the procurement process

First, supply risk can be defined broadly

using three factors:
kraljic’s portfolio matrix
Figure 1. Each of the four categories of commodities in the KPM requires a different
approach to suppliers.
1. Market risk: Availability of potential
suppliers for the commodities, type High
Leverage items Strategic items
of market (monopoly or oligopoly
• Standard, substitutable • Strategically important
condition) and entry barrier to the
market • Alternate suppliers • Substitution difficult
2. Performance risk: Supplier’s quality- • High volume or cost • No alternate suppliers
Profit
and performance-related issues, impact
which can include things like the Noncritical items Bottleneck items
supplier’s access to new technology
• Standard, substitutable • Substitution difficult
or the supplier’s pace at adopting new
technology • Alternate suppliers • Monopolistic market
3. Complexity risk: Associated problems • Low volume or cost • Critical items
with standardization of the product
Low Supply risk High
or service. Specification of the prod-
ucts or services is critical.
egy. This minimizes the supply risk and exchange and uncertainty associated
Second, profit impact can be defined as: makes the most out of buying power to with the exchange of resources between
enhance the organization’s purchasing buyer and supplier as the core dimen-
1. Impact on profitability: This factor performance and yield. sions of a transaction. In addition,
seeks to address the typical profit The KPM is arguably the most widely three sets of relationships – customer
yielded on the purchase of each used framework in industry today. For (existing and potential), supplier
commodity. example, comprehensive survey data (existing and potential) and indirect
2. Importance of purchase: This factor among Dutch purchasing professionals (e.g., company, firms, organizations,
seeks to address the importance or need have verified the credibility of his model. competitors, suppliers’ suppliers and
of the purchase of each commodity. However, since Kraljic proposed his regulatory bodies) – were identified
3. Value of purchase: This addresses the portfolio model, more advanced models within a network, which recommends
tangible and intangible costs attached have been suggested under various that firms should identify organiza-
to or the value obtained from the frameworks. For example, considering tions that are using each of the three
purchase of each commodity. the interdependency between the buying or a combination of the three portfo-
company and suppliers, transaction- lios of relationships and position the
These observations result in a two- based business relationships depend on organizations within the portfolio of
by-two matrix that has four categories: the attractiveness of the offer made by relationships.
bottleneck, noncritical, leverage and both sides. This leads to the second type Another suggestion advocated
strategic commodities, as shown in of approach, tri-partitioning business procuring industrial products by
Figure 1. processes to the product-classification following the industrial network
Each of the four categories requires a process of industrial projects. The next portfolio approach. Subsequently, stra-
distinctive approach toward suppliers. approach is applying contingency- tegic supplier portfolio perspectives
By plotting the buying strengths against inspired frameworks to model the considering risks, trade-offs and inter-
the strengths of the supply market, relationships among product, internal dependencies of relationships between
three basic power positions are identi- cooperation and inter-organizational the firm and its suppliers were devel-
fied and associated with three different relations. oped. Recently, a stakeholder-based
supplier strategies: balance, exploit and Then the inter-firm relationship model was designed that considered
diversify. The general idea of Kraljic’s emerged. It considers the transaction three organizational elements: policies
model is to classify the commodities cost analysis approach, which is based on (P), organization (O) and processes (P).
by their preferred procurement strat- asset specificity, frequency of economic These three “POP” elements help trans-

36 Industrial Engineer
the right flow
Figure 2. Procurement experts can use this chart to develop objective ratings for commodities before placing them in the KPM.

late the selected organizational strategy predominantly on a process of discuss- of these are qualitative and need to be
into an appropriate supplier strategy ing and analyzing. Reaching consensus assessed subjectively by the procure-
and clarify the idealized mix of suppli- is critical when choosing what weights ment experts based on their own
ers in terms of portfolio archetypes. to assign to the factors and ultimately experience. Such subjective judgment
for positioning commodities in the invariably makes the assessment impre-
The proposed approach KPM. Insightful discussions about cise, sometimes conveying multiplicity
The above-mentioned purchasing purchasing issues are considered the of meaning. The imprecise nature can be
portfolio models are based on buyer- most critical part of strategy develop- captured through a conventional ordi-
supplier relationships and consider ment with the help of the KPM. The nal scale to measure them and precisely
interdependency of relationship and likelihood that experts will have differ- determine their importance. A 10-point
strategy-based planning, but using ent opinions is quite obvious. Therefore, scale can capture high variation in the
product-based classifications to assign reaching consensus is a major issue data. What follows demonstrates the
a suitable purchasing strategy has not when assigning a commodity in the use of such an approach for mapping
been addressed properly. The time has KPM. automotive components in the KPM.
come to give managers a simple tool to Mapping commodities depends on Specifically, the approach proposed
assess their own purchasing strategies. various factors of supply risk and profit by two of the authors, Padhi and
The consensus method is based impact. As stated earlier, quite a few Wagner, along with V. Aggarwal in the

February 2013 37
the procurement process
March 2012 Journal of Purchasing & Supply
Management, combines multiattribute
what’s the score
Figure 3. The normalized preference scores of 10 procurement experts regarding supply
decision making and MDS techniques risk and profit impact.
to determine the importance weights of
the supply risk and profit impact factors Supply risk Preference score
to position the automotive components How much preference do you give to market risk while purchasing products/services 44.3%
in the KPM. The approach consists of for your organization?

six steps shown in Figure 2. How much for performance risk? 21%
How much for complexity risk? 34.7%
Weighing risks and impact Profit impact Preference score
To test the proposed methodology, the How much preference do you give to impact on profitability while purchasing 23.5%
products/services for your organization?
researchers applied it to an automotive
original equipment manufacturer that How much for criticality of purchase? 31.8%

procures more than 2,050 different How much for value/cost of purchase? 44.7%

product items and services to carry out

its normal operational responsibilities
and manufacture cars. Based on this
company’s total cost of purchases in parts and service
2010, 19 items were selected for this Figure 4: Performance score of selected commodities
analysis. The 19 items account for 80
percent of annual purchase value.
Following steps one through three of
the flow chart shown in Figure 2 deter-
mines the normalized preference scores
of the supply risk and profit impact
factors. Ten procurement experts were
asked to rate the factors on a 10-point
rating scale anchored at one (very
low) and 10 (extremely high). Figure 3
provides an overview of the normalized
preference scores the 10 experts gave for
the right quadrants
Figure 5. The proposed process maps automotive items into different quadrants of
supply risk and profit impact. Kraljic’s portfolio matrix.
Next, following steps four through
five of the flow chart in Figure 2 deter- High
Leverage Strategic
1 4
mines the performance score of the • Carburetor • Fuel supply system
supply risk and profit impact factors for • Breaking system • Engine components
• Engine cooling system • Antipollution kit
19 selected automotive components. Ten • Steering system • Ignition system
of the company’s procurement experts • Switches • Gear box
were asked to rate the items on a 1-to-10 • Charging system • Transmission system
Profit
scale on supply risk and profit impact impact
factors. Figure 4 gives the performance Noncritical Bottleneck
2 3
scores of a few selected commodities. • Audio/video devices • Electronic sensors
With the preference and perfor- • Gauges and meters
• Windscreen and glasses
mance scores of the supply risk and • Car seat and interior
profit impact factors, step six of the • Battery
flow chart uses MDS to obtain an over- • Wheels and tire parts
all visual positioning of the 19 selected
items since the six factors (three each Low Supply risk High

38 Industrial Engineer