Procurement is an important process for a business or a company that focuses on providing the right quality and quantity of products to people. It is important that a business is aware of how the process will affect the whole purchasing strategy that they are using with their products or services. Using the Kraljic Matrix is one way to help make the process easier and smarter. This strategy helps companies to use to minimize the vulnerability of their supply chain while simultaneously maximizing the buying power that they can have from the goods that they are offering.
The Quadrants of the Kraljic Matrix
Kraljic Matrix is divided into 4 quadrants that will show the potential result of the profits that a certain business can have when it is on one axis and see how vulnerable the business will be, with the suppliers’ disappearance from the other side of the axis. The quadrant four quadrants are: Strategic Items, Leverage Items, Bottleneck Items and Non-Critical Items. For those businesses whose purchasing managers are interested in incorporating the use of the matrix into their business, it is important that they know the most and the least critical parts of the Kraljic Matrix as well as those that show high and low impact on the business’ strategy.
These products are those that are included in the critical needs of the buyer because of the fact that these products may either be difficult to deliver, hard to find, costly, or directly impact the profitability of the company. Although all quadrants work together to make up the complete picture, because of the very nature of this quadrant and its relation to the business’s bottom line, this should be the quadrant to examine in depth first.
You will notice that this quadrant is also on the right side of the matrix with a high financial risk involved in the items that fall here, but it is at the bottom so the supply risk is low. Therefore even though the financial impact on the business is very high, the strategies and considerations for these items are different because of the wide variety of options available to procure them. Items in abundant supply tend to work well with competitive bidding as a part of the overall strategy.
This is the first of the two on the left side so you know it has a low financial risk. However, being on the top means the risk to the supply is greater with possibly only 1 or 2 vendors out there with the specific items needed. As a result of the reduced financial impact, these items are a little safer to explore other options. It is a sound strategy to nurture the relationship with the vendor while at the same time investigating and looking into other resources.
The products in this quadrant are at the bottom left so that means low financial risk and low supply risk. A perfect example of this would be basic office supplies such as paper, pens, binders, tape, etc. The challenge is that in many cases, the fees associated with shipping, transporting and receiving them are more than the items themselves! Obviously, competitive bidding on the price of the items themselves won’t be of much assistance. Instead, strategies should revolve around reducing the need and use of these administrative/office supplies and finding a way that makes sense to get the items the business does need from point A to B without added expense. This could involve some type of sharing
By using the Kraljic Matrix, a business can better understand the potential profit in relation to the supply chain weaknesses and vulnerabilities. By being aware of the four quadrants, there is no doubt that purchasing managers will have an easier time dealing with their procurement processes. They can make better strategy decisions, work on those relationships that are key to the financial success of the business, and identify items of lesser importance that may work better finding alternative sourcing or even outsourcing.
It has been a rough few years around the world for the economy, big business, and small business. Everyone is fighting to make their mark and improve profits or to simply hang in there until the next wave. Pick up any business publication especially around the end of a quarter and you’ll see companies lamenting profits falling, less than expected sales, missed forecasts and the list goes on. Then the article nearly always includes a positive spin or some change they are making to right the ship. But why wait? Get your business prepared and take steps now through improved procurement to enhance the business, improve efficiencies and increase profits.
Does your business import any raw or finished goods from overseas? If so, it’s time to reevaluate every step of the process. Is your preferred vendor still the best choice? Test the waters and see if there are better options. Maybe there was another supplier that was close in the bidding process that has since improved and would be better able to handle your needs.
Then look at the process of getting from the country of origin into the United States and again from the port to your location. Are there other options available to you now that weren’t before? With fuel rate changes does it make more sense to consider a different shipping method? Has your volume increased or decreased and do those changes give you an advantage with another method or another shipper?
You will also want to take a very close look at the suppliers themselves and more than whom the supplier is, what kind of a relationship your business has with that particular supplier. Obviously you want to cut costs or increase the value you are getting for the money you are spending. But go deeper. Are your suppliers just nameless, faceless companies? Do you know the people behind them? Do you consider them a “supplier” or do you look at them as a “strategic partner” that is an integral part of your business success? Strategic suppliers engage in regular, ongoing conversation, know your business almost as well as you do, and are extremely reliable. And when things get tough, situations occur that put in your business in a tough place, your supplier is able to go above and beyond the call of duty to make sure you are well taken care of. Is that the kind of relationship you have with your supplier? If not, why not? Can you build that relationship or do you need a new supplier? Certainly questions to ask and explore.
These are just a couple of specific examples, but you will want to consider all aspects of procurement. If you are interested in a complete procurement transformation, take a look at the previous post with some pointers on how to get started down that path.
In any form of business, making money and earning profit is still the endpoint of each process. Thus, the buyer and the seller have their own purposes and objectives in a business transaction. For the buyer or customers, they look at price and also value wherein they can have better savings. On the other hand, the vendors have their own strategies and goals to maximize profit. Negotiation takes place between both parties to try to reach their desired goals.
However, there are several myths that purchasing managers often adhere to in terms of price negotiations. It is very important to consider the myths and what they mean for purchasing managers. Here are three myths for price negotiations.
Myth 1: Price is King.
Many purchasing managers fall into the trap of looking at the price, the bottom line. That is important, but it involves many other considerations that result in the perceived value. One item may be slightly higher, but due to branding and marketing it has a higher perceived value. So then you have to consider all of that pointing out that the product’s success and how that will satisfy the needs of the end user. The purchasing department should be aware that customers can ultimately determine how to react and interpret the marketing messages. The companies are spending ideal time to research the market and get a good sense of how the customers feel and think.
Purchasing managers often look at price first to see where to maximize savings, but they must also consider what values are important to them and their business.
Myth 2: Buyer Has Exclusive Authority
The purchasing manager may or may not be the decision-maker. Depending on the size of the company, the number of employees in the department, and the chain of command, the purchasing manager may not be considered any more than the ‘signatory’. The procurement manager is usually part of a bigger team, whether that is within their department or working in hand with other company executives. This works as a built-in safety net to prevent one person from destroying a deal.
It is also important to share all information with the entire team of decision-makers. This is easily done through the use of purchasing software, but at the same time, it is only as good as the people using it so making full use of the software requires full participation.
Myth 3: Purchasing Managers Get Bonuses for Savings.
If you operate on the premise that purchasing managers get paid bonuses based on money saved, then that can lead to many problems. The reality is that 8 out of 10 purchasing managers work on a fixed salary. The other 20% that may have some bonuses or other payment structure beyond a fixed salary do not do so in relation to direct savings but rather other measurements of effectiveness. These could include things such as successful and timely payments, a percentage decline in complaints about invoicing, or streamlining vendors for more optimum pricing and supply management.
Negotiating with the buyer may be tough at times if people do not know how to manage it properly. Understanding these myths will allow a purchasing manager to operate from a different position going into negotiations. When you take a closer look at these situations you are better able to perform and meet the needs of your business. There are also many purchasing and procurement seminars available which are specific to various industries. People have the chance to learn different techniques, problems and problem-solving methods for your industry. It can also give you the advantage in future negotiations in our competitive world.
eProcurement is defined as the conducting of business transactions via electronic methods. The ‘e’ in this term stands for “electronic”. It may be utilized in each process stage and it may start with the actual sale coming from the purchaser and may end with the payment and invoice of the customer.
The internet itself is not new, but it is still, even today, rapidly changing and evolving. It has become one of the best methods for businesses to cut overhead costs and even broaden their customer base through marketing directly to the end consumer. As you can see, eProcurement is not just advantageous for businesses but also for the customers. Customers are no longer limited to what they can find in their hometown stores, but have an almost endless range of selection of merchandise online. With just few clicks, businesses and customers can immediately find the best price deal for their goods online.
Before eProcurement existed, traditional procurement was the accepted norm in all businesses. Procurement or traditional purchasing involved different interactions and steps with other departments of the company and the suppliers. Traditional procurement involves a lot of conversations (telephone or face-to-face) and a long paper trail with forms that track and document every step of the process as procurement officers interact with suppliers or long-time partners. It was merely a lower-end purchase process without a lot of thought given. In recent years procurement has changed to become a strategic function wherein the procurement officers are looking for suppliers that will fit the overall strategy of the company.
Today, eProcurement is recognized by many as more beneficial since it provides a fast and convenient purchasing system. It helps to modernize the workplace and get the business updated with the latest purchasing and procurement methods. eProcurement software also help the departments to be able to manage their supply chain efficiently. In addition, it opens up a diverse market range.
eProcurement helps speed up the entire process, cuts out unnecessary steps and will ultimately save money through better, more efficient management and spend control. The entire process will also be simplified considerably with the aid of real-time interaction of pre-approved trading partners and suppliers. It also shortens the time to delivery allowing for shorter lead times and better cash flow management.
eProcurement by its very definition involves technology. Utilizing an in-house eprocurement system is far better than a traditional paper-based system. Things have evolved even further with cloud procurement. The eProcurement solutions in the cloud address the challenges through taking advantage of all advanced technological innovations. By utilizing a cloud-based approach, companies have access to their procurement system virtually any time and anywhere; all they need is a device with Internet access – computer, laptop, tablet, or Smartphone. Many different online businesses have adopted applications in the cloud because instant visibility, fast adoption, Amazon/Google like usability, transparent pricing, and lower burden on IT.
eProcurement and cloud-based technologies can help advance your business, save you money, and bring about strategic changes in thinking far beyond the role of traditional procurement in years past.
How Supply Problems May Affect Companies
The supply chain is an important part in the operation of a business and companies having difficulties in the process often feel those issues. Supply chain is defined as the movement or sequence of materials as they flow from the original source up to the end or final costumer. Important activities usually characterize an active supply chain and these includes manufacturing, purchasing, transportation, customer service, supply planning and supply management. There is a need for companies to strictly adhere to the proper practices regarding their supply chain in order to avoid problems with the entire activities connected therein.
Despite the significant value and integrity of supply chains, it is really inevitable that supply problems will occur somewhere along the way. The problem could potentially get worse if the company fails to deal with this issue and does not exert an effort to proactively find and address the supply problems. Due to the nature of these problems, most companies will probably be put to test at some point and a if they do not truly understand the value of supply chain and fail to practice the right policies and protections this will lead to serious problems for the company, legal issues, and even imprisonment in some cases. Challenges and supply problems are not something that you can eradicate; they will always exist it’s important to realize that it doesn’t just affect your supply chain but also your entire operation.
Let’s consider a couple of examples. Taking the case of the Makers Mark, they decided to reduce the alcohol content in order to increase their supply and production to compensate for shortages in their supply chain. This action, to reduce alcohol content in each bottle allows for a small increase in production by spreading it out further.
Customers responded with complaints drawing the attention of company executives. Eventually Makers Mark realizes that the decision to alter their core product to adjust for supply chain problems was ultimately punishing the customers who had been loyal to them for years. They reversed their decision, returned to their original formula, publicly apologized and then made other corrections to compensate and increase production other ways.
Another recent example in the news is when Ikea meatballs were found to contain horse meat. Inspectors in Europe have found out that there are traces of horse meat from this signature food item. Ikea temporarily stopped selling and offering meatballs on some of its European outlets. This was a supply chain problem that resulted in loss of business and loss of good will. To address the problem, Ikea had conducted their own inspection on the meatballs in order to show their concern and commitment to the safety and protection of their customers. Whether it was a gap in their planning or a lack of planning, the result was the same – supply chain problems that affected the company. The company has actively attacked the problem and is positive that they will be able to take the right decision and figure out how to implement alternative solutions regarding the Ikea horse meat scandal including a change the recipe of their meat balls.
You may not know how or when problems will strike your supply chain, but as you can see from these examples, how you react is of utmost important to the ongoing ability of the business to function, retain customers, and remain successful.
Supply chain means the movement and flow of materials from the original source to its end consumers. Supply chain includes manufacturing, transportation, purchasing, warehousing, demand planning, supply management and supply planning. The supply chain is composed of people, information, activities and the resources involved for the movement of product from the original supplier to the customer. If a company fails to exercise diligence regarding their supply chain, some level of failure in operation will surely be expected. But if on the other hand, supply chain management is implemented the business or company will have smooth operation.
The supply chain is a vital part in any business because it is considered to be an effective determinant of success. A company must possess effective supply chain management in order to deal with their supply challenges and problems. Supply chain management is the administration of unified businesses that is involved in provision of services and product packages needed by the end consumers in the supply chain. The supply chain management spans the entire storage and movement of the raw materials, inventory for work in process and the finished goods starting from the origin point up to the final consumption point.
But despite the value and contribution of a solid supply chain, there are still companies that fail to understand and appreciate the real value and integrity of their supply chain. Many of today’s companies are reluctant to invest much time and energy into ensuring they do not have any improper and unethical activities. Results of surveys indicates that a high percentage of companies fail to observe due diligence and almost all of these companies admit that they have not even conducted checks what so ever.
When a company fails to observe due diligence and safety checks within their supply chain, it may result in several problems like contamination of products which can significantly impact the quality. Other negative effects can be brought by the companies’ failure to understand the real value of supply chain and supply chain management. The only way to avoid this is to observe full awareness and proper practices to avoid more damaging effects to the company.
In the event supply chain issues in your company reach its worst stage, your company will not just suffer problems on supplies and products but there is also the possibility that it will face several fines and charges. There is specific legislation requiring companies to demonstrate adequate and ideal procedure in addressing risks. The worst case scenario is that the executives or top leaders of the company may be sent to jail for failure to observe due diligence which may result in serious damage to people.
To avoid these effects, a company must make sure that they have the knowledge and full awareness on what the supply chain is about and its significant function to business. It is also advisable to create and organize teams that will monitor and ensure that the company is still following the proper practices for managing their supply chain in order to avoid several problems connected with the failure of observing due diligence regarding their supply chain.
Within every economy is an underlying current of supply and demand. There are many different economic theories regarding the impact of supply vs demand on an economy, macro vs micro economies, global economies, and the list goes on. This subject can get very complex very quickly and that is not the scope of this article. Instead we just want to look at the effect of supply and demand within a weak economy. With a weakened economy often comes weakened demand and without demand there will be no production or consumption that will take place. For this reason, having these two components always present and working within the economy is highly important. When changes take place it can be felt throughout a supply chain at many different levels.
Demand is known to be the quantity or amount of services or goods people are able and willing to purchase at various prices, whereas supply is known to be the quantity of services or goods that are provided at each price. How do demand and supply interact in order to take control of the market? Purchasers and sellers respond in opposite directions for fluctuation in price. If the price of a certain commodity increases, the capability and willingness of vendors to offer them will also increase, whereas the capability and willingness of consumers to purchase such commodity will decrease.
There are some instances wherein the domino effect might take place. This domino effect is another factor of the market that needs to considered in specific reference to the supply chain. What is meant by a domino effect? This is a chain reaction which takes place when a small modification causes another small modification in something close to it, which will cause another change similar to the first and so forth within linear sequence. This term is popularly known as the mechanical effect, which is used as the analogy for a falling line of dominoes. It normally refers to the linked succession of events in which the time range between the sequences of events is moderately small. It could be used metaphorically or literally; Metaphorical use to represent causal linkages in systems, like politics and global finance, and literal use as observed in series of real collisions.
An example of domino effect applied in global finance can be found looking at something as simple as the price of basmati rice, which is expected to increase by just about 80 percent because of decreased production in Pakistan and India. The Indian harvest in 2012 yielded 40 percent less than the previous year according to the Rice Association. So why did this happen? Drought? Poor soil conditions? Natural disasters? Actually, the main reason is the launch of a minimum price support by the Indian government for long-grain rice in order to motivate farmers and steer them into other varieties.
Basmati rice is only grown in Pakistan and India so based on simply supply and demand it is a high-value crop, but it is also a low-yield export crop. So farmers have to consider the new addition of the government backed price support, look at all the advantages and disadvantages of basmati compared to other varieties that have a higher yield and make some tough decisions. In the end, basmati producers are found to be switching to other varieties, which reduces supply and increases price.
You can easily see the domino effect at work. But take it a step further and you can see a chain reaction throughout the supply line as vendors and suppliers purchase from the farmers and sell to stores, restaurants and individuals. A good supply manager will be able to trace things back to the source, make intelligent decisions and prepare as much as possible for shifts and changes in the market.
Unfortunately, almost all people are now experiencing the negative effects brought by the weak economy during which the prices of commodities continue to increase. Price increase has been one of the major problems of people these days. Because of this phenomenon there are lots of individuals who keep on tightening their belt in order to compensate for such economical problems.
The effect of these problems in today’s economy does not exclude purchasing agents and travel buyers. They are affected by this occurrence as well. The economy of today is far different as compared to the others from the past. If you go back a bit in history, you will probably observe that there had always been the fluctuating financial economy. However, economies of the past were far more self-sufficient than today’s global economy. The more technology advances the smaller the world becomes and the more interdependent we all become on each other. This is also true for purchasing agents and buyers who partake in a global economy through travel to different parts of the world to conduct business.
Those travel buyers will need to maximize their capabilities and develop an in-depth knowledge this present year (2013) in order to compete within the weak markets and price increases resulting from weak markets. This warning is according to the report of ITM or Institute of Travel and Meetings.
Based on the 2013 Industry Outlook of ITM, trends in business travel will see price increases in airfare and hotel costs. Other findings show a range of increases from moderate to severe in the cost of car rentals. The weak economy within Europe and spreading throughout the global economy including the United States is among some of the toughest challenges facing business today.
According to the chief executive officer of ITM (Simone Buckley), “In order to minimize price increases for their companies, those travel buyers have to make the most of their negotiation capabilities”. Developing their expertise in these travel areas will not only help them in their long term goals of making excellent buying decisions, but through this process they will also build strong relationships with other purchasing agents, travel buyers, hotels, travel agents and suppliers/vendors.
Understanding the main drivers, the core values, behind how others set their prices is of great value to learning how to negotiate in a better way. Whether you are looking at hotels for your travel to other areas or looking at resources needed for your production or specific parts and finished products you turn around and sell at retail, understanding how those prices are set will help you understand how to negotiate.
Price increases and weak economy have you feeling overwhelmed or trapped? Consider additional training. But wait, before you cross this idea off your list due to additional cost give it some serious thought. And then go one step further and do some research. What kind of skills could you gain that would be beneficial to you as a purchasing agent in this economy? We mentioned negotiation. But there may be others you can consider based on your industry, interrelated industries, languages, customs and other ways that may give you the advantage. So take the time to stop and consider how you can work smarter and harder to get ahead in today’s economy.
Procurement, up until now, is a sort of necessity in most businesses. Although the irony is it is a rarely recognized as a vital, strategic component despite changes which constantly occur in this world that have a direct impact on the company’s financial position. In today’s time, procurement or purchasing teams within corporations play an increasingly crucial role in the efficiency of companies in such a way that traditional procurement managers had not ever considered previously.
Due to the challenges facing the purchasing industry, some unavoidable frustrations must be combated by people to remain strong in the business. Some of them even include serious challenges that may be faced by the procurement organizations – employee development and training, managing international sourcing offices and making sure of collaboration among the corporate departments. Procurement departments have acquired a higher strategic significance in global companies within the past few years, but there are still others who seem to be locked out of strategic decisions.
If you are one of those departments struggling to be viewed in a more strategic role, try to honestly see things from the point of view of other people. In addition to this, you should also take part in the proper selling of the value in procurement and how to engage stakeholders/executive within their organizations. This is highly advisable to fight back the struggles commonly faced by these professionals in the industry. Furthermore, this struggle and vying for position to be taken seriously in all company decisions seems to be a common theme for a lot of people in the profession. Indeed, most of these professionals are eager to get into the procurement or purchasing profession and to become highly involved within the strategic decisions of their organizations, yet it seems that they are being locked out or excluded.
In this case, there are a couple of general principles that will serve you well professionally and personally in many areas, but can also be used to help better position yourself to move into a more strategic role. Most things in business revolve around relationships. Have you heard the saying “It’s not what you know, but who you know?” So let’s take a brief look at a couple ways to improve relationships within your department and between your department and others within the company and even outside of your company:
On the surface these are very broad, general and common sense things to do. On the other hand, it is for that very reason they are so often overlooked and ignored. Give them serious thought and see how you can begin implementing these two changes and watch your stock rise within your company.