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Editor's Note: Take a look at our featured best practice, Cost Reduction Methodologies (33-slide PowerPoint presentation). This document discusses various cost reduction methodologies and concepts, including the following: Process Optimization, Strategic Sourcing, Shared Services, Business Process Outsourcing. This comprehensive guide delves into the intricacies of cost reduction, providing a robust framework for [read more]
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The procurement function in most organizations deserves more attention than it gets. Most executives associated with procurement lack the competencies and perspectives required to identify gaps and effectively manage the function.
This paucity of attention and capabilities is a certain path to extinction in this age of abrupt supply and demand shifts, intense competition, material and resource scarcity, and political turmoil. What’s needed in this era is an inclusive, long-term purchasing and supply management strategy.
A robust purchasing and supply management strategy should evaluate the risks associated with global sourcing, deal with uncertainties, anticipate supply and price instabilities, and shift focus from operations to strategic supply management.
This involves looking into the prospects of forming joint ventures, acquiring other firms to supplement existing capabilities and enter new markets, renegotiating contracts, and revisiting inventory management and materials planning systems.
Two key factors critical for devising a robust purchasing and supply management strategy are:
Organizations can adopt the following best practices to streamline and manage their purchasing and supply functions:
Procurement and Supply Chain leaders may use the Kraljic Matrix as a tool for categorizing and analyzing an organization’s purchasing portfolio. The Kraljic Matrix presents an objective methodology to identify supply bottlenecks, threats, and flaws.
The aim of the Kraljic Matrix is to inform an organization’s Procurement Strategy. It is a framework for administering a company’s product categories in the context of the market. The matrix facilitates buyers during times of abrupt technology disruption, economic instability, and shifting regulatory and environmental circumstances.
The Kraljic Matrix enables categorization, visualization, and prioritization of procurement items into 4 primary categories:
Implementation of the Kraljic Matrix involves a 4-stage process:
Let’s dive deeper into the first two stages of the Kraljic Matrix, for now.
The initial stage of the Kraljic Matrix warrants segregating purchases based on their profitability impact and supply risk. The impact of a supply item on profit is determined by its purchased quantity, proportion of total purchase price, and effect on product quality or business expansion. On the other hand, the impact of supply risks is evaluated by considerations such as availability, number of suppliers, competitive demand, make-or-buy opportunities, and storage hazards.
These two elements help the organizations organize their purchase items into 4 categories: Strategic, Bottleneck, Leverage, and Noncritical. The purchase portfolio classification needs to be frequently evaluated and adjusted based on the supply and demand patterns that affect each item’s category.
Next, the organization determines and compares the strengths of suppliers against its own strengths based on evaluation criteria. This market analysis helps in preparing for demand or supply fluctuations, barriers, and achieving cost efficiencies and volume scale-up.
This involves evaluating the bargaining power of an organization against its suppliers’ strengths by analytically appraising the supply market, the availability of the required quantity and quality of strategic items, and the comparative strengths of the vendors.
Interested in learning more about the next stages of the Kraljic Matrix? You can download an editable PowerPoint presentation on Kraljic Matrix here on the Flevy documents marketplace.
You can download in-depth presentations on this and hundreds of similar business frameworks from the FlevyPro Library. FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives.
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