Procurement - How to Choose the Best Procurement Strategy For YouStephen C Carter
November 19, 2012 — 1,125 views
Procurement professionals know how important it is to have an appropriate and agreed strategy for how they will go to market to meet the needs of their organization. This is particularly true when there is a risk of long-term scarcity of the purchased item or when you need to make a breakthrough cost reduction. However, not all purchases warrant the investment of time and effort needed to develop a bespoke strategy. Some form of prioritization is needed. One common way to do this is to use an approach called supply positioning.
Supply positioning is a technique that was first developed by Peter Kraljic to identify the appropriate strategy to use in managing a portfolio of spend categories. The technique produces a two by two matrix based on the importance of the spend category and the complexity or commercial risk involved in purchasing it.
Factors that can determine importance include:-
a) Value of spend i.e. the 80/20 rule - those items that together make up 80% or more of your total spend and those items that make up the remaining 20% i.e. the long "tail"
b) Importance to the delivery of your organization’s service or product e.g. it could be a key item in those services or products that are deemed to deliver 80% or more of the total value
c) Universality i.e. it may be a low cost component but is present in the majority of your service offerings or products without this component your organization’s output would be greatly impacted
The second axis is commercial supply risk which provides segmentation between high risk and low risk and includes a consideration of the complexity of buying from that market. We will cover a more detailed way to do this in a later section.
The result is four possible combinations.
The key here is that the items in the Strategic Core (high risk high importance) segment are a key focus for your category strategy and it is these that you take forward to the next stage of analysis when we look at supplier referencing and portfolio analysis.
Strategies for the other quadrants are as follows:-
Strategic Security: these are high risk items as they are probably a major determinant of your organization’s ability to deliver its products or services but low spend so you don't have much leverage. The strategy here is to secure continuity of supply while you work on ways to move them into one of the other quadrants.
Tactical Profit: these items are often low risk because there are plenty of willing and able suppliers in the marketplace. Strategies such as e-auctions to stimulate competition for your requirements can bring about price reductions at low risk to your organization.
Stephen C Carter
Steve Carter is an experienced procurement practitioner and published author and runs online training and coaching courses.