Natural selection

4 February 2010 | Andy Williams

Buyers can generate better gains from suppliers, says Andy Williams, by exploring methods of mapping vendors to maximise their potential

There is increased interest in the purchasing world about more carefully managed supplier relationships and their potential to generate value.

And with this comes a recognition that we need to find ways of working smarter with the suppliers we have, and how they can work with us to generate real gains and make a difference to the performance of our organisation. That raises the following questions: Which suppliers? Where should we focus effort? Are we going to attempt to cultivate similar relationships with them all? And, if not, how and why might they differ across the supply base?

Here we provide a method for thinking about those questions.

SUPPLIER POSITIONING

When it comes to mapping suppliers, the king of models is undoubtedly Kraljic’s matrix, also know as ‘supplier positioning’.

For those of you not familiar with it, Kraljic has our spend with each supplier as one axis, and our vulnerability to their failure or disappearance as the other. The former has the great advantage of being objectively measurable, while the latter is a matter of judgment.

The model generates four categories of supplier – ‘acquisition’, ‘security’, ‘profit’ and ‘critical’.

It is useful for all sorts of purchasing issues, particularly for planned risk management, because one axis is specifically about risk. The matrix also helps to develop appropriately tailored bidding and negotiation processes.

For our purposes, however, mapping out our approach to supplier relationships, Kraljic has two main weaknesses.

First, it does not take into account the supplier’s perception of us, clearly an issue of some importance. It is assumed that our spend with a supplier is somehow a reflection of our standing in their eyes, but this depends on how large the supplier is.

For example, £30,000 spent with your local taxi firm brings rather more influence than the same amount going to Microsoft.

Second, thinking of our suppliers in terms of how much harm they can do us may at times be useful, but it is somewhat passive, not to say negative. The more interesting question is ‘could this supplier contribute to a real improvement in the way our organisation works and competes?’ This we will call ‘supplier strategic potential’.

Here are the areas we might look to develop working with suppliers:

• Product, service or process innovation

• Helping us to differentiate our own products or services to reduce competitive pressure

• Helping to reduce the time it takes to deliver new products to market

• Improved service levels

• Improved quality levels

• Outsourcing/offshoring

• Reduced capital requirement

• Cost reduction

• Risk reduction/elimination

• Joint forecasting

• Joint design

• Joint investment planning

• Sharing market intelligence

It’s important to bear in mind that we don’t necessarily know whether this potential exists. Don’t be too quick to write suppliers off. One of the most interesting projects I’ve been involved with, which led to major productivity gains, was initiated by a supplier of a material we had regarded as mundane. If you’re not sure, talk to them. That is, after all, the point.

CUSTOMER PROFILE

Returning to the issue of the supplier’s perception of us, we need to take this into account in our model. We should not invest significant effort trying to promote innovation with suppliers who are simply not interested, and whose attitude is unlikely to change.

We will gain most by talking to suppliers who regard us as important and for whom spend as a proportion of their turnover is a key part of this.

However, that’s not all that counts. Suppliers are also influenced by our behaviour, the benefits of having us as a client, and the potential they believe we have as a customer. And it’s important to get the basics or ‘hygiene factors’ right (see customer positioning matrix). For example, customers who talk about partnership but cannot get the bills paid on time receive an especially poor press.

This is neatly summed up in another four-box model called ‘customer positioning’ (some call it supplier preferencing).

All the non-spend issues are bundled together under the heading of ‘attractiveness of account’. I call the diagonal that runs from bottom left, low spend, difficult or nuisance customers, to top right, high spend key accounts who are good to work with ‘customer profile’.

The tricky part here is that while we may make educated guesses about how high our profile is with a particular supplier, it’s hard to be sure. Suppliers aren’t trained to answer a straight question about what they think of you, and in any case a supplier’s organisation is made up of individuals who may have very different perceptions. Nevertheless we have to work at it.

Now we have the dimensions of our model: their supplier strategic potential and our customer profile.

This yields four combinations which I have called control, leverage, rethink and strategic.

Control

Here we have a low profile with the supplier in whom we do not see strategic potential.

While the items or services we purchase from that supplier may be important, there is little point in developing a deeper relationship.We must ensure we get the best available deal and that deliverables are met using classic purchasing techniques. One group we worked with called this ‘business as usual’, which sums it up neatly.

Leverage

This area combines a low supplier strategic potential with a high customer profile, which could mean we have a one-sided relationship; we matter to the supplier but do not see advantages in developing strategic potential with them. The question here is not so much ‘should we develop a deeper relationship?’ as ‘are we maximising our leverage?’. In that respect it’s a little like Kraljic’s ‘profit’ box.

There is a further issue here, which is the question of whether our high profile with some of these suppliers reflects a potentially risky vulnerability on their part. Does it arise, for example, because we are taking an unduly high proportion of their turnover and if so, do we need a plan to reduce that risk?

Rethink

Here we have a low profile with the supplier with whom we think there could be strategic potential. The problem is, we don’t think we have their attention. This is a tricky area and we have three options depending largely on why we’ve decided our profile is low with a particular supplier:

1. Raise our profile by increasing our spend.

2. Change to a supplier with whom we would have a higher profile.

3. Market ourselves more actively to the supplier through other means. This might involve an audit to ensure we’re not causing problems through neglect of hygiene or basic factors. It might mean changing old negotiating habits; changing our point of contact or doing something altogether more imaginative to change the supplier’s perception of us as a customer. For example, offering to work with them on new ways of doing business or market opportunities.

Strategic

This is the area of greatest potential in that we have suppliers to whom we matter, and who we believe offer us the scope to do interesting things. Some of these may well be happening already, but we need to plan a structured, managed relationship which is truly integrated into both organisations. If you are serious about a supplier relationship programme, this is the area demanding attention first, and where your resources and effort should be targeted.

Before you begin to use a tool like this there is a final question; which suppliers should we think about positioning on this matrix? The Kraljic matrix is intended to cover the whole supply base, and we could do the same with this, but there is not going to be a return on the effort of considering our relationship with every supplier, even if we did have the time.

Often it will be obvious which suppliers we should be thinking about and it pays to exclude, for example, low spend, low risk suppliers, and those whose performance cannot have any impact on our own organisation’s objectives.

Try using this device; try positioning three or four suppliers in each quadrant and see if it helps thinking through the relationships. And remember, tools like this are useful not so much in the questions they answer, but in the questions they raise.

* Andy Williams is managing director of CPM Training