There are a variety of ways that a firm can organize the supply process into the organization, and these are known as sourcing strategies. The rationale for these different approaches will come from a variety of factors, including the evaluation of how important the goods or
Supply continuityBottleneck
CooperationCritical
EfficiencyRoutine
Best deal Leverage Impact on business: value or cost
Low High
Technicalorsupplyrisk LowHigh
Kraljic Positioning Matrix
services of strategic supply are to the firm and determining the competitive nature of the market place. In addition, the firm must also consider the level of technical complexity within the product.
Kraljic (1983) developed a positioning matrix to help consider these and other factors to help buyers and suppliers in their sourcing and competitive positioning strategies. He identified four key purchasing approaches or strategies: routine, bottlenecks, leverage and critical.
These are represented on the following matrix. These strategies are positioned against the level of supply exposure and/or technical risk compared with the strategic nature of the product or service – i.e. the level of value or cost exposure to the buying firm. Figure 5.8 illustrates the basic positioning matrix in which buyers can position the types of products and services that they purchase. These groups are termed
‘sourcing groups, which refers to a range of products or services that might be purchased. For example, nuts, bolts and rivets are often referred to as a Maxmin sourcing group. This is because the buyer will order to maximum and minimum stock levels.
This matrix is very simple but also very powerful, and has proved to be invaluable to firms in enabling them to focus on their procurement approaches.
The technical or supply risk can be derived from a few key factors.
First, if there are only a few suppliers in the market place then the
Figure 5.8 Strategic positioning matrix.
supply exposure is likely to be very high (the supplier will have all of the power in the market place). Alternatively, the supplier may possess superior technological skills, competencies and/or capabilities. This will give them a competitive advantage in the market place and therefore create higher degrees of dependency. With respect to the matrix, the buyer must weigh up the relative scale of high versus low (which is always an inherent weakness of this sort of model) and establish where the supplier best fits. The horizontal axis refers to the level of impact that the supplier’s product or service has upon the customer’s (buyer’s) ability to deliver the final product. Value or cost is used because the item could be of relatively low cost, but of high
‘strategic’ value to the buyer’s product. For example, in the aerospace industry a helicopter’s gearbox is held in place primarily by several large bolts. Whilst these bolts are relatively inexpensive compared to other elements of the aircraft, i.e. avionic systems, they are of high strategic importance and value, because without them the gearbox would fall out!
The strategic positioning matrix suggests several strategies that the buyer might choose to follow. If the product/service is of low value/cost and low technical/supply risk, it is seen as a low level part or commodity type product. Examples include nuts, bolts and rivets in manufacturing.
Types of stationary or low level temporary labour hire would also fall into this category, and should be sourced from the most efficient suppliers. The objective would be to get the most competitive price for the product, whilst maintaining delivery and quality standards. As switching costs are low and the market is highly competitive, buyers would negotiate over price. This often involves a Dutch auction approach, where the buyer will bid the price of the parts down sequentially, telling each supplier what the previous supplier has bid.
This is a short-term strategy used to get low prices for the product.
If, on the other hand, there are few suppliers in the market place and/or the part or service has high degree of technological competences, then the sourcing strategy will be different. These are recognized as ‘bottleneck’ items. Here the strategy is to maintain supply continuity, and this may be achieved through the establishment of long-term contracts. The focus of the buyer will tend to be more on cost than simply on price, and the buyer will also be interested in maintaining the continuity of supply. Liquidated damages clauses are often put in place in these types of contracts in order to maintain continuity of supply.
Moving to the high value/cost items, the model suggests using different strategies depending on technical and/or supply exposure to
Buyer
Supplier 3
Models A and B
Buyer
Supplier 2
Supplier 1 Supplier 3
Buyer
Supplier 5
Supplier 3 Supplier 4
Model A Model B
the market place. For example, where the buyer perceives the exposure to the market place to be low yet the cost or value of the item is high – in automotive, for example, this may be a product such as car seats – the strategy would be to negotiate the ‘best’ deal. This can be obtained through the use of ‘leverage’ strategies (Porter, 1980).
Leveraging involves pulling together a range of similar products (or sometimes the same product bought at different locations throughout the firm) and making a larger contract as a result. The aim of this approach is to increase bargaining power, thus establishing a much stronger negotiating position. For example, the buyer of seats, instead of sourcing Model A with Supplier 1, Model B with Supplier 2 and so on, would source both models from the same supplier. This will give the buyer the advantage of economies of scale, thus allowing a stronger negotiation position from which to leverage. Firms who are pursuing a strategy of cost reduction consistently follow this strategy. This approach to purchasing can and often does change the nature of the supply market exposure.
The supply market exposure will tend to increase as the buyer moves from several suppliers to one major source, and this will increase the dependency relationship and tend to move the supplier into the top right-hand box of Figure 5.8. This process often occurs without the buying company realizing the effect of the strategy, and there are many examples of this in recent years, with companies pursuing cost minimization programmes leading to large-scale supply base
Figure 5.9 Leveraging strategies.
Comparison of approaches
1 2
A B
1 2
A B
1 2
1 2
A B
Single
Parallel
consolidation (Cousins, 1999). This leads to the final quadrant, where there is high exposure to the supplier and high impact upon the business (value and/or cost). These products or services are often seen as critical or strategic to the business. These would tend to be high value items, often with mega suppliers created through leveraging strategies. Examples of these types of products would be modular assembly supplies (from first-tier suppliers and key technology suppliers). In services there are many examples of major outsource providers, such as key suppliers of information technology – com-panies such as EDS and CSC Index take over the operations of the firm’s entire IT network. These relationships tend to be single or sole sourced. This is mainly due to the large amount of investment required; switching costs are generally prohibitively high, with mutual dependencies. These relationships need to be managed very carefully, and they are seen as very long-term with the focus on partnership as opposed to buyer/supplier.