Portfolio Analysis - Procurement

1 The Essential Sourcing Skills Handbook series 2010 SpringTide Consulting Ltd. All rights reserved. Unauthorised distribution in hard or soft form prohibited. Portfolio Analysis The Essential Sourcing Skills Handbook series Strategic sourcing 1. Launch process Category Profiling Business Needs Sourcing History Stakeholder Mapping RACI Matrix Communications Charter Change Management Transition Analysis 2. Current position Portfolio Analysis Seller s Perception Matrix Relationship Positioning Risk and Vulnerability Analysis Specification Challenge Supply Market Analysis Opportunity Analysis 3. Strategy development Request for Information Conditioning Price and Cost Analysis Supply Chain Analysis Quick Wins 4. Strategy selection Options Analysis Request for Proposal Supplier Selection Capability Assessment 5.

2 Strategy implementation Negotiation Contract Award Debriefing Implementation Plan Savings Post-implementation management 6. Supplier performance management Problem Solving Service Level Agreements and Key Performance Indicators Total Cost of Ownership Contract Register Relationship Audit 7. Supply chain management Market Movements Industry Curves 8. Specification management Learning Curves Value Analysis / Value Engineering Gainsharing Exit Strategies Current position 2010 SpringTide Consulting Ltd. All rights reserved. 3 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.

3 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 Current position 4 2010 SpringTide Consulting Ltd.

4 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 ) 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 ) 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.

5 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 ). 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, the minimum relationship required to deliver the desired results.

6 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 2010 SpringTide Consulting Ltd. All rights reserved. 5 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. LeverageStrategicRoutineBottleneckLevera geExample: Packaging Low risk, high expenditure Highly competitive market Many suppliers No internal dependency on particular supplierStrategicExample: Outsourced services High risk, high expenditure Limited supply base design supplier behaviour lack of suppliersRoutineExample: Plastic cutlery Low risk, low expenditure High variety of products Competitive marketBottleneckExample: Specialised software High risk, low expenditure Often related to spare parts Often products protected by patent or copyrightSourcing complexity/risk Spend impact Difficult High Low Easy Current position 6 2010 SpringTide Consulting Ltd.

7 All rights reserved. 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, 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 influencesSupply chainExclusive channels to marketTooling ownershipIntellectual property issuesSwitching costsMake-or-buy optionsCapacity across supply chainToo many stepsNumber of suppliers to ensure supply continuityIndustry curveLevel of market competitionCreation of competitionPotential new entrantsAvailable substitutes (now and future)Acquisition or integrationMonopoly or dominant suppliersSupply versusdemand, local versusglobalObsolescenceMarket influences (Porter's Five Forces)Political: tariffs, government interventionsEconomic: exchange ratesSocial: ethical issues Technological: supplier with competitive edgeLegislative: new regulationsEnvironmental: carbon footprintSupplier collusionAggregation Current position 2010 SpringTide Consulting Ltd.

8 All rights reserved. 7 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 influencesStakeholdersUnderstanding of items to be procuredUndue preference/prejudice towards a supplierTunnel vision clouding the bigger pictureFailure of recent supplier switchNeed for egos to be overcomeLack of clarity about total cost of ownershipBusiness Needs versusBusiness WantsRefusal to deal with particular suppliersSpecificationsProduct/service designed around supplier's solutionUse of test facility by supplier to launch new productsIntellectual property ownershipInternal design capabilityPropensity to assume risk for the designRemoval of brands and trademarks from specificationKnowledge of standardsCustomer/industry requirementsContract optionsTermination rightsPrevention by framework agreements of use of alternative suppliersUnderstanding of internal costs of manufactureTendency to

9 Procure domestic productsElimination of suppliers through pre-qualificationSupplier s reluctance to accept particular clauses payment termsAttractiveness of organisation to suppliersCaps on the contract Current position 8 2010 SpringTide Consulting Ltd. All rights reserved. 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.

10 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 relationshipsSeek competitive advantageCultivate relationshipObtain best dealAggregate spendSecure supplyMinimise riskSourcing complexity/risk Spend impact High High Low Low Current position 2010 SpringTide Consulting Ltd. All rights reserved. 9 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.