raw Materials & Commodities & Commodities Category 3 4 Miscellaneous Miscellaneous Indirect Purchases Indirect Purchases Category 1 Category 1 Standard Goods Standard Goods & Services & Services Category 4 3 High Benefit From Category Management & Aggregation
- 27. Purchasing Sourcing Model Grid Purchase Category Assessment Positioning Category Business Impact Leveraged Purchases Category 2 Critical Purchases Category 4 Spot Purchases Category 1 High Strategic Purchases Category 3 Low High Category’s Supply Market Complexity
- 28. Purchasing Sourcing Model Grid Sourcing Approaches Based on Spend Volume High Cross Business Unit Overlap Coordinated Sourcing Category 2 Collaborative Sourcing Category 4 Other Sourcing Options Category 1 Site Specific Sourcing Category 3 Low High Category’s Mission Criticality
- 29. Purchasing Sourcing Model Grid Sourcing Approaches Based on Strategy Supply Chain Risk Bottleneck Category 2 Strategic Category 4 Routine High Leverage Category 1 Category 3 Low High Volume of Purchasing Source: Adapted from Hogeschool van Arnhem en Nijmegen
- 30. Purchasing Sourcing Model Grid Sourcing Approaches Based on Buyer’s or Seller’s Market High Product Criticality/ Quality of Services Required Core/Preferred Suppliers Category 2 Strategic Alliances Category 4 Commodity/ Spot Market Category 1 Monopolies/ Oligopolies Category 3 Low High Market Control/Risk Source: Adapted from Dr. Edward Marien in SC Digest
- 31. Supplier Base Management Improvement and Leverage Strategic Sources Preferred E-Procurement Suppliers Services Procurement Contractors Purchasing Supplier Interaction Competitive Incumbent Goods Suppliers Spot Purchasing Vendors Total Spend Management
- 32. Supplier Base Management Improvement and Leverage Supplier Source Type Purchasing Supplier Interaction Total Spend Management Strategic Sources Key suppliers and longterm 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 Random access on an as needed or required basis for goods or services Insignificant, disparate purchase spend and no leveraging opportunities Spot Purchasing Vendors
- 33. Supplier Perception Model How Is Buyer Viewed?
- 34. Supplier Perception Model— How Is Buyer Viewed? Source: Capacent and OGC
- 35. How Is Buyer Viewed?—Supplier Perception Model Source: Capacent and OGC
- 36. Portfolio Analysis from Buyer's Perspective—Kraljic Model Centralized Procurement Activity in a Sourcing Group Portfolio Business Degree of Market Complexity Capital Equipment Technical & Fixed Assets Category 2 Category 2 Raw Materials Strategic & Commodities Category 3 Category 4 Miscellaneous Acquisition Indirect Purchases Category 1 Category 1 High Standard Goods Leverage & Services Category 4 3 Low High Purchasing Spend
- 37. 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.
- 38. Leverage Value Using Strategic Sourcing— Anadarko Petroleum Corporation Example
- 39. Supplier Perception Model— How Is Buyer Viewed? Source: Capacent and OGC
- 41. Strategic Sourcing Approaches with Different Types of Buys Using a Sourcing Grid in Risk Management
- 42. Strategic Sourcing Transformation— Where Are You? Transactional Strategic Followers Leaders Buyers Internal Consultants Poor Reputation Reputed for Results Reactive Proactive
- 43. Strategic Sourcing Hexagonal Goals Product Specification Improvement Volume Concentration Lowest Overall Cost Evaluation Strategic Sourcing Gemstone Map Global Sourcing Expand Supply Base Joint Process Improvement Relationship Restructuring
- 44. Strategic Sourcing Primary Benefits
- 46. Strategic Sourcing Scorecard to Measure Success—KPMG View
- 47. Strategic Sourcing Model Grid Strategic Sourcing Approaches Assessment Category Business Impact Strategic Purchases Category 4 Non-Critical Purchases Category 1 High Leveraged Purchases Category 2 Bottleneck Purchases Category 3 Low High Category’s Supply Market Complexity
- 48. Different Strategic Sourcing Approaches Fit Better With Particular Types of Buys 1 2 3 4 5 Low Value High Value
- 49. Supplier Requirements Matrix for Doing Business—Littlefuse (LF) Company Example
- 50. Supplier Requirements Matrix for Doing Business—Littlefuse Company Example