Authored by: Mickey North Rizza
Supplier management is the art of managing suppliers to the greatest possible profitable benefit for the buyer. Sounds easy, but considering every supplier is different, what they supply is different and their interactions are different across your company, it isn’t.
Peter Kraljic introduced his portfolio management model back in the 1980s to help companies think about supplier management differently. The model is simple and focused on the products or services the company purchases. Unfortunately we make it difficult by not recognizing that suppliers supply the necessary goods and services that fit into the quadrants of the model.
The portfolio management model start with the x axis as risk or ability to resource an item (low to high) while the y axis is spend and profit impact to your company (low to high). The four quadrants are: transactional easy to source items; commodity items that can be leveraged for better value; strategic items that can diversified, exploited or balanced out for best outcome; and the last are the bottleneck items or those that pose a risk because volume is not assured for any reason.
Suppliers may supply items in every quadrant, several or just one. Regardless, each has a responsibility to fulfill based on your company requirements. How you manage the supplier for the particular items in each quadrant can simplify or complicate your business processes. Items that have low profit/spend impact and are low risk may be bought anywhere and represent an easy sourcing target, basic contract and inventory planning opportunity and straight forward payment processing; typically a quick and easy process a buyer does automatically. More complicated items, such as those that are a unique identifier to your product or are the brains behind the service or product being offered may have more complex processes to review and approve the product or service, more touch points across the organization because of its uniqueness and have very complicated contracts, inventory requirements, warranty clauses and payment terms. The point is each quadrant, while simplified for thought, has complexity when tied to the business processes. The higher the spend/profit impact and risk, the more complex the management of the supplier and business processes tied to it.
Reducing the complexity makes the supplier management easier; governance models that detail out the various quadrants into business process hierarchies are the simplest form of reducing the complexity. From transactional items that are easy to purchase on a catalogue and automatically tagged for payment when received, to the high risk item that must be reviewed prior to purchase and contract, and must complete a battery of tests before being paid – the business processes can reduce the complexity and make it easy to manage the supplier.