Managing Contracts andRelationships in Procurement and SupplySession 2 Planning the Relationship Portfolio
Objectives of Session1.1 Classify types of commercial relationships in supplychains1.2 Apply portfolio analysis techniques to assessrelationships in supply chains4.2 Explain the main techniques for supplier relationshipmanagement4.3 Explain the main techniques for supplierdevelopment4.4 Explain techniques for relationship improvement
Relationship ManagementRelationship management can be defined as the process of analysing, planningand controlling an organisations relationships, in order to be able to leveragethe more important relationships to the long-term benefit of the organisation.Portfolio analysis and segmentationThis involves categorising and dividing the firm’s supplies and/or suppliers intodifferent classes, according to relevant criteria such as volume and value ofbusiness, profitability, supply risk – or, broadly, ‘importance’ to the firm’sstrategic objectives.Most purchasing operations increasingly face operational pressures to sustainand extend cost savings – while as assuring the quality and continuity of supply.Portfolio segmentation allows the procurement function to:Focus and leverage available resourcesFollow a standardised frameworkJustify supply and supplier portfolio management
Risk Assessment‘Risk’ is one of the key factors in prioritising supplies andsuppliers for investment in relationship management. Thehigher the risk, the more the buying organisation will want toexercise control over the suppliers and their processes in orderto minimise risks.Activity : Identify some Supply risk factors
Supply and Supplier PositioningA supply positioning model is a tool for determining whatkind of supply relationships and sourcing approaches abuyer should seek to develop, in relation to the variousitems it procures for the organisation. The aim is to assessthe importance of the different items in the purchasingportfolio and to prioritise contract and relationshipmanagement effort accordingly.Some popular tools for positioning supplies and suppliers
1. Improving your supplier delivery scheduleadherence: Pareto is an excellent tool when analyzing supplierperformance and deciding on your management strategy –which suppliers to focus on and what route causes to eradicate.2. Cost Savings initiatives: Using Pareto techniques toanalyse cost drivers within your organisation can help you focuson the key contributory factors such as Suppliers, Parts or Bill ofmaterial elements allowing you to focus your improvementactivities on the parts that matt
Carrying out Pareto AnalysisFirst gather you data and summarise (as in the belowexample)Sort your table in descending order of the issue yourinvestigating (in our example by number of Late Deliveries)Add a Cumulative % column for your issueOn your table/list draw a line at 80%The Items in your list which add up to the 80% are typicallythe primary causes the ones between the 80-100% are theless important causes
Culmative percentageAdd each new individual percent to the running tally of thepercentages that came before it.For example, if your dataset consisted of the four numbers:100, 200, 150, 50 then their individual values, expressed as apercent 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%)
ActivityWe’re investigating supplier rejections of goods sent to ourorganization. 152 data points have been collated andgrouped into 5 categories.The data was captured over a 3 week period and is asfollowsDamaged Packaging 42 OccurrencesParts received too early 5 OccurrencesIncorrect Documents 52 OccurrencesIncomplete Parts sent 12 OccurrencesIncorrect Part sent 17 OccurrencesCreate a Pareto matrix to analyis
Kraljic Portfolio Purchasing Model 1983Its purpose is to help purchasers maximize supply security andreduce costs, by making the most of their purchasing power. Indoing so, procurement moves from being a transactional activityto a strategic activity – because, as Kraljic said, "purchasing mustbecome supply management."The model involves four steps:Purchase classification.Market analysis.Strategic positioning.Action planning.
Step 1: Purchase ClassificationStart by classifying all of the commodities, components,products, and services that you buy according to thesupply risk and potential profit impact of each.Supply risk is high when the item is a scarce rawmaterial, when its availability could be affected bygovernment instability or natural disasters, whendelivery logistics are difficult and could easily bedisrupted, or when there are few suppliers.Profit impact is high when the item adds significantvalue to the organizations output. This could bebecause it makes up a high proportion of the output(for example, raw fruit for a fruit juice maker) orbecause 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 theproduct purchasing classification matrix
1. Strategic Items These items are directly linked todifferentiation and profit. These items are also scarce. Thisquadrant normally contains high-value items such as preciousmetals with limited, or even a single supplier. The purchasingstrategies we would typically use for these types of itemsinclude collaboration and strategic partnerships.2. Leverage Items Just like strategic items, these items have alarge financial impact however, the item is in abundant supply.Because of their large financial impact these items areimportant to the organization. The purchasing strategies wewould typically use for these types of items include tenderingand competitive bidding.Write down examples of these in your experience
3. Bottleneck Items These are items that have a low financial impacthowever, there is a high supply risk. An example might be where wehave a new supplier supplying a new technology. The purchasingstrategy we would typically use for these types of items is to ensurecontinuity of supply and develop plans to reduce our dependence onthis supplier, by adapting our prodcts and investigating alternativeproducts and suppliers.4. Non-critical Items These are items that have a low financial impacton our organization and are also in abundant supply, such as officesupplies. Although these products are low impact and have abundantsupply, they are nevertheless interesting, because the cost of handlingthem can often outweigh the cost of the product itself. Thus, thepurchasing strategies we would normally use for these types of itemsfocus around reducing administrative costs and logistical complexitWrite down examples of these items
Reasons For OutsourcingCost savingsManufacturing is not a core competencyLack of technical skills to develop or makean itemLack of capacityMinimization of inventoryAvoidance of risk of technical errorsInsufficient staff to process orderActivity – how well does this describe thecurrent situation
Kraljic’s Matrix - a 21stCentury ApproachActivityRead 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 ?
Kraljic’s Matrix 21stCentury ApproachBeginning with strategic items, a manufacturers most trustedpartner should be itself. It should acquire the capability to makethese items in-house. Buying the supplier would provideimmediate capability and permit the supplier to carry onproduction for other customers while allowing the buyer to reapthe benefits of the new additions success. Or, if the talent isavailable, the company could create the required capability in-house, tailored to its own needs. This approach, too, often leads tothe creation of a new business unit. (For a real-life example, seethe sidebar "Allen Organ hits the right notes on production.")Regardless of which path is chosen, the result is control of allaspects of the most critical subassemblies.
Leverage items must be handled in much the same way asbottleneck items, but because they represent a greater costand profit exposure than bottleneck items do, the companymust have a stronger voice as a board member, and theremust be a stronger commitment by the supplier to alwaysmake the items available when needed. (For an example of amanufacturer that followed this strategy, see "Neways invests for success.")
Non-critical items are usually classified as "C" items (lowestcategory of annual cost-volume) by inventory managers.Manufacturing resource planning (MRP) or enterprise resourceplanning (ERP) information systems can manage these itemsand warn of supply problems well before they occur. Sincethese are common, low-cost items that usually are purchasedin bulk and typically are available from a variety of sources, itmakes sense to establish relationships with more than onesupplier. This will allow buyers to always have a "warm base"of several suppliers that are producing those items atmoderate rates and are able to respond to surges in demandfor these fast movers.
Moving next to the bottleneck items, the certain way toensure available supply is, again, to produce it in-house. Costcontrol will be the biggest challenge for these items,because they may produce little profit. Acquiring or creatingcapability is a possibility, but cost-effectiveness will be theimmediate concern. Another strategy would be to invest inthe supplier, becoming a part owner with a seat on theboard of directors, so as to ensure the manufacturersinterests are locked in with the suppliers overall businessstrategy.
Read the article ‘From bean to cup: How Starbuckstransformed its supply chain’Use the tools and techniques we have looked in the sessionas milestones in Starbucks transformation process
1. It does not take into account the supplier’s perception of us,clearly an issue of some importance. £30,000 spent with yourlocal taxi firm brings rather more influence than the sameamount going to Microsoft.2. Thinking of our suppliers in terms of how much harm theycan do us may at times be useful, but it is somewhat passive,not to say negative. The more interesting question is ‘could thissupplier contribute to a real improvement in the way ourorganisation works and competes?’ This we will call ‘supplierstrategic potential’Limitations of Kraljic’s Model
Supplier PreferencingThe supplier preferencing model illustrates how attractive itis to a supplier to deal with a buyer, and the monetary valueof the buyers business to the supplier:
This is a useful model as it suggests strongly that in order to get the best fromsuppliers a buyer will need to maintain its attractive customer status.Attractive buyers include:Buyers from a glamorous or high profile brandBuyers from companies with good reputationsBuyers from fair and ethical companiesAs a contrast there is a potential downside to establishing a reputation as a‘negative’ or ‘unattractive’ customer. A buyer may become less attractive tosuppliers if, for example:They often pay their invoices lateThey constantly query or despite itemsTheir personal are rudeThey are dishonest or unethicalSuch customers might suffer the penalties of such conduct, and poor relationshipmanagement, in the form of:Refusal of high-quality suppliers to deal withLoss of supply, if suppliers find more attractive customersHigher pricesMore law suits, if suppliers reflect the customer’s litigious approach