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Portfolio Analysis - SpringTide | Procurement Analysis positions a category in this matrix...
Transcript of Portfolio Analysis - SpringTide | Procurement Analysis positions a category in this matrix...
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
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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
Current position 2.1
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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
2.1 Current position
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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
Current position 2.1
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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
2.1 Current position
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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
Current position 2.1
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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
Routine Leverage Strategic Bottleneck
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
2.1 Current position
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Actions
Routine Leverage Strategic Bottleneck
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
Current position 2.1
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Approach
Routine Leverage Strategic Bottleneck
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.
2.1 Current position
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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.