LESSON 3

PROCUREMENT STRATEGIES
ANALYZING SUPPLY CHAIN MARKET

Supply market analysis assists procurement planning and the ongoing management of supply arrangement by
identifying the following:
 Structure of the market
 Market behavior
 Supply chain
 Barriers to market entry
 Environmental factors
 Ethical considerations
 The buyers value in the market

5 STEPS TO A SUPPLY CHAIN MARKET ANALYSIS

● Define your objectives, scope, and commodity profile

○ The primary goal of performing a market analysis can vary, but a common goal is to develop key insights to
drive better business decisions and improve your competitive position via your supply chain. Since every
organization is unique, ensure you and your stakeholders are in alignment prior to executing this analysis.

○ Before you begin any research, it is also critical to understand the scope of your project. Define the breadth
and depth of your efforts and develop a clear understanding of the profile of the commodity that you will
research.

● Research the market and pricing structure for your commodity

○ Make sure you understand how pricing works for the goods or services you are interested in; factors
including material costs, labor costs, transportation costs, energy and utility needs, and overhead can influence
the final price you pay.

○ Is the commodity’s availability influenced by the time of year? By geopolitical events? By new laws coming
into effect? This is the time to find out.

● Conduct in-depth supplier analysis

○ Identify the main players in your market and research them thoroughly. From geographic locations to target
customers and competitive advantage, it’s important to understand the context in which they operate.

○ It’s also not a bad idea to do some digging into their financial background and research any lawsuits or other
risky situations they may be up against. One framework that can be helpful in this step is a SWOT (Strengths,
Weaknesses, Opportunities, Threats) diagram, which can make it easier to compare suppliers against one
another.

● Identify key market indicators

○ Finding the right indicators for your commodity can be difficult, but it can play a significant role in your
research conclusion and ultimately, your recommended business strategy.

○ How? When viewed in context, the right indicators can help you understand the current state of the market,
and when tracked over a period of time, these indicators can become predictors of what’s to come in the
market. Four categories of indicators you may consider measuring include:
■ Economic Indicators – pricing trends, inflation rates, and production rates
■ Pricing Indices – Consumer Pricing Index (CPI), Producers Pricing Index (PPI), and Import/Export Price
Indexes
■ Employment Indicators – unemployment claims, percentage of workforce fully employed
■ Production Measurements – gross domestic product (GDP), industrial production rates, and capacity
utilization rates.

● Compile your findings and outline final recommendations

○ In this step, keep in mind the context and culture of your organization. Risk tolerance, for example, can vary
greatly from industry to industry and company to company. Developed and implemented the right way for your
unique organization, your findings can enhance your business’ competitive advantage, reduce risk in your
supply chain, and strengthen your financial position.

○ Conducting your own supply chain market analysis is not an easy feat, but with careful, comprehensive
research and judiciously applied recommendations, this analysis can prove very effective. From increasing
your supply chain’s strategic impact to enabling business agility to outsmart unexpected circumstances, the
outcomes of such an analysis can be far-reaching and surprisingly valuable.

SPEND MANAGEMENT

● Is the way in which companies control and optimize the money they spend. It involves cutting operating and
other costs associated with doing business

● Even though the money is spent for goods or services for:

 Direct inputs (raw goods and materials used in the manufacture of products),
 Indirect material (office supplies and other expenses that do not go into a finished product)
 Or services (temporary and contractual labor, print services, etc.),

● A company needs a mechanism by which they are not only able to save money but control costs.

● Spend management is a continuous process of controlling and improving the way a company spends money
and typically includes strategic procurement activities such as supplier management, category management,
inventory management, and product development.

● Ideally, an effective expense management strategy includes a comprehensive spend analysis and helps
companies maintain control of their purchases, optimizes supplier relationships, and maximizes the ROI of
every dollar they spend.

● While spend management is often executed by procurement, it impacts many internal and external
stakeholders of a business who are also concerned with budgeting and planning future profitability.

● They need spend management to stay in business and improve an organization’s bottom line. Effective
spend management will leverage real time analytics and insights to drive better decisions, create value, and
cut costs.

● Is meant to represent a holistic view of the activities involved in the “source-to-settle” process which includes
the following:
- spend analysis
- sourcing
- procurement
- receiving
- payment settlement
- management of accounts payable and general ledger accounts
SPEND MANAGEMENT SYSTEMS

Companies have recently been utilizing the following new tools that promise not only to automate paper
intensive and manual processes, but also to help monitor and control spending activity and to create an
integrated process in which each activity feeds into another.

1. e-sourcing - for bidding and reverse auction

2. e-procurement - to control and monitor purchasing activities and contracts
3. e-spend analytics - to gain insight into how much money is being spent on what types of services or
products

HOW SPEND MANAGEMENT IMPROVES PROCUREMENT?

● Better sourcing opportunities

○ By mapping out all the costs involved in the supply chain process, you can identify which suppliers are
yielding the most value and which ones are not. Supply chain management becomes more efficient because
you have a clearer picture of the vendors who are the most cost-effective.

● Increased process efficiency

○ Spend management software eliminates manual processes that take up valuable time and money and
optimizes procure-to-pay processes like strategic sourcing and contract management

● More spend visibility

○ Spend management systems provide accurate and timely data that lead to more insightful decisions around
procurement. Spend analytics support forecasting efforts that reduce maverick spend and capitalize on savings
opportunities.

● Better risk management

○ An end-to-end spend management solution provides the means to assess the market, identify risk factors,
and develop plans for navigating around them before they occur and well into the future.

HOW SPEND MANAGEMENT SAVES MONEY?

Decreasing “maverick" spend

- "Maverick" spend is the process whereby requestors buy items or services that are outside the preferred
process. Requestors are those who are creating a request for an item or service that will be turned into an
order to a supplier. This means that a “maverick” purchase results in an individual or department buying an
item that results in paying a premium for that item.

- This is often hard to enforce unless some control mechanism (often technological) is put in place that:
> 1) prohibits this type of purchasing
> 2) sets up penalties for these types of purchases
> 3) puts into place some type of approval or check and balance system.

Increase of spend economies of scale

- By directing more spend toward a particular supplier, a company can negotiate more favorable pricing based
on how much money it spends with that supplier in a given year. By consolidating this "spend", and directing it
toward one or a few suppliers, companies are able to get bigger discounts.

Increase process efficiencies

- Automating sourcing, procurement and payment processes will greatly improve the efficiency of paper based
and manual processes. The general idea is not just to automate, but also use the technology to improve upon
these processes.
- Process savings can be measured in various ways such as how long it takes to process a purchase order,
how many individuals need to touch the purchase order before it can be sent, how long it takes to reconcile
and pay the supplier, and many other methods to measure these process improvements.

Increase procurement efficiency

- This involves using e-sourcing tools for the bidding and contract award process similar to eBay in which there
may have one buyer and many suppliers, or one supplier and many buyers. These supply chain management
tools also help to develop product requirements that can be sent to suppliers (typically called an “RFP” or
Request For Proposal).

This may involve the following procedures:

A buyer will develop a document listing the type of product they need and why, specifications, the bidding
process (how the process will work and how suppliers will be scored), rules for the bidding process, and other
factors.

Buyers will then invite suppliers to register online, and open the event for a set period of time so that suppliers
can bid.

At the end, the buyer awards the contract to one of several suppliers.

The e-sourcing of direct items (raw materials) is often much more complex than indirect (office supplies, etc.),
as the deciding factor is not just price but also the way the product fits into the overall manufacturing of a
product.

DEVELOPING SUPPLY STRATEGIES

Purchasing departments are seen as highly valued, strategic contributors to the organization because of their
ability to impact product design and quality, cost of goods sold, cycle time. Their influence both within and
outside the organization is considered unique in that it interacts with internal and external customers and
suppliers, and with internal design, production, finance, marketing and accounting personnel.

The ever changing global economic environment has forced many organizations to institute strategic sourcing
initiatives. Strategic sourcing is managing the firm’s external resources in ways that support the long-term
goals of the firms.

This includes the following:

Make-or-buy decision

Whether to make or buy components is a strategic decision that can impact an_ organization's competitive
position. Cost has been the major driver when making sourcing decisions.

Reasons for buying or outsourcing:

1. Cost advantage
2. Insufficient capacity
3. Lack of expertise
4. Quality

Reasons for making:

1. Protect proprietary technology
2. No competent supplier
3. Better quality control
4. Use existing idle capacity
5. Control of lead-time, transportation and warehousing cost
6. Lower cost

Identification and selection of suppliers

The process of selecting a group of competent suppliers for important materials, components, and services
which can impact on the firm’s competitive advantage is a complex one.

Factors that firms should consider while selecting suppliers are:

1. Product and process technologies
2. Willingness to share technologies and information
3. Quality
4. Cost
5. Reliability
6. Order system and cycle time
7. Capacity
8. Communication capability
9. Location
10. Service

Managing and improving supplier relationships and capabilities

Organizations must develop the right capabilities for developing long-term relationships with their suppliers.
However, before entering into any partnerships, it is important for an organization to conduct a thorough
investigation of the supplier's capabilities and core competencies

Monitoring and rewarding supplier performance

By evaluating supplier performance, organizations hope to identify suppliers with exceptional performance. A
supplier evaluation and certification process must be in place so that organizations can identify their best and
most reliable suppliers. Providing frequent feedbacks on supplier performance can help organizations avoid
major surprises and maintain good relationships.

Example of supplier performance metrics:

1. Cost/price
2. Quality
3. Delivery
4. Responsiveness and flexibility
5. Environment
6. Technology
7. Business metrics
8. Total cost of ownership

TACTICS TO IMPROVE YOUR SPEND MANAGEMENT PROCESS

● Identify expenses and company spending

○ The first step is to identify the sources of expenditure, which encompasses both direct and indirect spend. It
involves collecting purchase orders, goods receipts, supplier invoices, and supplier payment data. There is no
room for error here and it can be an extremely tedious task. That’s why investing in spend management
software that records expenses digitally is a good idea.

● Centralize expense data

○ Once you have all your expense sources, you must gather this information in a central database. Automation
can help maintain records of spend or you can put all your expense data in a digital spreadsheet. Either way,
make sure you assign this task to a responsible individual.
● Verify data
○ The data that’s collected and stored must be cleansed. This entails steps such as removing duplicates,
correcting any spelling mistakes, and ensuring that all spend data is recorded in a single currency. Cleansing
and verifying your database validates that the data you’re using to make key company decisions is as accurate
as possible.

● Create spend categories

○ Expenses come in all shapes and forms. It’s necessary to create top level spend categories that align with
your company’s objectives. Examples could be advertising expenses, supplier contracts, employee salaries,
and so on. Compartmentalizing helps with better understanding all the spend information you’ve gathered.

● Analyze spend data

○ Now it’s time to conduct a detailed spend analysis that will give you real-time visibility into your company’s
purchasing history, spending patterns, and will provide insight into supplier benchmarking and cost
opportunities. This is also how you can quantify cost savings and differences in terms of percentages and
aggregates/averages.

● Define a strategy
○ Based on the data you’ve collected, streamlined, and analyzed, you can form a spend management strategy.
This will most likely involve implementing changes that affect all stakeholders, so make sure they’re involved in
the decision-making and implementation process.

● Forecast and planning

○ When you obtain accurate and reliable data through a spend management platform, you can identify savings
and cost reduction initiatives and estimate the impact it will have on your bottom line. Data forecasting helps
you prepare for the future, improve supplier relationships, and provides the insights needed to adapt to
changes in supply and demand.

SPEND ANALYSIS

● Spend Analysis is the starting point of strategic sourcing and creates the foundation for spend visibility,
compliance, and control.

● Spend analysis organizes procurement information via supplier hierarchies, commodity alignment, and
spend amount, in order to:
○ Ascertain true category spend
○Identify strategic sourcing opportunities through demand aggregation and supplier rationalization.
○ Identify expense reduction through increased compliance – in the form of vendor rebates, maverick spend,
contract compliance, and budget variance.

● The savings can range from 2 to 25% of total spend.

● Spend analysis is the practice of analyzing procurement spend to decrease costs, increase efficiency, or
improve supplier relationships.

● Is the process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of
reducing procurement costs, improving efficiency and monitoring compliance. It can also be leveraged in other
areas of business such as inventory management, budgeting and planning, and product development.

KEY TERMS AND DEFINITIONS

● Spend data (also known as procurement spend data) is information dealing with a company’s expenditures
on goods and services purchased from external suppliers.

● Spend data management is the process of collecting, sorting, and managing that spend data.
● Spend analytics is the process of collecting, cleansing, classifying, and analyzing spend data through either
dedicated software or one-off spend cubes.

● Spend analysis is the practice of analyzing spend data to decrease costs, increase efficiency, or improve
supplier relationships.

SPEND ANALYSIS

● Put simply, spend analysis is a process of systematically analyzing the historical spend (purchasing) data of
an organization in order to answer the following types of questions:

○ What was the corporate-wide spend associated with each cost center last year? Does the aggregate amount
enable me to increase leverage with suppliers?
○ What are the top commodities? What has the spend trend been over the last few years? Which of these
commodities represent opportunities for spend reduction? ○ Which suppliers are the most valuable and
strategic?
○ How much am I spending with preferred suppliers? How much am I spending with poorly performing
suppliers?
○ What percentage of spend is associated with contracts?

● The idea is to be able to examine these reports and identify opportunities for savings.

● For example, if the spend associated with non preferred suppliers is high, this category is clearly where
spend “leakage” is occurring because the prices and terms negotiated with preferred suppliers are usually
better than the prices and terms that are in effect with non preferred suppliers.

● Similarly, if a particular commodity is fragmented (i.e., is being sourced from many suppliers), this commodity
could be consolidated into fewer suppliers and better prices could be negotiated by channeling a higher
volume of spend through them.

● To understand this situation, take a look at figure 1.1, which shows a few transactions pulled from the A/P
(accounts payable) systems of two divisions of a corporation. Examine these transactions and try to quickly
answer the following questions:
○ How much did the company spend on personal computers?
○ How much did the company spend with IBM on software?
○ What was the spend associated with IT and professional services in Q3 and Q4 of 2006?
SPEND ANALYSIS

You will quickly figure out the challenges in analyzing this data. The two divisions have separate cost centers
and separate GL (general ledger) codes, which have not been integrated.

You may also have noticed that all of the transactions belong to IBM, but this might not be, easily apparent if
you did not know that Lotus Corporation, Ascential, and MRO Software are subsidiaries of IBM."

You might also have noticed the many different variations of the name IBM. Also, the various fields in the two
extracts are not identical. Division 2 transactions do not show commodity codes or SIC (standard industrial
classification) codes. They do contain descriptions, but they are not very good.

In short, the data residing in business systems are many times not cleansed, enriched, consolidated, and
organized at the corporate level. This makes it very difficult to make like

Moreover, the information is finance centric. The various GL, cost center, and other codes were created to
facilitate accounting, not purchasing.

Figure 1.2 shows a procurement-centric view of the same spend, in which spend is aggregated by categories.
This view is 80 much more meaningful! A few facts immediately catch your attention—Division 1 is spending
much more money on personal computers and computer maintenance than Division 2, even though they
spend less money on software than Division 2.

You can also see that Division 1 is not buying any servers from IBM, but is spending heavily on IT consulting, If
the two divisions can combine their spend, they can negotiate better terms with IBM for both divisions across
all categories.

CHARACTERISTICS OF AN IDEAL SPEND ANALYSIS APPLICATION

● Data definition and loading (DDL)

● Data cleansing, structure, and enrichment (DE)
● Spend data analytics (SA)
● Knowledge Base management (KB)

SPEND ANALYTICS VS SPEND ANALYSIS

● Spend analytics is the art behind spend data management. It begins with the collecting and cleansing of
data. Then, there are the important steps of classifying and consolidating the data, so it’s grouped and named
in understandable ways. After that, the data can be merged with external data, and be ready for the analysis
stage.
● With spend analysis, you examine a specific part of the spend data to identify and extract valuable
information that gives you strategic insights. It’s one of the key methods procurement organizations use to
proactively identify savings opportunities, manage risks, and optimize their organization’s buying power.

● Spend analysis is often regarded as the fundamental foundation of sourcing. It is a tool that sourcing
executives can utilize to engineer superior performance. The insights from spend analysis can improve visibility
into corporate spend, as well as drive performance improvement, contract compliance, and most importantly,
cost savings.

● Analyzing procurement spend provides a baseline to measure improvements and provides a reliable
reference for deciding strategies to realize short- and long-term savings.

● As procurement moves to a more strategic function in the company, spend analysis is its fundamental
strategic technique which establishes a parallel process that guides senior leaders and budget holders in
maximizing value for the organization’s dollar.

SPEND ANALYSIS

● To extract valuable information out of a spend analysis, it involves pulling together purchase history data to
look at all angles of an organization’s expenditures. This includes considering products, prices, quantities,
suppliers, business units, and payment terms.

● By following these guiding questions, spend analysis can help you look back at past performance and help
you perform an assessment of future performance as well as trends.

These are the basic questions we are asking when performing spend analysis:
○ What are we buying?
○ How much have we paid?
○ How much have we bought?
○ Who are we buying from?
○ Who is buying?
○ On what terms did we buy?
○ How often do we buy?
○ When did we buy it?
○ Are we getting what had been promised?
○ Where were the items delivered to (geographical location)?
○ How does the data compare from previous years?
Here are some of the most common sources of procurement spend data.
○ enterprise resource planning (ERP) tools
○ general ledger information (i.e., an organization’s financial data)
○ purchase orders
○ data shared by suppliers
○ risk reviews
○ credit ratings
○ transaction data
○ other internal systems and external sources

DIRECT AND INDIRECT PROCUREMENT SPEND

● Direct spend in procurement refers to goods and services that are directly related to making products.
Examples may include raw materials, components, hardware, and services related to manufacturing
processes.

● Indirect spend in procurement is the sourcing of goods and services not directly related to manufacturing of
products. Indirect procurement enables businesses to maintain and develop its operations.

● Examples of indirect spend categories include:

○ marketing services (media buying, agency fees)
○ professional services (consultancies, advisors)
○ travel and lodging
○ MRO (maintenance, repair, and operations)
○ information technology (hardware, software)
○ HR related services (recruitment, training)
○ transportation and fleet management
○ utilities (gas, electricity, water)

● In manufacturing industries, direct material spend covers most of the total spend – sometimes it may account
up to 80% of the total spend. But what is the difference between direct spend and direct material spend?
SPEND ANALYSIS IN 6 STEPS

● Identify Data Sources

○ To start a spend analysis, the first step is to get an overview of what spend will be covered. Doing this allows
you to restrict those purchases to just a few key sources.
○ You can segment your spend into different groups and from there determine all the spend data sources
available from your departments, plants, and business units. Start by identifying the areas of your business that
make significant purchases, such as procurement, finance, and marketing.

● Data Extraction
○ Once you have narrowed the scope down, you can now capture your spend data and consolidate all of it into
one central database. Data is usually in different formats, different languages, and different currencies, so
collecting it into one single source might be challenging. There are, however, software programs available to
make this step easier.

● Data Cleansing
○ Cleansing is about detecting inaccuracies and removing corrupt records and redundancies from a set of
data. This includes finding and eliminating errors and discrepancies in descriptions and transactions to ensure
accuracy. Through data cleansing, you can identify which contacts in your database are incomplete or
irrelevant. Typos are removed and missing codes are validated and corrected for up-to-date information.

● Data Enrichment
○ Data enrichment refers to the process of enhancing, refining, and improving raw spend data. It also includes
standardizing the spend data for easy viewing. Enriching the spend data makes sure that all the header and
line level names and details are accurate and to a specific naming standard. Data is often missing specific
fields, and misspellings and abbreviations are common — as are incorrectly coded fields.

● Classification
○ Classification typically involves grouping several suppliers of the same parent company or organization. For
example, Microsoft purchases like Microsoft 365, Azure, and Surface should all be grouped together. At the
same time, you can also categorize the data into meaningful groups (like marketing, office supplies, software)
to identify how and where the business is spending its money.

○ Unifying heterogeneous spend data into clearly defined categories makes spend easier to address and
manage across the whole organization. Classification is about harmonizing all purchasing transactions to a
single taxonomy, enabling procurement to gain visibility to the global spending to make better sourcing
decisions.

● Analysis of Data
○ The last step is to identify opportunities for savings and other procurement improvements. Analysis can be
geared towards investigating all sorts of business problems, such as ensuring that you have negotiated the
best contract deals per supplier, or confirming buyers are purchasing from preferred suppliers.

○ With this, you can identify opportunities of reducing the number of suppliers per category and negotiating
better rates. The best probable method for cost savings can only be realized after the confirmed estimates
have been calculated properly.

TYPES OF SPEND ANALYSIS

● Tail Spend Analysis

○ Tail spend is defined as the amount of money that an organization spends on purchases that make up
approximately 80% of transactions but only 20% of total spend volume. Tail spend is easy to ignore, but at a
big cost. It is the place where procurement organizations may be leaving money on the table and utilizing their
resources inefficiently

● Supplier Spend Analysis

○ Supplier spend analysis is the task of identifying the amount of spend coming from critical vendors. It
involves creating a detailed spend profile for each vendor using historical consumption data. Knowing this can
help focus efforts on getting the best value from these preferred vendors and consolidating the relationships.

● Supplier Spend Analysis

○ Supplier spend analysis is the task of identifying the amount of spend coming from critical vendors. It
involves creating a detailed spend profile for each vendor using historical consumption data. Knowing this can
help focus efforts on getting the best value from these preferred vendors and consolidating the relationships.

● Category Spend Analysis

○ Category spend analysis allows you to explore spend in a defined spend category hierarchy. This is useful in
identifying spend leakage issues.

● Item Spend Analysis

○ Item spend analysis refers to analyzing expenditure at an item/ SKU level. It takes into account every
individual purchase, classifying each one of them to identify what department it was for and what supplier was
used.

○ This analysis gives the ability to know whether a specific item is being purchased from various suppliers, or
in several locations and at different item prices. Doing this analysis can highlight the different opportunities for
purchasing in the business and potentially identify spend leakage issues, such as purchasing from non-
preferred vendors and maverick spend.

● Payment Term Spend Analysis

○ Payment term spend analysis provides excellent insights for companies to analyze payment practices and
terms within their purchase to pay (P2P) processes. It explores the opportunities of leveraging all possible
discounts or interest from the invoice payment process, while increasing working capital.

○ Suppliers may reward early payment of invoices with discounts, but early payment of invoices may also
mean lost interest on working capital. Payment term spend analysis utilizes data and gives a comprehensive
view that enables you to identify unrealized discounts through late payments of invoices or opportunities to
negotiate better payment terms to capture unrealized interest. It also covers the review of payment patterns to
identify practices and activities that are not done properly.

● Contract Spend Analysis

○ Finally, contract spend analysis tells companies if they are complying with their existing negotiated contract
terms. It analyzes spend with with vendors by contract to identify spend leakage through non-compliant
contracts. It ensures that the best contract deals per supplier have been negotiated and that all the buyers are
purchasing from preferred suppliers.

SUPPLY POSITIONING MODEL

Allows you to weigh the relative importance of each one of your various purchase of goods and services by
taking account of the following factors:

A. LEVEL OF ANNUAL EXPENDITURE ON THE ITEM

Here, we have been following Pareto’s rule, which states that 20% of your purchase items are likely to take up
80% of your total expenditure. Consequently, the remaining 80% of our purchase items are likely to take up
only 20% of your total expenditure. The more you spend on an item, the more important it will be to you
because of the potential for cost savings

B. IMPACT ON THE ENTERPRISE

This involves determining what the effect will be on your company, generally in terms of lost profit if you are not
able to meet your supply targets for the item.

C. SUPPLY OPPORTUNITY AND RISK

This indicator gauges the extent to which the item’s supply market conditions will require you to make a
particular effort either to avoid the risk of falling short of your supply targets and/or to take advantage of supply
opportunities that will allow you to move ahead of the competition.
SUPPLY POSITIONING MODEL

The Supply Positioning Model serves two main purposes:

1. To guide you in prioritizing your efforts

2. To guide you in developing your supply strategy

● The supply positioning model refers to segmenting the spend portfolio by risk and opportunity. With the help
of this model, organizations rank their supplies based on the money spent with the supplier and the level of
susceptibility a business has if that supplier fails.

● Supplier positioning is the process of classifying spend with a supplier in terms of the profit potential and
supply risk and assists in prioritizing categories of spend and developing the right strategy.

● Supply positioning is an analysis tool that seeks to map the importance to an organization of the item being
purchased against the complexity of the market that supplies it. It identifies the two variables of risk and spend
as determining the type of commercial relationships that should be formed for supply agreements. Based on
this, all procurement can be assigned to one of the four categories namely - strategic, routine or non-critical,
and bottleneck items. With this knowledge, the supplier has a platform for prioritizing supplying activity based
on the importance of the goods and developing the appropriate purchasing and supply relationships with the
suppliers who supply them.
Non-critical items: components that have a low impact on the company and that are found in abundance and /
or in low-risk markets (e.g. office stationery). For such items, the goal should be to maximize efficiency of the
procurement process to reduce the administrative burden, for example by delegating purchasing to local
managers, or using catalogs.

Leverage items: components that are important for the company but sourced from low-risk markets with an
abundant supply. As the name suggests, the optimal management of these purchase categories is essential to
ensure a satisfactory business result. For this type of component, the company tends to make the most of its
bargaining power and the abundance of the offer with frequent negotiations.

Bottleneck ems: components with a low business impact in economic terms but where supply continuity is at
risk. The management of these components should be aimed at creating relationships of Collaboration in the
medium-long term between customer and supplier to guarantee the supply, with less emphasis on the cost.

Strategic items: components that are important for the company both in terms of economic impact and for
supply conditions from complex and / or risky markets. In this field, the horizon is medium-tong term with a
continuous monitoring of the economic situation of the market, technical evolution, evaluation of “make-or-buy”,
creation of alternatives and development of stable relationships and magnum collaboration with the suppliers.

Kraljic Matrix
SUPPLY POSITIONING MODEL

The four types of relationships are:

Acquisition: Many suppliers, buyers dominate. Focus on supply chain optimization, efficient procurement
processes, and receiving bids from many suppliers

Profit: Lots of suppliers, but big impact on company if supply is disrupted; so, consider target pricing strategies
and umbrella contracts with preferred suppliers.

Security: Few suppliers, but not a lot of financial risk from supplier failure; so, consider volume insurance
contracts, maintaining buffer stock, and always be on look out for alternative suppliers.

Critical: The company depends on the suppliers. Generally, the company will look for performance-based
partnerships, with market and technology leaders owning specific know-how

Peter Kraljic

is Director Emeritus of Mc Kinsey holding various senior positions for the last 22 years. He holds a Masters
degree in business management and a PhD degree in Germany. He wrote a number of scientific and business
articles for publications such as Harvard Business Review and Le Figaro Economic.

This model was first published in Harvard Business Review. The core of the model as shown In the graphic
below is to rank suppliers based on two dimensions: High or Low.

The amount of company spend with the supplier

How vulnerable a company is to a supplier’s failure or disappearance

BENEFITS OF SUPPLY POSITIONING MODEL

● Simplicity:
○ It is easy to understand and is a strong communication tool that could be used to convince other
departments of what they should have to do.
○ This is because applying supply positioning to a particular context is a fairly straightforward process and
facilitates easy mapping of the current situation.

● Focuses on those areas where potential benefits and risks are greatest:
○ The model highlights the fact that each category of items will have an impact on the financials of an
organization according to its use and that risk is associated with supply, depending on the number or range of
suppliers in the marketplace.
○ Based on this, the buyer can discover ways for improving company’s bottom line profits through cost
reductions and efficiency gains.

DISADVANTAGES OF SUPPLY POSITIONING MODEL

● It ignores the fact that not all the risk of supply comes from within the relationship between customer and
supplier. External environmental factors, especially competition, and the PESTEL factors can have a great
impact.

● The supplier side of the buyer-seller relationship is considered a disregarded element in the model.

● It does not take into account the possible strategies and reactions of the supplier.

● Fixation on the model can restrict the development of appropriate relationships to suit the changing nature of
market conditions and the power dynamics between the parties involved.
E-PROCUREMENT

● E-procurement is the process of buying and selling supplies and services over the Internet. It differs from e-
commerce in that it makes use of a supplier’s closed system typically available only to registered users.

● When implemented properly, e-procurement open the lines of communication between a company and a
supplier by creating a direct link and facilitating interactions such as bids, purchase orders and emails.

BENEFITS OF E-PROCUREMENT

● Cost Savings
○ Built-in monitoring tools help control costs and maximize performance, reducing overhead and paperwork.
Fully automated systems streamline processes and can result in a faster cycle from creating an order to
fulfillment. There also is an opportunity for a larger selection of products and services.

● Shorter Purchasing Cycles

○ Centralized transaction tracking simplifies reporting on orders, payments, and requisitions, as well as
ensuring contract compliance, all of which can reduce delivery time. Buyers have electronic access to available
products, services, and prices.

● Improved Inventory Control

○ Procurement professionals can quickly locate products from preferred suppliers and are limited to the
purchases they can make, so inventory is better controlled.

● Transparency
○ All information is centralized and can be made available to management, stakeholders, shareholders or the
public, as appropriate.