Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

2.2.3 Strategic Procurement Portfolios

Intended learning outcomes: Explain the supplier portfolio describing the degree of mutual dependence between buyer and supplier. Present procurement strategies for material groups in dependency on their logistics characteristics.

In procurement, the material portfolio and the supplier portfolio are established tools for classing strategies. See here, for example, [Alar02], [Kral83], [Bens99]. The attempt is to use simple visual mapping to distinguish between objects and suppliers that are “important” for procurement or have risks and objects and suppliers that are “less important” or associated with fewer procurement risks. The idea is to use this as a basis to derive procurement strategies and recommendations to organizations and IT.

Today, companies seldom procure single items from suppliers and instead procure entire item families or even more comprehensive material groups, or planning groups. This is the case not only for high-cost items or high-turnover items (A items — see Figure but also particularly for low-cost items or low-turnover items (C items).

With this, the material portfolio shifts more and more to a material group portfolio. On this level, however, only a few groups of indirect material, such as office materials, are “less important.” As companies generally work with a few or only one supplier per material group, all material groups are in addition associated with certain procurement risks. In such cases, the traditional material portfolio does not yield much information. If that is so, then the supplier portfolio becomes more useful. Figure shows a possible supplier portfolio.

Fig.        Supplier portfolio.

This supplier portfolio describes the degree of mutual dependence between buyer and supplier. As companies become aware of their dependence, they generally recognize that a certain degree of cooperation is necessary and are then mostly willing to cooperate.

  • In market-oriented relationships, that is, via the traditional market­place, goods or capacities are procured that are unimportant in the eyes of both the buyer and the supplier. Either side, buyer or sup­pli­er, can easily change business partners.
  • In buyer-dominated relationships, goods or capacities are procured that are major in the eyes of the supplier but not for the buyer. Or, the supplier must make one-sided investments related to only the one buyer. These can be, for example, buyer-specific devices, IT platforms, consignment inventories, or know-how on customer-specific processes and business practices. Thus, this type of relationship should be designed for the long term. This means that there must be a customer-supplier partner­ship to a certain degree but not necessarily a balanced one. Here see Section 2.2.2.
  • In supplier-dominated relationships, goods or capacities are procured, with the one-sidedness of the investments on the opposite side: the buyer’s side.
  • In (balanced) partnership relationships, goods or capacities are procured that are seen as important in the eyes of both buyer and supplier. Both parties make considerable and mutually demonstra­ble investments in this relationship to the one business partner. This type of relationship should in every case be designed for the long term, mostly with intensive cooperation. Here see Section 2.3.

Figure shows that — in dependency on the logistics characteristics of the material group — between one and the same pair of business partners a different positioning in the supplier portfolio and related procurement strategies can occur.

Fig.        Procurement strategies for material groups in dependency on their logistics characteristics.

  • The procurement of indirect material in the case of office supplies is usually handled via a market-oriented relationship. The behavior of the buyer is like that of any consumer: The buyer follows the classical law of supply and demand. The buyer will try to achieve a position of strength by bundling the requirements. If material of this type shows a sporadic pattern of demand, it is necessary to find especially inexpensive and rapid solutions for their operative procurement, called buy-side solutions (see Section 2.2.5).
  • The same can be said of the case with MRO items. However, here the buyer depends on high-quality and on-time deliveries to maintain performance levels towards the buyer’s own customers. For material groups of this type, companies will strive to design longer-term relationships; depending on the conditions, a buyer-dominated or supplier-dominated relationship.
  • For procurement of direct material, what was said about MRO items largely holds for commodities. Experience has shown that suppliers are quite willing to enter into buyer-dominated relationships. For example, suppliers of material groups of C items (e.g. screws, nuts) invest in efficient delivery logistics such as Kanban or vendor-managed inventory (VMI) due to the large delivery volumes for an extensive range of products. Also, for the business of the buyer, long-term relationships are certainly important also in the case of a supplier-dominated relationship. A supplier-domina­ted relationship can occur, for example, in the case of use of patents or proprietary technologies of the supplier or with large suppliers of electronic components.
  • For customer-specific semifinished goods, joint product innovation can also stand in the foreground. One example is assembly modules from system suppliers. Here it is best for the business partners to choose the (balanced) partnership relationship.
  • For direct material with highly volatile or lumpy demand, the buyer — in some circumstances also where there is a well-estab­lished buyer-dominated or even partnership relationship — may have to procure a part of the demand, sometimes the entire demand, via a market-oriented relationship, often with the aid of one or more brokers. Here the buyer is often not in a strong position.

Treating material groups instead of individual items is also called material group management. Assigning the procurement items to material groups, evaluating suppliers in supplier portfolios, and choosing the procurement strategy are prone to errors. To reduce these risks, these tasks should generally be performed by a team made up of people from R&D, logistics, production, strategic and operative procurements, and quality assurance.

Course section 2.2: Subsections and their intended learning outcomes

  • 2.2 Strategic Procurement

    Intended learning outcomes: Produce an overview on strategic procurement. Differentiate between traditional market-oriented relationship and Customer-Supplier Partnership. Describe strategic procurement portfolios. Explain strategic selection of suppliers. Present basics of supplier relationship management and e-procurement solutions.

  • 2.2.1 Overview on Strategic Procurement

    Intended learning outcomes: Disclose the supplier structure follows the product structure. Differentiate between direct material, indirect material, commodities, and various demand patterns. Describe various traditional procurement strategies.

  • 2.2.2 Traditional Market-Oriented Relationship

    Intended learning outcomes: Present target area strategies for the traditional market-oriented relationship, and disclose possible supply chain risks entailed.

  • 2.2.2b Customer-Supplier Partnership

    Intended learning outcomes: Identify the concept of customer-supplier partnership and disclose adequate target area strategies, and disclose possible supply chain risks entailed.