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The Essential Sourcing Skills Handbook series

2.1

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Portfolio Analysis

The Essential Sourcing Skills Handbook series

Strategic sourcing 1. Launch process

1.1. Category Profiling 1.2. Business Needs 1.3. Sourcing History 1.4. Stakeholder Mapping 1.5. RACI Matrix 1.6. Communications

Charter 1.7. Change Management 1.8. Transition Analysis

2. Current position 2.1. Portfolio Analysis 2.2. Seller’s Perception

Matrix 2.3. Relationship

Positioning 2.4. Risk and Vulnerability

Analysis 2.5. Specification

Challenge 2.6. Supply Market

Analysis 2.7. Opportunity Analysis

3. Strategy development 3.1. Request for

Information 3.2. Conditioning 3.3. Price and Cost

Analysis 3.4. Supply Chain Analysis 3.5. Quick Wins

4. Strategy selection 4.1. Options Analysis 4.2. Request for Proposal 4.3. Supplier Selection 4.4. Capability

Assessment 5. Strategy

implementation 5.1. Negotiation 5.2. Contract Award 5.3. Debriefing 5.4. Implementation Plan 5.5. Savings

Post-implementation management 6. Supplier performance

management 6.1. Problem Solving 6.2. Service Level

Agreements and Key Performance Indicators

6.3. Total Cost of Ownership

6.4. Contract Register 6.5. Relationship Audit

7. Supply chain management 7.1. Market Movements 7.2. Industry Curves

8. Specification management 8.1. Learning Curves 8.2. Value Analysis/

Value Engineering 8.3. Gainsharing 8.4. Exit Strategies

Current position 2.1

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2.1 Portfolio Analysis Introduction The first portfolio matrix was described by Fisher in 1970 and later refined by Kraljic in 1983 and applied to procurement. Portfolio Analysis is now widely used in identifying optimal strategies for category sourcing at global, regional or local levels, based on an assessment of two of the most critical factors affecting a supply market:

sourcing complexity or risk

spend impact relative to the buying organisation’s total spend.

By plotting these two elements in a matrix, an overall strategy can be determined and an action plan developed for each category of spend. Thus category management becomes proactive rather than reactive.

Objectives To segment supply markets for a spend category and to

position spend according to sourcing complexity relative spend and profit impact

To identify appropriate procurement strategy options

Relevance Effective procurement strategy relies on an accurate understanding of the organisation’s position in the market. Portfolio Analysis enables:

the understanding and challenging of the organisation’s market position in each area of segmented spend

the determination of reasons why the organisation is so positioned

the formulation of action plans to minimise market risk

Summary

The supply market can be divided into four quadrants according to the combination of sourcing complexity/risk and spend impact

Portfolio Analysis positions a category in this matrix

The category’s quadrant positioning dictates the most appropriate aims, actions and approaches for the sourcing strategy

Movement between quadrants is possible and sometimes desirable

2.1 Current position

4 © 2010 SpringTide Consulting Ltd. All rights reserved.

planning of actions to reduce supply chain risk an assessment of where the balance of power lies timing of events according to market vagaries the realisation that action planning and extensive

Conditioning (see section 3.2) may be required in order to move out of the Strategic quadrant and that this can sometimes takes years to achieve.

A single supplier may provide a product mix across all quadrants, for example capital plant (Strategic), essential spares (Bottleneck), consumables (Routine) and maintenance control (Leverage). Hence, the approach adopted must be at the category level, otherwise the buyer–supplier relationship could be distorted, with all products viewed as Strategic. Portfolio Analysis should be considered alongside the Seller’s Perception Matrix (see section 2.2) to provide a 360° view and to determine areas of misalignment; for example, a Bottleneck category alongside a supplier’s view of the customer as a Nuisance with no contractual protection of a termination clause presents a high-risk situation. The data arising from the Portfolio Analysis are objective and can therefore be helpful in gaining from both management and customers support for proposed change.

When to use Portfolio Analysis provides essential information to underpin recommendations for the development of the category strategy. It should be used as part of the assessment of the current position, along with the Seller’s Perception Matrix and Relationship Positioning (see section 2.3).

The Tool The analysis determines the current status and indicates the appropriate future supply position, allowing the development of optimal strategic options which in practice reflect the analysis output. Thus an action plan can be formulated for each spend category and appropriate relationships with suppliers can be adopted, i.e. the minimum relationship required to deliver the desired results.

1. Portfolio segmentation The calculation of expenditure is usually simple and quick, assessing the organisation’s spend with each supplier and for each category relative to the total spend. A Pareto analysis is



required to determine the level of spend relative to other categories. A Pareto is achieved when approximately 20% of spend categories give rise to approximately 80% of the spend. The relative level of difficulty or risk of the supply market is assessed for each category and graded from high to low. Then each item can be added into the Portfolio Analysis matrix in the most relevant quadrant.

The characteristics of each quadrant are distinct and thus the quadrants can be considered as different types of marketplace.

Leverage Strategic

Routine Bottleneck

LeverageExample: Packaging•Low risk, high expenditure

•Highly competitive market•Many suppliers•No internal dependency on particular supplier

StrategicExample: Outsourced services•High risk, high expenditure

•Limited supply base•design•supplier behaviour•lack of suppliers

RoutineExample: Plastic cutlery•Low risk, low expenditure

•High variety of products•Competitive market

BottleneckExample: Specialised software•High risk, low expenditure

•Often related to spare parts•Often products protected by patent or copyright

Sourcing complexity/risk

Sp

end

imp

act

Difficult

High

Low

Easy



The balance of power for the spend category in the market is reflected by its position in the matrix. In the Bottleneck and Strategic quadrants, where sourcing complexity or risk is high, the supplier has more power, whereas power lies with the buyer where the sourcing complexity or risk is low, i.e. the Routine and Leverage quadrants.

2. Challenging existing paradigms Factors affecting sourcing complexity or risk can be either external or internal. In considering the effects of these external influences on the procurement strategy, the buyer should focus on the following key questions.

What is the balance of power between the buyer and the supplier(s) for each category spend?

External influences

Supply chain

Exclusive channels to market

Tooling ownership

Intellectual property issues

Switching costs

Make-or-buy options

Capacity across supply chain

Too many steps

Number of suppliers to ensure supply

continuity

Industry curve

Level of market competition

Creation of competition

Potential new entrants

Available substitutes (now

and future)

Acquisition or integration

Monopoly or dominant suppliers

Supply versusdemand, local versus global

Obsolescence

Market influences (Porter's Five

Forces)

Political: tariffs, government interventions

Economic: exchange rates

Social: ethical issues

Technological: supplier with

competitive edge

Legislative: new regulations

Environmental: carbon footprint

Supplier collusion

Aggregation



How can the balance of power be shifted towards the buyer?

What would be the optimal balance between decreasing costs, increasing value and managing risk?

What are the key priorities for an action plan? Can new entrants be introduced to the market? Is it possible to influence the end-customer? Is an event a short-term anomaly or a new baseline? Can elements of the supply chain be influenced in order to

perform differently? Are alternative suppliers necessary to eliminate capacity

issues?

Internal influences

Stakeholders

Understanding of items to be procured

Undue preference/prejudice towards

a supplier

Tunnel vision clouding the bigger

picture

Failure of recent supplier switch

Need for egos to be overcome

Lack of clarity about total cost of

ownership

Business Needs versus Business

Wants

Refusal to deal with particular suppliers

Specifications

Product/service designed around supplier's solution

Use of test facility by supplier to launch new products

Intellectual property ownership

Internal design capability

Propensity to assume risk for the

design

Removal of brands and trademarks

from specification

Knowledge of standards

Customer/industry requirements

Contract options

Termination rights

Prevention by framework

agreements of use of alternative

suppliers

Understanding of internal costs of

manufacture

Tendency to procure domestic

products

Elimination of suppliers through pre-qualification

Supplier’s reluctance to accept particular clauses

e.g. payment terms

Attractiveness of organisation to

suppliers

Caps on the contract term



The focus around internal influences on the sourcing strategy should be:

how much time is spent on issues within each matrix quadrant?

does the category spend justify the time and effort involved?

what additional skills would enable greater control to be applied?

what changes within the organisation would be beneficial to the management of this category spend?

does the current behaviour of the organisation accurately reflect the Portfolio position?

Internal difficulties can be managed or resolved by, for example:

increasing the awareness and understanding amongst stakeholders of the difficulties and of their own role

engaging stakeholders in the resolution developing creative options (outsourcing, buying from

multiple suppliers, longer-term contracting, joint ventures) challenging the reasons why change is not possible ensuring that the research accurately reflects reality.

3. Identification of appropriate procurement techniques Each of the four quadrants is approached with a different procurement strategy as they represent different types of marketplace.

Minimise priceAvoid

long-term relationships

Seek competitive advantageCultivate

relationship

Obtain best deal

Aggregate spend

Secure supply

Minimise risk

Sourcing complexity/risk

S

pen

d im

pac

t

High

High

Low

Low



Movement is possible and often appropriate between certain quadrants by adapting the procurement strategy.

Move to another quadrant

Routine Leverage Strategic Bottleneck

Move to Leverage: Aggregate

suppliers Make package

more attractive to the market

Move to Strategic: Harness

supplier capability

Ensure that relationship is aligned

Ensure delivery of extra value

Move to Leverage: Develop new

suppliers Remove entry

barriers Review

specifications Unsettle

current supplier

Move to Routine: Remove

dependency Make-or-buy

decision

Aims, actions and approaches must be in line with the quadrant position. The techniques proposed should also reflect the organisation’s own objectives and its perception by suppliers.

Aims


Effort minimisation, efficiency maximisation

Decrease in number of suppliers

Simplification of requisition process

Standardisation Clustering and

moving into Leverage

Effective use of buying power

Maximisation of specifications and performance

Minimisation of unit price

Avoidance of inadvertent move into the Strategic quadrant

1–2-year aggregation opportunities

Achievement of competitive advantage

Decrease in total cost of ownership, continuous innovation

Consideration of joint ventures

Commitment relationships

Obtain competitor intelligence

Guarantees of product/plant availability

Consideration of make-or-buy options and alternative sourcing solutions

Removal of criticality

Substitution Forecasting

and modelling to assess dependencies



Actions


Use of e-sourcing tools (e.g. e-auctions)

Product standardisation (ranges, specifications)

Inter-divisional volume aggregation and data sharing

Simplification of procurement process (e.g. introduction of blanket order/ release process)

Automation of communications with suppliers

Outsourcing of the spend; collaborative procurement

Use of catalogues (preferably e-catalogues) if appropriate

Use of extensive Conditioning

Tactical and firm/combative negotiation

Use of a wide range of techniques

Use of e-sourcing tools (e-auctions)

Unpredictable behaviour (short-/ long-term contracting)

Frequent changes to supplier/ category

Rotation of categories

Unilateral rejection of price increases

Application of simple cost analysis

Continuous market monitoring

Establishment of long-term relationships framed by appropriate termination clauses

Sharing of resources (money, people, technology)

Clear understanding of supply chain and opportunities

Absence of threatening behaviour

Application of cost modelling, open-book costing

Performance measurement by efficacious means

Use of principled price clauses and negotiations

Development of suppliers to expand the market; approval of alternative sources

Application of Risk and Vulnerability Analysis

Extensive sourcing activity

Extension of notice periods

Knowledge of substitutes

Application of Supply Chain Analysis

Negotiation of long-term agreements

Monitoring of the market and suppliers

Use of front-end package pricing, contracting options

Application of Specification Challenge

Reassessment of customer needs

Consolidation with Leverage items to improve leverage

Inventory generation

Testing of alternatives



Approach


Task orientation, simplification

Limitation of buyer–supplier relationships to no more than Approved

Minimisation of contractual commitments

Provision of management information by suppliers

Absence of long-term contracts

Blanket orders Development

of new approaches

Avoidance of long-term relationships

Maintenance of simplicity

Maximisation of discounts

Participation in joint ventures, partnerships, mutual exclusivity arrangements

Establishment of long-term, detailed agreements

Shared vision

Use of detailed financial skills

Influencing of Business Needs

Creative options generation

Establishment of closer buyer–supplier relationships

Development of sophisticated stakeholder engagement models

4. Development of an action plan The sourcing strategy should include actions and approaches most suitable for the product in the light of the Portfolio Analysis, for example:

cost reduction to achieve targets cost containment of price increases to achieve savings

targets optimisation of time and effort through prioritisation introduction of effective management techniques where the sourcing complexity/risk is high, i.e. the

Bottleneck and Strategic quadrants, identification of the reasons for this, but more importantly the estimation of the time required to remove the risk; for example, how long it might take to introduce and test a new specification

for Bottleneck and Strategic quadrants, creation of an advantage for the organisation

for Routine and Leverage quadrants, exploitation of buyer power.



Notes It can take the buying organisation considerable time and

effort to move from the Bottleneck or Strategic quadrants. Suppliers can push buyers into the Strategic or Bottleneck

quadrants through the creation of ‘internal market difficulties’;; for example, closing the specification or encouraging relationship-driven preference and prejudice.

portfolio analysis - springtide | procurement analysis positions a category in this matrix...

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