Managing Contracts and Relationships in Procurement and Supply

Session 2 Planning the Relationship Portfolio

Objectives of Session

1.1 Classify types of commercial relationships in supply chains1.2 Apply portfolio analysis techniques to assess relationships in supply chains4.2 Explain the main techniques for supplier relationship management4.3 Explain the main techniques for supplier development4.4 Explain techniques for relationship improvement

Relationship Management

Relationship management can be defined as the process of analysing, planning and controlling an organisation's relationships, in order to be able to leverage the more important relationships to the long-term benefit of the organisation.

Portfolio analysis and segmentation

This involves categorising and dividing the firm’s supplies and/or suppliers into different classes, according to relevant criteria such as volume and value of business, profitability, supply risk – or, broadly, ‘importance’ to the firm’s strategic objectives.

Most purchasing operations increasingly face operational pressures to sustain and 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 and suppliers for investment in relationship management. The higher the risk, the more the buying organisation will want to exercise control over the suppliers and their processes in order to minimise risks.

Activity : Identify some Supply risk factors

Supply and Supplier Positioning

A supply positioning model is a tool for determining what kind of supply relationships and sourcing approaches a buyer should seek to develop, in relation to the various items it procures for the organisation. The aim is to assess the importance of the different items in the purchasing portfolio and to prioritise contract and relationship management effort accordingly.

Some popular tools for positioning supplies and suppliers

1. Improving your supplier delivery schedule adherence: Pareto is an excellent tool when analyzing supplier performance and deciding on your management strategy – which suppliers to focus on and what route causes to eradicate. 2. Cost Savings initiatives: Using Pareto techniques to analyse cost drivers within your organisation can help you focus on the key contributory factors such as Suppliers, Parts or Bill of material elements allowing you to focus your improvement activities on the parts that matt

Carrying out Pareto AnalysisFirst gather you data and summarise (as in the below example)Sort your table in descending order of the issue your investigating (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 typically the primary causes the ones between the 80-100% are the less important causes

Culmative percentageAdd each new individual percent to the running tally of the percentages that came before it.

For example, if your dataset consisted of the four numbers: 100, 200, 150, 50 then their individual values, expressed as a percent 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 our organization. 152 data points have been collated and grouped into 5 categories.

The data was captured over a 3 week period and is as follows Damaged Packaging 42 OccurrencesParts received too early 5 OccurrencesIncorrect Documents 52 OccurrencesIncomplete Parts sent 12 OccurrencesIncorrect Part sent 17 Occurrences

Create a Pareto matrix to analyis

Kraljic Portfolio Purchasing Model 1983 Its purpose is to help purchasers maximize supply security and reduce costs, by making the most of their purchasing power. In doing so, procurement moves from being a transactional activity to a strategic activity – because, as Kraljic said, "purchasing must become 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 the supply risk and potential profit impact of each. Supply risk is high when the item is a scarce raw material, when its availability could be affected by government instability or natural disasters, when delivery logistics are difficult and could easily be disrupted, or when there are few suppliers.

Profit impact is high when the item adds significant value to the organization's output. This could be because it makes up a high proportion of the output (for example, raw fruit for a fruit juice maker) or because 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 the product purchasing classification matrix

Step 1: Purchase Classification

1. Strategic Items These items are directly linked to differentiation and profit. These items are also scarce. This quadrant normally contains high-value items such as precious metals with limited, or even a single supplier. The purchasing strategies we would typically use for these types of items include collaboration and strategic partnerships.

2. Leverage Items Just like strategic items, these items have a

large financial impact however, the item is in abundant supply. Because of their large financial impact these items are important to the organization. The purchasing strategies we would typically use for these types of items include tendering and competitive bidding.

Write down examples of these in your experience

3. Bottleneck Items These are items that have a low financial impact however, there is a high supply risk. An example might be where we have a new supplier supplying a new technology. The purchasing strategy we would typically use for these types of items is to ensure continuity of supply and develop plans to reduce our dependence on this supplier, by adapting our prodcts and investigating alternative products and suppliers.

4. Non-critical Items These are items that have a low financial impact on our organization and are also in abundant supply, such as office supplies. Although these products are low impact and have abundant supply, they are nevertheless interesting, because the cost of handling them can often outweigh the cost of the product itself. Thus, the purchasing strategies we would normally use for these types of items focus around reducing administrative costs and logistical complexit

Write down examples of these items

Step 1: Purchase Classification (2)

Step 2: Market Analysis

Step 3: Strategic Positioning

Reasons For Outsourcing

Cost savingsManufacturing is not a core competencyLack of technical skills to develop or make an itemLack of capacityMinimization of inventoryAvoidance of risk of technical errorsInsufficient staff to process order

Activity – how well does this describe the current situation

Kraljic’s Matrix - a 21st Century Approach

Activity

Read 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 21st Century Approach

Beginning with strategic items, a manufacturer's most trusted partner should be itself. It should acquire the capability to make these items in-house. Buying the supplier would provide immediate capability and permit the supplier to carry on production for other customers while allowing the buyer to reap the benefits of the new addition's success. Or, if the talent is available, the company could create the required capability in-house, tailored to its own needs. This approach, too, often leads to the creation of a new business unit. (For a real-life example, see the sidebar "Allen Organ hits the right notes on production.") Regardless of which path is chosen, the result is control of all aspects of the most critical subassemblies.

Leverage items must be handled in much the same way as bottleneck items, but because they represent a greater cost and profit exposure than bottleneck items do, the company must have a stronger voice as a board member, and there must be a stronger commitment by the supplier to always make the items available when needed. (For an example of a manufacturer that followed this strategy, see "Neways invests for success.")

Non-critical items are usually classified as "C" items (lowest category of annual cost-volume) by inventory managers. Manufacturing resource planning (MRP) or enterprise resource planning (ERP) information systems can manage these items and warn of supply problems well before they occur. Since these are common, low-cost items that usually are purchased in bulk and typically are available from a variety of sources, it makes sense to establish relationships with more than one supplier. This will allow buyers to always have a "warm base" of several suppliers that are producing those items at moderate rates and are able to respond to surges in demand for these fast movers.

Moving next to the bottleneck items, the certain way to ensure available supply is, again, to produce it in-house. Cost control will be the biggest challenge for these items, because they may produce little profit. Acquiring or creating capability is a possibility, but cost-effectiveness will be the immediate concern. Another strategy would be to invest in the supplier, becoming a part owner with a seat on the board of directors, so as to ensure the manufacturer's interests are locked in with the supplier's overall business strategy.

Read the article ‘From bean to cup: How Starbucks transformed its supply chain’

Use the tools and techniques we have looked in the session as 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 your local taxi firm brings rather more influence than the same amount going to Microsoft.

2. Thinking of our suppliers in terms of how much harm they can do us may at times be useful, but it is somewhat passive, not to say negative. The more interesting question is ‘could this supplier contribute to a real improvement in the way our organisation works and competes?’ This we will call ‘supplier strategic potential’

Limitations of Kraljic’s Model

Supplier PreferencingThe supplier preferencing model illustrates how attractive it is to a supplier to deal with a buyer, and the monetary value of the buyers business to the supplier:

This is a useful model as it suggests strongly that in order to get the best from suppliers 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 companies

As a contrast there is a potential downside to establishing a reputation as a ‘negative’ or ‘unattractive’ customer. A buyer may become less attractive to suppliers if, for example:

They often pay their invoices lateThey constantly query or despite itemsTheir personal are rudeThey are dishonest or unethical

Such customers might suffer the penalties of such conduct, and poor relationship management, 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