This document discusses techniques for managing supplier relationships in procurement and supply chains. It covers classifying commercial relationships using portfolio analysis, assessing relationships based on supply risk factors, and positioning supplies and suppliers using tools like the Kraljic portfolio model. The document also explains techniques for supplier relationship management, development, and relationship improvement such as Pareto analysis, supplier preferencing models, and managing relationships based on a supplier's strategic potential and attractiveness as a customer.

1. Managing Contracts and
Relationships in Procurement and Supply
Session 2 Planning the Relationship Portfolio

2. Objectives of Session
1.1 Classify types of commercial relationships in supply
chains
1.2 Apply portfolio analysis techniques to assess
relationships in supply chains
4.2 Explain the main techniques for supplier relationship
management
4.3 Explain the main techniques for supplier
development
4.4 Explain techniques for relationship improvement

3. Relationship Management
Relationship management can be defined as the process of analysing, planning
and controlling an organisation's relationships, in order to be able to leverage
the more important relationships to the long-term benefit of the organisation.
Portfolio analysis and segmentation
This involves categorising and dividing the firm’s supplies and/or suppliers into
different classes, according to relevant criteria such as volume and value of
business, profitability, supply risk – or, broadly, ‘importance’ to the firm’s
strategic objectives.
Most purchasing operations increasingly face operational pressures to sustain
and extend cost savings – while as assuring the quality and continuity of supply.
Portfolio segmentation allows the procurement function to:
Focus and leverage available resources
Follow a standardised framework
Justify supply and supplier portfolio management

4. Risk Assessment
‘Risk’ is one of the key factors in prioritising supplies and
suppliers for investment in relationship management. The
higher the risk, the more the buying organisation will want to
exercise control over the suppliers and their processes in order
to minimise risks.
Activity : Identify some Supply risk factors

6. Supply and Supplier Positioning
A supply positioning model is a tool for determining what
kind of supply relationships and sourcing approaches a
buyer should seek to develop, in relation to the various
items it procures for the organisation. The aim is to assess
the importance of the different items in the purchasing
portfolio and to prioritise contract and relationship
management effort accordingly.
Some popular tools for positioning supplies and suppliers

8. 1. Improving your supplier delivery schedule
adherence: Pareto is an excellent tool when analyzing supplier
performance and deciding on your management strategy –
which suppliers to focus on and what route causes to eradicate.
2. Cost Savings initiatives: Using Pareto techniques to
analyse cost drivers within your organisation can help you focus
on the key contributory factors such as Suppliers, Parts or Bill of
material elements allowing you to focus your improvement
activities on the parts that matt

9. Carrying out Pareto Analysis
First gather you data and summarise (as in the below
example)
Sort your table in descending order of the issue your
investigating (in our example by number of Late Deliveries)
Add a Cumulative % column for your issue
On your table/list draw a line at 80%
The Items in your list which add up to the 80% are typically
the primary causes the ones between the 80-100% are the
less important causes

10. Culmative percentage
Add each new individual percent to the running tally of the
percentages that came before it.
For example, if your dataset consisted of the four numbers:
100, 200, 150, 50 then their individual values, expressed as a
percent of the total (in this case 500),
are 20%, 40%, 30%and 10%.
The cumulative percent would be:
100: 20%
200: 60% (i.e. 20% from the step before + 40%)
150: 90% (i.e. 60% from the step before + 30%)
50: 100% (i.e. 90% from the step before + 10%)

11. Activity
We’re investigating supplier rejections of goods sent to our
organization. 152 data points have been collated and
grouped into 5 categories.
The data was captured over a 3 week period and is as
follows
Damaged Packaging 42 Occurrences
Parts received too early 5 Occurrences
Incorrect Documents 52 Occurrences
Incomplete Parts sent 12 Occurrences
Incorrect Part sent 17 Occurrences
Create a Pareto matrix to analyis

13. Kraljic Portfolio Purchasing Model 1983
Its purpose is to help purchasers maximize supply security and
reduce costs, by making the most of their purchasing power. In
doing so, procurement moves from being a transactional activity
to a strategic activity – because, as Kraljic said, "purchasing must
become supply management."
The model involves four steps:
Purchase classification.
Market analysis.
Strategic positioning.
Action planning.

14. Step 1: Purchase Classification
Start by classifying all of the commodities, components,
products, and services that you buy according to the
supply risk and potential profit impact of each.
Supply risk is high when the item is a scarce raw
material, when its availability could be affected by
government instability or natural disasters, when
delivery logistics are difficult and could easily be
disrupted, or when there are few suppliers.
Profit impact is high when the item adds significant
value to the organization's output. This could be
because it makes up a high proportion of the output
(for example, raw fruit for a fruit juice maker) or
because it has a high impact on quality (for example,
the cloth used by a high-end clothing manufacturer).
Then mark each item in the appropriate place on the
product purchasing classification matrix

15. Step 1: Purchase Classification

16. 1. Strategic Items These items are directly linked to
differentiation and profit. These items are also scarce. This
quadrant normally contains high-value items such as precious
metals with limited, or even a single supplier. The purchasing
strategies we would typically use for these types of items
include collaboration and strategic partnerships.
2. Leverage Items Just like strategic items, these items have a
large financial impact however, the item is in abundant supply.
Because of their large financial impact these items are
important to the organization. The purchasing strategies we
would typically use for these types of items include tendering
and competitive bidding.
Write down examples of these in your experience

17. 3. Bottleneck Items These are items that have a low financial impact
however, there is a high supply risk. An example might be where we
have a new supplier supplying a new technology. The purchasing
strategy we would typically use for these types of items is to ensure
continuity of supply and develop plans to reduce our dependence on
this supplier, by adapting our prodcts and investigating alternative
products and suppliers.
4. Non-critical Items These are items that have a low financial impact
on our organization and are also in abundant supply, such as office
supplies. Although these products are low impact and have abundant
supply, they are nevertheless interesting, because the cost of handling
them can often outweigh the cost of the product itself. Thus, the
purchasing strategies we would normally use for these types of items
focus around reducing administrative costs and logistical complexit
Write down examples of these items

18. Step 1: Purchase Classification (2)

19. Step 2: Market Analysis

20. Step 3: Strategic Positioning

22. Reasons For Outsourcing
Cost savings
Manufacturing is not a core competency
Lack of technical skills to develop or make
an item
Lack of capacity
Minimization of inventory
Avoidance of risk of technical errors
Insufficient staff to process order
Activity – how well does this describe the
current situation

24. Kraljic’s Matrix - a 21st
Century Approach
Activity
Read the articles
‘Allen Organ hits the right notes on production’.
‘Neways invests for success’
Which elements of the matrix do you recognise in these articles ?

25. Kraljic’s Matrix 21st
Century Approach
Beginning with strategic items, a manufacturer's most trusted
partner should be itself. It should acquire the capability to make
these items in-house. Buying the supplier would provide
immediate capability and permit the supplier to carry on
production for other customers while allowing the buyer to reap
the benefits of the new addition's success. Or, if the talent is
available, the company could create the required capability in-
house, tailored to its own needs. This approach, too, often leads to
the creation of a new business unit. (For a real-life example, see
the sidebar "Allen Organ hits the right notes on production.")
Regardless of which path is chosen, the result is control of all
aspects of the most critical subassemblies.

26. Leverage items must be handled in much the same way as
bottleneck items, but because they represent a greater cost
and profit exposure than bottleneck items do, the company
must have a stronger voice as a board member, and there
must be a stronger commitment by the supplier to always
make the items available when needed. (For an example of a
manufacturer that followed this strategy, see "
Neways invests for success.")

27. Non-critical items are usually classified as "C" items (lowest
category of annual cost-volume) by inventory managers.
Manufacturing resource planning (MRP) or enterprise resource
planning (ERP) information systems can manage these items
and warn of supply problems well before they occur. Since
these are common, low-cost items that usually are purchased
in bulk and typically are available from a variety of sources, it
makes sense to establish relationships with more than one
supplier. This will allow buyers to always have a "warm base"
of several suppliers that are producing those items at
moderate rates and are able to respond to surges in demand
for these fast movers.

28. Moving next to the bottleneck items, the certain way to
ensure available supply is, again, to produce it in-house. Cost
control will be the biggest challenge for these items,
because they may produce little profit. Acquiring or creating
capability is a possibility, but cost-effectiveness will be the
immediate concern. Another strategy would be to invest in
the supplier, becoming a part owner with a seat on the
board of directors, so as to ensure the manufacturer's
interests are locked in with the supplier's overall business
strategy.

29. Read the article ‘From bean to cup: How Starbucks
transformed its supply chain’
Use the tools and techniques we have looked in the session
as milestones in Starbucks transformation process

30. 1. It does not take into account the supplier’s perception of us,
clearly an issue of some importance. £30,000 spent with your
local taxi firm brings rather more influence than the same
amount going to Microsoft.
2. Thinking of our suppliers in terms of how much harm they
can do us may at times be useful, but it is somewhat passive,
not to say negative. The more interesting question is ‘could this
supplier contribute to a real improvement in the way our
organisation works and competes?’ This we will call ‘supplier
strategic potential’
Limitations of Kraljic’s Model

31. Supplier Preferencing
The supplier preferencing model illustrates how attractive it
is to a supplier to deal with a buyer, and the monetary value
of the buyers business to the supplier:

32. This is a useful model as it suggests strongly that in order to get the best from
suppliers a buyer will need to maintain its attractive customer status.
Attractive buyers include:
Buyers from a glamorous or high profile brand
Buyers from companies with good reputations
Buyers from fair and ethical companies
As a contrast there is a potential downside to establishing a reputation as a
‘negative’ or ‘unattractive’ customer. A buyer may become less attractive to
suppliers if, for example:
They often pay their invoices late
They constantly query or despite items
Their personal are rude
They are dishonest or unethical
Such customers might suffer the penalties of such conduct, and poor relationship
management, in the form of:
Refusal of high-quality suppliers to deal with
Loss of supply, if suppliers find more attractive customers
Higher prices
More law suits, if suppliers reflect the customer’s litigious approach