NEW GENERATIONUNI

VERSI
TY
COLLEGE

STRATEGI
CSOURCINGANDSUPPLI
ERRELATI
ONSHI
P
MANAGEMENTASSI
GNMENT

NAME:BI
NIYAM BEYENE

I
DNO.:
21/
2153

DEPARTMENT:LOGI
STI
CSANDSUPPLYCHAI
N
MANAGEMENT

SUBTO.MR.TI
GISTU
PART1

A.Tr
ansact
ionalr
elat
ionshi
ps

Tradi
ti
onall
y,r
elati
onshi
psbetweenbuyer
sandsuppl
iersar
etransact
ional
,meani
ngtheyare
basedsolel
yont hetr
ansact
ionbetweent
hetwopart
ies:whati
sthesuppli
erprov
idi
ngthe
buyer
,atwhatcost,andforwhatlengt
hofti
me.Ther
elati
onshi
pbeginsandendsthere.

Whi l
ethereisnothinginherentl
ywr ongwithtransactionalrelati
onships,
theyar erelat
ivel
yshort
-
sightedanddonotencour agetheinnov at
ivemi ndsetof t
enr equi
redbyambi t
ioussustainabi
l
ity
andr esponsibl
esourcinginit
iati
ves.Transacti
onr el
ationshipscanal sobesomewhat
“adversari
al”becausetheyputt hebuyerandsuppl i
erareatodds: t
hebuy erwant stogetthe
mostv alueatthelowestpossi blecost,whil
ethesuppl ierwant stoprovi
det he“least”val
ueat
thehighestpossiblecost.Thereisaconst anttensionbet weenbuy erandsuppl ierandwhat
theyareeacht ryi
ngtoachi eve.

Today,buyer/
suppl
ierrel
ati
onshi
pst
endt
obemor
etr
ansact
ional
,butt
hecasef
ormor
e
col
laborat
ivepar
tnershi
psisbecomi
ngcl
ear
.

Transacti
onalr
elat
ionshi
psinbuyer-
suppl
ierr
elat
ionshipsarechar
act
eri
zedbyshort
-t
erm,
tr
ansacti
on-basedint
eract
ionst
hatfocusonimmedi ateneedsandexchangeofgoodsor
servi
ces.Herearesomeexampl esoftr
ansact
ionalrel
ationshi
ps:

Retai
lPurchases:Whenconsumersvisi
taretail
storeormakeonlinepurchases,t
heyengagei
n
tr
ansacti
onalrel
ati
onshi
pswi t
hthesuppli
ers.Therelat
ionshi
pisbasedonone- t
ime
tr
ansacti
ons,wherethebuyerpaysf
orthegoodsorser v i
ces,
andthesuppli
erdeliv
erst
he
product
.

SpotBuyi
ng:Spotbuy i
ngr ef
erstopurchasi
nggoodsorservi
cesonanas-neededbasi
swit
hout
establ
i
shi
ngl ong-t
erm contr
actsorcommi t
ments.Buyer
sapproachsuppl
ier
sfori
mmediate
needsorurgentrequi
rementswi t
houtanongoingrel
ati
onshi
p.

B.Col
labor
ati
vebuy
er-
suppl
ierr
elat
ionshi
p

Coll
abor ati
vesuppli
errelat
ionshi
pi sabusinessrelat
ionshipbetweent woor ganizati
onswhere
bothpar ti
esworktogethertoimpr ovethequali
tyofpr oductsandser vi
ces,whil
eal soreduci
ng
costs.Thistypeofrelat
ionshipisbenefici
alf
orbot hpartiesi
nvolvedasi thel
pscr eateamore
effi
cientsupplychai
n.Inordertomai ntainacoll
aborativesuppli
errelat
ionship,both
organizati
onsneedt obecommi tt
edt ocommuni cati
onandcol laborati
on.

Ther
earemanybenefit
stobegainedfrom col
l
abor at
ivebuy
er-
suppl
ierr
elat
ionship:l
eadt
o
i
mprovedquali
tyanddel
iv
eryofgoodsandservices,l
eadtocostsav
ings,I
mpr oved
communicat
ion,pr
ovi
deanopportuni
tyfori
nnovati
on.

Therear
eaf ewr i
skstoconsiderwhencol l
aborat
ingwi
thsuppli
ers.Onei
sthattheprocess
coul
dleadtoadecr easeincompetit
ion,andthuslessi
nnovat
ionandhigherpri
ces.Addit
ional
l
y,
ther
eisthepotenti
alforsuppl
ierl
ock-i
n,whereacompanybecomest oodependentonone
suppl
i
erandhasdi
ff
icul
tyswi
tchi
ngt
oanot
heri
fnecessar
y.

Inor
dertoestabli
shacol l
abor
ati
vesuppl
ierr
elat
ionshi
p,bothpar
ti
esmustbewi l
l
ingtocommit
toworki
ngtogether.Thi
smeanst hatt
heymustbeabl etotr
ustandrespecteachother
,aswel
l
ashaveopencommuni cat
ion.

Ther
ear
esev
eral
stepst
hatcanbet
akeni
nor
dert
oencour
agecol
l
abor
ati
on:

1.Defi
netheobj
ect
ivesoft
her
elat
ionshi
p–Whatdoeseachpar
tywantt
oachi
eve?Whatar
e
thegoal
s?

2.Bui
l
dtr
ust–Thi
scanbedonebybei
nghonest
,tr
anspar
ent
,andkeepi
ngpr
omi
ses.

3.Encour
agecommunicat
ion–Makesur ethatther
ear
eregul
art
ouchpoi
ntsbet
weent
he
part
iessothati
nfor
mat
ioncanbeexchangedfreely
.

4.Faci
li
tat
ecoll
aborati
on–Pr
ovi
deoppor
tuni
ti
esf
ort
hepar
ti
est
owor
ktoget
heronpr
oject
s,
sharebestpr
acti
ces,etc.

C.Suppl
yAl
li
ance

ASuppl yAll
iancei sabusi
nessrelat
ionshipbetweenabuy erandasuppl i
er.Theybothfocuson
achievi
ngcont inuousimpr
ovement swhilesqueezi
ngcostsout .Thesealli
ancesemphasizethe
i
nflowofinnov ationfr
om t
hesuppl i
erpartnerandfost
erar el
ati
onshipbaseduponmut ualtr
ust
andt hepursuitofcommongoal s.Thealli
ancemember smayshar einf
ormation,
resour
ces,and
bestpracti
cest oachievemutualbenefi
tsandcompet i
tiv
eadv antages.

ASuppl yAl
li
ancei
scol
laborati
ver
elat
ionshi
pfor
medbetweentwoormoreenti
ti
es,typical
l
y
organi
zati
onsorcompanies,t
oenhancethei
rsuppl
ychai
neff
ici
enci
esandover
allbusiness
perfor
mance.

Pr
imaryBenef
itsofaSuppl
yAl
l
iancei
ncl
ude:
LowerTot
alCost
s,ReducedTi
met
o
Market
,I
mproveQuali
ty

Keytrai
tsofasuppl
yal
li
ancecoul
dconsistoft
hef
oll
owing:
Mutual
Goal
s,Col
l
ecti
vedeci
sion,
Shar
ingofInf
ormati
on,
Shari
ngofRisksandRewar
ds,Long-
Ter
m Commit
ment.

All
i
ancesal
sohaveadownsi
de.Al
li
ancesarearesour
ce-
int
ensesuppl
ymanagementappr
oach
andtendt
obereser
vedf
orthemostcr
iti
cal
rel
ati
onshi
p.

2.PART2

Ideall
y,acontr
actshoul
dbestructuredtoincreasethefi
rm'spr
ofit
sandsupplychai
nprofi
ts,
discourageinf
ormati
ondist
ort
ion,andofferincenti
vestothesuppl
iertoi
mproveperf
ormance
alongkeydimensions.Manyshortcomingsinsupplychainperf
ormanceoccurbecausethe
buy erandsuppli
erar
etwodiff
erententit
ies,eachtr
y i
ngtoopti
mizeitsownprof
it
s.
Cont
ract
sforPr
oductAv
ail
abi
li
tyandSuppl
yChai
nPr
ofi
ts

Buy
backCont
ract
s

Rev
enue-
Shar
ingCont
ract
s

Quant
it
yFl
exi
bil
it
yCont
ract
s

1.Abuy backagr eement:i sal egal documenti nwhi chabusi nessownert ransfersthe
owner shipofshar esbackt othecompanyi nsteadofsel l
i
ngt hem directlytoani nvestor.For
exampl e,abuy backagr eementcanbeusedwhenacompanywant st orepur chaseitsstock
from cur rentshareholder s.
Int hiscase, i
twouldal l
owt hecorpor ati
ont opur chaseanyoral l
out standingshar esfrom i t
sshar eholder
satf airmar ketvalue,usuallywi t
hcashonhandor
throughf i
nancing.Abuy backagr eementmayal socont ai
nclausest hatpr otectfrom future
l
itigation.Theymayal soout l
inet hepar t
ies’r
esponsi bili
ti
esconcer ningnoncompet eand
nonsol i
cit
ati
on.Inpar t
icular,abuy backcontracti spr eferr
edf orproduct swi thlowcrit
icalrati
o
whi lerevenueshar i
ngispr efer r
edf orproductswi t
hhi ghcr i
ti
cal rat
io.

2.Revenueshari
ngcont r
act:Revenueshar i
ngisabusi nessmodel thatallowscompani esto
shareit
ssuccesswi thstakeholders.
Iti
sasomewhatf l
exi
bl econceptt hatinvolvessharing
operati
ngprofi
tsorlossesamongassoci atedfi
nancialactor s.
Rev enueshar i
ngcanexi stasa
profi
t-
shari
ngsy st
em thatensur eseachentit
yiscompensat edf orit seff
orts.Thegr owthof
onli
nebusinessesandadv erti
singmodel shasledtocost -per -
saler evenueshar ing.Ot
herforms
ofrevenueshari
ngincludethosewi t
hprofessi
onalspor t
sl eaguesandempl oyee-based
i
ncentives.

Thepr acti
cal detai
lsforeacht y
peofr evenueshar ingplanaredif
ferent,buttheconcept ual
purposei sconsi st
ent:I
tusespr ofi
tstoenabl eseparateactorstodevelopef fi
cienciesor
i
nnov ateinmut ual
lybenefi
cialway s.Thepr acticeisnowapopul artool wit
hincor porat
e
gover nancet opr omotepartnershipsandi ncreasesalesorsharecost s.
Rev enueshar i
ngisalso
usedi nr eferencetotheEmpl oyeeRet ir
ementI ncomeSecur i
tyAct(ERISA)budgetaccount s
between401( k)provi
dersandmut ual funds.ERI SAestabli
shesstandardsandi mpl ementsrules
forfiduciaries(orinvestmentcompani es)t ofoll
owi naneffortt
opr eventmi susingplanassets.
Standar dscani ncl
udethelev elofpartici
pat i
onneededbyempl oyeesandt hef undingof
reti
rementpl ans.

3.Quanti
tyFlexibl
econtract:
Animport
antsucht ooli
sthatofquant
it
yfl
exi
bil
i
tycont
ract
s.Such
acontractall
owst hebuyerinasuppl
ychaintopostponesomeofhi spur
chasestoalat
erdate
andataf avorablepr
iceafterani
mprovedforecastofthecust
omerdemandbecomesav ai
labl
e.

Underquanti
tyflexi
bil
itycont
ract
s,t
hemanuf acturerall
owst heret
ail
ertochangethequant
ity
orderedaf
terobservi
ngdemand.I faret
ail
erorders0uni ts,themanuf act
urercommitsto
provi
dingQ=( 1+a) Ouni t
s,wher
eastheret
aileriscommi t
tedt obuyi
ngatleastq=(1-ß) 0
unit
s.Bothaandßar ebetween0and1.Ther etailercanpur chaseupt oQunits,
dependi
ngon
thedemandi tobserves.
Thesecontractsaresimil
artobuy-backcont
ract
sinthatthemanuf acturernowbearssomeof
theri
skofhav ingexcessinvent
ory
.Becausenor et
urnsarerequi
red,thesecontract
scanbe
moreeffectiv
et hanbuy-
backcontractswhenthecostofretur
nsishigh.Quant i
tyfl
exi
bil
it
y
contr
act
si ncreasetheaverageamounttheretai
l
erpurchasesandmayi ncreasetot
alsupply
chai
nprofits.

3.
PART3

Negot
iat
ionOut
comes

Howeachpartyappr
oachesthecont
ractnegot
iat
ions,
andthedy
namicsbet
weenthet
wo
appr
oaches,
hasabigimpactontheoutcome.Sopherear
esomeoftheappr
oach:

Avoi
d:Doesn’
twantt
onegot
iat
e,sot
hey
’redi
ff
icul
ttogett
othet
abl
eandhar
dtokeept
her
e.
No-
onewi
ns.

Compet
e:Want
stohav
eal
lthei
rneedsmetanddoesn’
tcar
eabouty
our
s(usual
l
yassoci
ated
wi
thl
i
mit
edr
esour
ces)
.Won’
tcar
eaboutr
elat
ionshi
psorongoi
ngbusi
ness.Theywi
n,y
oul
ose.

Accommodat
e:I
t’
sjustnott
hati
mpor
tantt
othem (
usual
l
yassoci
atedwi
thl
owr
iskorl
ow
i
mpactoppor
tuni
ti
es)
,sot
hey
’rehappyf
ory
out
ohav
eity
ourway
.Youwi
n,t
heyl
ose.

Compr
omi
se:Ther
ear
eenoughbenef
it
stor
eachanagr
eementbuty
oubot
hcompr
omi
se.Bot
h
par
ti
eswi
nandl
ose.

Col
labor
ate–I
swi
l
li
ngt
oshar
ether
iskandr
ewar
dbet
weeny
oubot
h(of
tenwi
thst
rat
egi
c
i
ntent
).Ev
ery
onewi
ns!

whenwecomet
otheout
comet
hatwegetaf
ternegot
iat
ionar
eher
eunderl
i
stedwi
th
def
inat
ion

1.
Win-
LoseOut
come

Frequentl
yinthissituati
on,
bothsideshaveattempt
edt obevi
ctori
ous,wit
houtmuchregardfor
theotherparty.Bothsidesmayhav ecomei nt
otheagreementwithadesir
edgoalanda" wal
k
away "poi
nt.Inawi n-l
osescenari
o,onepart
yfall
swit
hinthi
stargetrange(
orevenexceedsit
)
andtheot herpartyfall
sbel
owt hei
rtar
getrange.

Noticet hatt heseresult

soccurwhenbot harepushedbel owt heir'
walkaway 'point,endingin
bothsi desl osingmoneyandexper ienci nganundesi r
ableout come.Suchascenar i
ooften
ari
seswhenpeopl eareunawar eoft heirbestal t
ernativeoptionsornegot iat
eagai nsttheirown
i
nterest s.Fact or
slikecoercionandasy mmet ricinformat i
oncanal socont ri
butet owin-l
ose
si
tuat i
ons.Thi sappr oach,characterizedbyacompet iti
veandz er
o-sum ment ali
ty,ai
mst o
secur ethebestscenar i
oforonesi dewhi l
edisr
egar dingtheot her'
sinter
ests.Anexampl eofa
win-
loseout comecoul dbewhenabuy ernegotiatesasi gnif
icantpricereductionfrom asuppl i
er,
l
eadi ngt odecr easedprofi
tmar ginsf ort hesupplier.I
ncont r
ast ,awin-winstrategyseekst o
craf
tsol ut
ionst hatbenefi
tallparti
esi nv ol
ved.Itrecognizest hatpercepti
onsoft hesi t
uation
arerel
ati
veandt hatfai
rnessisessenti
alf
orasit
uati
ontobedeemedasoccur ri
ngfai
rly
.Inthe
cl
assicpri
soner'
sdilemma, fori
nstance,t
hebestr
esultwouldbeforbothsidestocooperat
e
andbesetf r
ee,butloweredexpectati
onsandalackoftrustmakeachievi
ngsuchawi n-win
si
tuati
onlessli
kely.

2.
Lose-
LoseOut
come

Adopt i
ngalose- l
oseapproachi nnegot iati
onscanl eadtounsati
sfactoryendingsforal
l t
hose
i
nv olv
ed,asitfocusesonr igidposit
ionsandf ail
stoexplorecoll
aborativesolut
ionst
hat
maxi mizevalue.I
naLose- Losescenar i
obot hpartiesconcedebargainingposit
ionsoutsi
de
theirt
argetranges.Ift
henegot iat
orsf ailtoreachanagr eement,bothpar ti
esmayendupi n
wor seposit
ionsthanwhent heystartedt henegotiati
ons,thi
sisoftenincludedasalose-l
ose
outcome.Thi softenoccurswhencol laborati
onandef fecti
vecommuni cati
onfail
.

Ifoneorbothsidescan’ twal
kaway ,butareunwi ll
i
ngtomakeconcessi ons,bothwillbeforced
todeal wi
ththepoorconsequencesofnotr eachinganagr eement .Alt
ernati
vely,bothsides
couldbetooqui cktomakeconcessi ons,reachingacompr omisethatisfair,butdetri
mentalto
bothsides.Li
kewi se,i
fbothpart
iesaremi stakenaboutthebenef itsofwhatt heothersideis
offer
ing,t
heymayr eachanagreementt heylatercometor egret.Anexampl eofal ose-lose
sit
uationcouldbewhent wocompani esengagei nabiddingwarf oracont ract,dri
vi
ngt heprice
upbey ondwhati sreasonabl
eforeit
herpar ty.

3.
Win-
WinOut
come

Inthi
sscenari
o,bothpart
iesaimtoachieveresul
tsthatfall
wit
hint
hei
rtar
getranges,
resul
ting
i
nmut uall
ybenefi
cial
agreements.Thi
scouldinvolv
er eachi
ngafai
rmiddl
egroundorcraft
ing
creat
ivesol
uti
onsthatimprovetheposi
tionofbothpar t
ies.

Wi n-
winscenari
osoccurwhenbot hsidesunderst
andthevalueofagooddeal andhave
compat i
blegoal
s,incr
easingthelikeli
hoodofapositi
veoutcome.Whi lethereisar i
skof
attempti
ngtopusht heothersideintoalosingposi
ti
on,part
iesoftenrecognizethatthese
result
sarethemostst abl
eandsust ai
nabl
e.Suchresult
screateaf ai
randr el
ativesi
tuat
ion
wher ebothpart
iesbenefi
t,r
educingt hechancesoffut
ureconfli
cts.

Thoseinvol
vedinawi n-wi
nsituati
onhav eashar edincentivetoengageinfutur
enegot i
ations
andestabli
shamut uall
ybenefici
alworkingrel
ationship.Forexample,whent wocompani es
negot
iateapart
nershipagreementt hatbooststheirmar ketshar
eandpr of
itabi
l
ity
, i
texempl i
fi
es
awin-
wi nsit
uat
ionwher ebothsidesunderstandt heimpor t
anceofcraft
ingbenefici
alsoluti
ons.

St
alemat
e

Inthistypeofoutcome, nei
thersidewinsorlosesandafteralongnegoti
ati
ngsessi
on,
both
sidesareatt heexactsamepl acethattheyst
artedof
fat.Thisisaresul
tofnotbei
ngablet
o
deal wit
hinterest
sandonl ypositi
ons.Stal
emateshappenwhenbot hsidesaggr
essi
vel
ydefend
theirposit
ionsandneithersi
dei sabletomaket heot
hersidebudge.
Andher
ether
ear
ethet
ypesofpoweri
nnegot
iat
ion

I
nfor
mat
ionPower
:

I
nformati
onpowercomesf rom havi
ngknowl edget
hatwil
li
nfl
uencetheoutcomeofthe
negoti
ati
on.Planni
ngandresear
chcani ncr
easeourinf
ormat
ionpower,ascanaski
ngther
ight
quest
ionsbeforewereachthebargai
ningphaseofthenegot
iat
ion.

Rewar
dPower
:

Rewardpowercomesfrom havi
ngtheabi
l
ityt
or ewardtheot
herpar
tyinthenegot
iat
ion.I
t
coul
dbethepowerabuy erhastopl
aceanorderforgoodsandserv
icesorthepowera
sal
esper
sonhastogiv
egoodser vi
ceandsolveprobl
ems

Coer
civ
ePower
:

Coerci
vepoweristhepowert
opunish.Thi
sisseenmostcommonl
yint
hebuy
er-
sel
l
er
rel
ati
onshi
p,butcanbeafeat
ureofothert
ypesofnegot
iat
ion.

Si
tuat
ionPower
:

Sit
uati
onpoweristhepowerthatcomesfrom bei
ngi
nt her
ightplaceatther
ightti
me.A
customeri
sdesperat
etoplaceanorderandyouaretheonl
ysour ceofsuppl
yi nt
heshortt
erm.
Havinganeff
ect
ivenetwor
kandkeepingintouchwit
hwhati shappeningcanincr
easeyour
si
tuati
onpower.

Exper
ti
sePower
:

Exper
ti
sepowercomesf
rom hav
ingapar
ti
cul
arski
l
lwhi
chy
oucanappl
yandwhi
ch

cani
nfl
uencet
heout
comeoft
henegot
iat
ion.I
mpr
ovi
ngnegot
iat
ionski
l
lshel
psy
ou

wi
nbet
terdeal
s.Ot
herar
easofexper
ti
secoul
dal
sohel
ptheout
comeoft
he

negot
iat
ion.

AndFi
nal
ly-Ref
erentPower
:

Refer
entpowercomesfr
om beingconsi
stentovert
ime.I
fpeopleseeyouashav
ingacl
ear
,
consi
stentst
rat
egyasanegot
iator
,youwilli
ncr
easeyourref
erentpower
.

Havingst andar
dst hatyousticktoandbeingconsistentwil
lhel
ptoincr
easeyourref
erent
power .Intheei
ghties,MargaretThatcherwasn’
tuniversal
l
ypopular,
butwasrespect
edbymany
forbeingconsistentinherviewsandbehav iour
.Intheendshef ai
l
edbecauseherapproachwas
toorigidandshewasunabl et oadapttochangi
ngci r
cumstances

4.
PART4

Busi
nessesmayr
equi
resev
eral
suppl
i
ersf
orpr
oduct
s,mat
eri
als,
andser
vicest
oensur
e
smoot hoperati
ons.Onesy stem t hathelpstomanagesuppl ierrelat
ionshi
psistheKralj
i
c
portf
oli
opur chasingmodel .Under st
andingwhatt hismodeldoesandhowi tworkscanbe
hel
pful i
fyou'r
econsi deringpur suingacar eerinprocur
ement ,
supplychainmanagement ,or
purchasing.I
nt hisarti
cle,wedef inetheKr alj
i
cmat ri
x,l
istt
hest epsinvolv
edinusingit
,and
descri
bet hedifferentpurchasingcat egori
es.

Whati
stheKr
alj
icmat
ri
x?

TheKr al
jicmatri
xisatoolthatbusinessesmayuset odeterminethebestpossi bl
esupplier
sf or
productsandser vi
cesandimprovet heeffi
ciencyofthepurchasingprocess.Thismodel helps
compani esincr
easesupplysecuri
tyandr educecost sbymaxi mi
zingt hei
rpurchasingpower.
Thesuccessoft hematr
ixisheavil
ydependentont hesupplychain'
scompl exit
yandt he
strat
egicimportanceofthepurchase.Whencompani esuset hemat ri
xeffecti
vely
,itcanhelp
them prepareandplanforsupplydisrupt
ion,str
ategydevelopment ,
andpot enti
alsupplychain
chall
enges.

UsingtheKral
ji
cmodel isessent
iali
nmi ni
mi zi
ngpotent
ialsupplyri
sks.It
'sasystem t hat
analyzesandorgani
zesacompany 'spurchasingpor
tfol
i
o.Thi st
wo- by-
twomatrixi sakeyt ool
thatmanyprofessi
onalsusetoguidetheprocurementstrategyprocesswhenwor kinginsupply
chainandprocurementmanagement .It
'sal
sonecessarytomai ntai
nmar ketr
elevancewhen
overseei
ngacompany '
si t
em cat
egories.

4st
epsi
nusi
ngt
heKr
alj
icpur
chasi
ngmat
ri
x

UsingtheKral
jicmethodi nvol
vesgoingthrought hefourstagesofthegr i
d'
squadrants.
Foll
owingthemat ri
xallowsbusinessesandpr ocurementof fi
cerstomakeaccur at
e
assessmentsandconsi derati
onswhendev elopingpurchasest r
ategies.Acarefulanal
ysi
sof
avail
abledat
agi v
est hem agoodst art
ingpointi
ni denti
fyi
ngandmi nimizi
ngri
skswhi l
e
i
ncreasingpotenti
alprofi
t.Herearethefourstepsi nusi
ngt heKralj
icmet hod:

1.Cl
assi
fypur
chasi
ngpor
tfol
io

Thef irststepinv olvesidentifyi

ngal lthecomponent s, i
ncludi ngproduct s,services,and
commodi ti
es,topur chaseandcl assif
ybasedonpr of i
tabilityandsuppl yri
sk.Toef f
ect i
v el
y
classifyapur chasi ngpor t
folio,not ehowt hesuppl yr iskincr easesordecr easesbasedon
factorsaf fecti
ngi tsmov ement .Thesef actorsincludenat ur aldisasters,fewersuppl iersf ora
speci f
icpr oduct,gov ernmentr est ri
cti
ons,suppl ychai ndi srupt i
ons,andascar ci t
yofr aw
mat erials.Carefullyassessingt hecur rentstatusoft hesef actorshelpsi nmaki ngamor e
accur atesuppl yriskpr oj
ection.Pr ofi
timpactisanot herf act orrequir
ingcar eful consideration.
Thismeansest abl i
shinghowmuchv al
ueapur chaser ealistical
lyprovidest othebusi ness.
Analy zingthepr ojectedprof i
tst hatacompanymaygai nf rom thepur chasehel psitdet ermineif
thesuppl yri
ski swor thtaking.Compani escat egorizepur chasesasl ev er
age, noncr i
tical,or
strategicitems.
2.Per
for
m mar
ketanal
ysi
s

Thisprocessinvolvesevaluat
ingthecurrentmarketsi
tuati
onandthecompany '
sbuyi
ngpower
todeterminethebestpur chasingstr
ategy.Thekeystothisst
eparetounderst
andthesuppli
er'
s
capacityandmar kettr
endsandt oconsi
derthecompet i
ti
on.Theseact
ionsall
owpurchasi
ng
teamst oident
if
ywher ethebal anceofpowerlies,
whichisessenti
alf
orasuccessful
procurementstrategy.

Onef actorthatcompaniesmi ghtconsiderdur

ingmar ketanaly
sisi
st hesupplier
'sabil
i
tyto
ful
fi
llthedemandcompar edt othemar ket'
ssi
ze.Thishelpsthem assesst hebestwayt o
all
ocater esour
cesandbal ancetheriskofbuyi
ngf r
om singleormult i
plesuppli
ers.I
talsohel
ps
businessesnegot i
atet
hemostbenef ici
alcont
ractt
ermswi t
hsuppliers.

3.Det
ermi
net
hest
rat
egi
cposi
ti
on

Acompany '
sstr
ategicposi t
ionisanot herimpor tantf
act orindevelopi
ngit
spr ocur
ement
strat
egy.Thisst
epinv olv
esunder standingcurrentandf uturebusinessobj
ectivesandt he
procurementcapabil
iti
est hatacompanyr equirestoachi evethem.It'
sal
soessent i
al t
o
determinehowmuchr iskacompanycanacceptandi tsabi l
it
ytoaccesshigh-qual
itygoods,
servi
ces,andmat er
ial
s.Byunder standingt heobjecti
ves, companiescandevisestrategiesusi
ng
theKralj
icmodeltosecur et hebestdeal ssat i
sfyi
ngtheircor eneeds.

Inst
rategi
cpositi
oning,i
t'
snecessaryt
oconsiderthecl
assif
icati
onsmadeinthefi
rststep.
Thesecanhelpdeterminethebestpossibl
esuppli
ertoworkwi t
handhowt ostr
ucture
contr
actsandnegot i
atethebestdeal
s.Thesestr
ategi
esalsoallowthepur
chasi
ngt eam to
makeamor eaccurateposit
ioni
ngdeci
sionwit
hthelowestrisksandthehi
ghestpr
of i
t
proj
ecti
on.

4.Cr
eat
eanact
ionpl
an

Thisstepinvolvesi
denti
fyi
ngtheri
skandrewardsofeachpur chasi
ngcategoryanddev el
oping
aplantomi ti
gat et
heri
skswhilemaximi
zingtherewar
ds.It'
sessentialt
oidenti
fyanypossible
areasofimpr ovementandhaveaclearl
ineofcommuni cat
ionwithsuppli
ers.Anotheri
mpor t
ant
aspectisthattheacti
onplanconsi
dersthesuppl
ychain'scomplexit
iesandthedemandf lowof
theproducts.Ineff
ecti
vel
yexecuti
ngthi
sstep,t
herear
et hreestrat
egicdir
ecti
onsacompany
cantake:

Expl
oit
:Ifacompanyenj
oysahi
ghpur
chasi
ngposi
ti
on,
itcansecur
elong-
ter
m cont
ract
sfr
om
manyst abl
esuppli
erst
oguar anteethatthebusi
nesspurchasessuppli
esataf avourabl
epri
ce
andmi nimi
zessupplyr
isk.Thisalsoputsthebusi
nessinabet t
ernegoti
ati
ngposi t
ionwitht
he
suppl
iersandmaypr ov
ideadv antages,
suchastheabil
it
yt omakespotpur chasesfor
emergencies.

Bal
ance:Thi
sist
hemi
ddl
epat
hwi
thaccept
abl
epot
ent
ial
riskandpr
ofi
tlev
els,
wher
ea
companyusesanonaggr
essi
veordi
ver
seapproach.Secur
ingsuppl
i
erswit
hthi
sstr
ategy
ent
ail
snegoti
ati
ngf
oranaccept
abl
edealbasedontheneedsofthebusi
nessandwhatthe
suppl
i
erscanof
fer
.

Di
ver
sif
y:Thi
sappr
oachal
l
owsbusi
nessest
oreducesuppl
yri
skbycr
eat
ingcont
ingenci
esf
or
eachsuppli
er,
product
,andotherlogi
sti
calf
act
ors.Thi
sinv
olv
espr
ocur
ingsuppl
i
esf
rom
multi
plesuppl
ier
stoensureavai
labil
i
tyandhel
pmeetdemand.

Pur
chasi
ngcat
egor
ies

TheKr alj
i
cmodel consistsoffourdisti
nctpurchasingcategoriesthatdefi
netheover al
l
procurementstrategy
.Thesecat egori
esar edynami candcanchangedependi ngont he
si
tuati
onandmar kettr
ends.Forexampl e,productsabusi nesspreviousl
yconsi
deredas
l
ev er
agemaybecomenoncr i
ti
cal i
fthemar ketsit
uat i
onchangesorsuppl yri
skincreases.
Understandingthemov ementsoft hesecategori
eshel psbusinessesdev i
sestr
ategiesthat
maximi zethei
rpurchasingpowerwhi leavoidi
ngpot enti
alpit
fall
s.

TheKral
ji
cmodel i
sanef fecti
vetool t
hatacompanycanuset oassessitspurchasi
ngportf
oli
o
anddevel
opstrategiesthatstrengthenit
smar ketposit
ion.Wit
ht her
ightappl
i
cation,
busi
nessescancr eatesupplychainsthatef
ficientl
yuseresourcesandmaximizepr of
it
s.Here
aret
hefourpurchasingcat egori
esinthematr i
x :

A.
Noncr
it
ical

Theseacquisit
ionshaveli
tt
let
onoeffectonacompany '
sov eral
loperat
ions,ri
sks,andprof
it
i
mpact .Whilet
hey '
rer
egul
arit
emsorservicesforthebusi
ness, t
hey'r
enotv endorspeci
ficor
essent
ialtothecompany'ssur
viv
alorsuccess.Examplesincludeoffi
cesupplies,dri
nki
ngwater
,
orjani
tor
ialser
v i
ces.

B.
Lev
erage

Whileit
emsi nthi
scategoryaresimpl etobuyandrequirealowinvestmentinti
meorr esources,
theycanaffectacompany '
soverallr
ev enueandprofi
tabil
i
ty.Abusinesshasleewayinplanning
anddev el
opingit
spurchasingst
rategiesforthi
scategorybecauseleveragedi
temsarelow-risk
andrequir
elitt
lenegot
iat
ionoreffortfrom thecompany.Companiesusual l
yprocur
ethese
i
temsf rom aregul
arsuppli
eroradi versi
fi
edsource.

Abusi
nessmaynegot i
atewiththevendort
osecur
eagooddealandthebestpr
icebasedont he
vol
umeandf r
equencyofpurchase.Anexampl
eofalev
eragedi
tem i
sarawplasti
cmat er
ial
for
manuf
actur
ingplast
icchai
rs.

C.
Bot
tl
eneck

It
emsi nthiscat egoryar
eessenti
al purchasesthatmayhavefewerv endors,whichpresentsa
highsupplyriskduet oscarci
tyofav ai
labi
li
tyandsourci
ng.Despitethehighsupplyrisk,
companiesdev elopstr
ategi
estopr ocuretheseit
emsbecauset heyarerequir
edf oroperat
ions.
Whilethefinancialimpactofbott
lenecki t
emsi stypi
cal
l
ymi ni
mal,procuri
ngt hem present
sa
ri
skbecausef ewv endorscont
rolthesuppl y
,givi
ngthem l
ever
agei nnegotiat
ions.
D.
Str
ategi
c

It
emsundert hiscategoryar eessenti
al,haveahighprof
it
abil
it
yimpact,andpresentahigh
supplyri
sk.Someexampl esi ncl
udeautomat i
onsoftwar
eandpr oduct
ionequipmentvit
alto
businessoperati
ons.Str
at egicit
emscanbel ar
georsmal l
purchasesthatbenefi
tthebusi
ness
i
nt helongter
m andr equireconsistentaccesstothevendor.

Whileacompanyt ypi
call
ypurchasesautomat i
onsoftwaretoimpl ementandinnovate,i
t
requir
esfuturesupportandservi
ceforintegrat
ionandupgr ades.Thesamei struefor
equipmentwher erepl
acementpar t
smayonl ybeavail
ablefrom thesamev endor.Suppl
ier
s
from t
hiscategoryoff
erbusinessesspeciali
zedproductsthatarealsoessenti
al.