Supply risk – the broad category of risk associated with an organisation's supply chain being unable to supply or being unable to supply on time, in full, or to required quality standards Supplier risk – supply risks associated with the inadequacy or failure of the supplier. Examples include a buyers lack of capacity or the supplier having sudden liquidity problems. Environmental supply risks – the risk of disruption to supply, or rising supply costs, arising from factors or changes in the supply market and external environment. Examples include a global shortage in raw materials, natural disasters, exchange rates and so on. Demand risks – arising from factors such as: fluctuations in demand for the finished product; unexpectedly high demand, resulting in poor service levels; unexpectedly low demand, leading to waste; and the importance of the supply item to the buyers organisation
A – risk events which are not likely to happen or if they did it would have little effect if they did. The action plan here would be, as the given the low level of impact, the organisation can safely ignore such factors as low priority. B – events which are relatively likely to occur, but will not have a major effect, for example an exchange rate fluctuation, if the organisation is not heavily exposed by international sourcing outside the EU.The action plan here would be to monitor such factors in case the situation changes and the impact may be greater than anticipated. C – events which are not likely to happen, but will have a big impact if they do, for example the business failure of supplier of critical requirements. The action plan here would be to draw up a contingency plan to minimise the impact, in the case the event occurs. D – contains both events which are both likely to happen and the serious in their impact, for example the emergence of new technologies that alter the supply market.
How would this apply to the supply chain
High profit/high risk items deserve the most attention - typically are the most costly, and they would have the greatest impact on profits and the ability to serve customers if there were an interruption in the flow of available supply. The "performance core" of the item being manufactured classified as strategic items . An automobile engine is one example of a product that fits this category. Low profit/high risk items deserve attention to the extent that they do not have such a strategic impact on the end product, but they do prevent the product from being completed. These items are often custom-made and are readily available if suppliers are given enough time. Lack of these items would delay production, but by themselves, they add little profitability to the finished item. They are considered bottleneck items . The exhaust system for an automobile would be included in this category. High profit/low risk items are absolutely necessary to complete a product and ideally are available on short notice from established suppliers They are classified as leverage items . Automobile glass or seats would fit this category Low risk/low profit items are necessary to complete a product but are readily available, low-cost, and are not customized for the product. These are classified as non-critical items . Common hardware and welding rods used in automobile production are typical of this category
Kraljic recommends the following purchasing approaches for each of the four quadrants: Strategic items (high profit impact, high supply risk). These items deserve the most attention. Options include developing long-term supply relationships, analyzing and managing risks regularly, planning for contingencies, and considering making the item in-house rather than buying it, if appropriate. Note that step 3, below, provides detailed options for the best purchasing approach for these items, after considering other factors. Leverage items (high profit impact, low supply risk). Purchasing approaches to consider here include using your full purchasing power, substituting products or suppliers, and placing high-volume orders. Bottleneck items (low profit impact, high supply risk). Useful approaches here include overordering when the item is available (lack of reliable availability is one of the most common reasons that supply is unreliable), and looking for ways to control vendors. Non-critical items (low profit impact, low supply risk). Purchasing approaches for these items include using standardized products, monitoring and/or optimizing order volume, and optimizing inventory levels.
Exploit – Make the most of your high buying power to secure good prices and long-term contracts from a number of suppliers, so that you can reduce the supply risk involved in these important items. You may also be able to make "spot purchases" of individual batches of the item, if a particular supplier offers you a good deal. The only real caution is not to take any aggressive approach too far, just in case circumstances change. Balance – Take a middle path between the exploitation approach and the diversification approach described below. Diversify – Reduce the supply risks by seeking alternative suppliers or alternative products. For example, in our logistics example, could you use the railroad to ship some of your overland freight instead of relying solely on trucking companies?
Critcism - Modern view
The cost savings associated with outsourcing overseas. Chinese companies' manufacturing successes have created a middle class that now requires higher pay and benefits. cost of establishing and managing the contracts with external suppliers, plus the increasing transportation costs and lead time Core competency- when small volumes of products and components are required, and preparing to manufacture the product in-house would be extremely expensive, it probably does make sense to leave it to the experts. However, if significant volumes would be involved Lack of technical skills ties in with core competency issues. Whether or not an organization should possess certain skills is a strategic decision As for lack of capacity, it's easy to say that a production facility can't take on any more work, but often a shop is not actually at maximum The lean, build-to-order inventory mentality says that the supplier takes on the inventory risk, and that manufacturers should carry little or no inventory. But when a customer order does arrive and there is insufficient stock to fill it Delegating the technical risk to a supplier appears to absolve the brand owner of responsibility. It gives management someone to blame if a product doesn't live up to the promises made to the customer Outsourcing has encouraged companies to keep their staffs lean, but that can be risky. Few companies, for instance, recognize the consequences of failing to have enough staff to enable timely and competent order processing
Beginning with strategic items, a manufacturer's most trusted partner should be itself. It should acquire the capability to make these items in-house..
Nuisance customers – neither attractive not valuable to do business with Exploitable customers – offer large volume of business, which compensates for lack of attractiveness Developing customers – are attractive, despite current low volumes of business. The supplier may see the potential to grow the account Core customers – highly desirable and valuable for suppliers, who will want to establish long-term mutually-profitable relationships with them if possible
Example CIPS online lecture
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