Category Archives: Supplier Management

It’s Time For a Resurgence of Keiretsu!

Keiretsu, which can be briefly described as a long continual business relationship, in one way or another, has been a significant force in the Japanese economy for over four decades and, despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan. But now it needs to be the foundation for supply chain relationships the world over.

Twenty years ago we were in a period of (rising) globalization. Opening markets with the (first) cold war behind us. Limited, contained, conflicts. Relatively stable fuel prices. Piracy (off the Ivory Coast) was being curbed. And with the introduction of modern e-Sourcing and e-Procurement tools, it was easier by the day to invite more (and more) suppliers to events, to swap them out on a whim for (semi-)commodities, and keep supply lines fluid.

Relationships went on the decline for all but the most strategic suppliers because they weren’t necessary. But that was then, this is now.

Now we have anti-globalization and isolationism. Sanctions and closing markets. Escalating conflicts and closures of seas, straits, and critical shipping lanes. Rising and unpredictable fuel prices. A resurgence of piracy. Suppliers failing as a result of a myriad of tariffs, trade wars, border closings, shipping lanes, etc. Carriers failing as a result of rapid rising in fuel prices, insurance, increased theft, seizures, and blockades.

Suppliers who can actually fulfill your orders that you can actually receive products from that were once a dime a dozen to add to the RFP are now few and far between.

That means, now, more than anything, with risk and volatility increasing by the day, relationships matter again. Relationships that are:

  • long term: to create economic efficiencies that can help both parties survive the economic storm
  • knowledge sharing: workforce and even executives
  • business sharing: both parties buy from each other when possible and introduce throughout their partner networks
  • stock sharing: of the financial or physical variety — that reinforces each partner’s financial status when relevant or ensures security of cross-supply when stock-outs must be avoided
  • mutually beneficial asymmetrical trade: that works best for both parties

And relationships that can:

  • move low-value-add production to subsidiaries
  • ensure continuous high quality production capability to avoid excess production & consumer problems
  • improve risk management, especially with regards to variable or uncertain demand
  • ensure increased sales mean a corresponding increase for subsidiaries that are essential to the parent company’s survival
  • prevent critical confidential IP and technological information from being disclosed to short-term suppliers that may not be so obliged to keep it in the future, despite agreements

Which can help keep your supply chains running smooth in these troubled times.

The Kraljic Matrix is NOT a Foundation for Future Fit Supplier Segmentation

A recent piece over on Procurement Leaders noted how the author had several recent conversations about how the Kraljic Matrix has become outdated (and, as per our series last week, it has) and how one consumer goods company came up with their own approach to supplier segmentation to “leverage critical supplier capabilities to maximise value”. More specifically, he company has focused its supplier segmentation on two completely different matrices: first, the level of engagement; and second, suppliers’ ability to execute commercial growth and capabilities in an attempt to allow the company to do is to segment suppliers based on the strength of their relationship and the specific value they should bring to the business.

And, in effect, shift the Kraljic matrix from “noncritical, leverage, bottleneck and strategic” to “transactional, essential, visionary and strategic”.

It’s progress, but not much. It’s making the same error that every analyst firm (and even analyst) is making, and that’s thinking that segmentation can be appropriately captured by a 2*2.

As per our series last week on what the Busch-Lamoureux Exact Purchasing framework really is, it’s not a matrix, it’s a pocket cube* — which accomplishes the goal of the Kraljic matrix by appropriately segmenting categories in a manner that allows them to be properly managed from a supply-assurance based Procurement perspective. This is the point you need to start from if you want to create a supplier segmentation strategy for appropriate supplier management.

Then you see it’s not just

  • transactions (transactional in Exact Purchasing)
  • essential (governance in Exact Purchasing)
  • visionary (risk monitoring in Exact Purchasing)
  • strategic (architecture in Exact Purchasing)

Because

  • transactions can be low impact (and non-critical) or high impact (and create a bottleneck if they don’t show up)
  • governance can be accomplished at the spend level if the spend is low impact, but needs to be relationship level if the spend is high impact
  • risk monitoring is enough (and no vision required) for low impact spend but detailed risk management with mitigation plans that involve strategic, and maybe visionary, relationships will be key for high impact spend
  • strategic can be accomplished through cost architecture and mitigation strategies for low impact categories, but require detailed supply chain architecture with supplier participation in the high impact categories

This means that there are at least seven categories that need appropriate supplier management — all of the high impact transactions, plus the cost architecture (as you need supplier input), market risk management (as you need supplier relationships to rapidly shift demand), and relationship governance (as you need cooperation to manage obligations). And the degree of management depends on the categories.

Plus, to make matters even more difficult, some suppliers will cross multiple categories — which means that you can’t just put them into the most intense management category and treat all interactions as interactions in that category. You have to take the category into account, and focus the management on what’s critical, not what isn’t. Management requires HUMAN INTERACTION, and you only have so many people with so much time to build the RELATIONSHIPS, so you have to focus based on the category being supplied.

In other words, it’s not a matrix, it’s a cube that manages the supplier based on the category impact to the P&L, the market risk (that lies primarily with the supplier or the supply chain they introduce), and the complexity (where the supplier needs to be able to produce items that meet the complex requirements). And suppliers who supply more than one category will fall into more than one bucket.

In other words, to fix supplier management, first fix Purchasing.

(And that’s why it’s so critical to Take Purchasing.)

* and, one that’s different for every industry, which might make it a 4-polytope, but since each company can customize the pocket-cube, we’ll stick with the pocket cube

Supplier Management Must Be Continuous AND Proactive Throughout the Supply Chain!

Xavier recently wrote a great article over on Hackket Spend Matters on how you must treat Supplier management as a continuous signal because it points out that while traditional supplier management worked well when supplier ecosystems were smaller and more stable, it does not scale well in today’s operating reality.

As Xavier points out:

  • risk does not neatly emerge during onboarding, it accumulates through behavior over time and
  • risk changes continuously with performance and fitness as
  • pricing behaviour shifts, reliability degrades, dispute frequency increases, payment anomalies appear, and compliance exposure evolves with regulation

And this is not captured by periodic reviews.

However, just continuously capturing the updates that flow through the P2P system (from POs, receipts, invoices, payments, and disputes) is not enough for continuous management and monitoring. As per above, you need to be monitoring for regulatory compliance changes that can impact the supplier or the relationship. You need to be capturing returns and issues in the warehouse and with service for performance. And you have to be tracking the identified risks.

But that’s not enough. You have to get into the supply chain.

  • pricing behaviour shifts with supply chain events — supply gets caught off, transportation becomes scarce, the Tariff King decrees new tariffs, etc.
  • on time delivery and lead time reliability shifts with carrier availability which shifts with overall demand, geopolitical events, labour availability, and the current price of oil
  • payment issues arrive AFTER impact events (loss of a major customer, supply shortages, major financial loss from a lawsuit or natural disaster, etc.)
  • etc.

There’s a reason the doctor co-authored a series with Bob Ferrari on why Direct Sourcing Should Be Part of Supply Chain Management, and that’s because if you’re not tapped into the supply chain, you’re not getting all the signals you need to manage suppliers.

Because it’s not just the supplier signals, it’s the supply chain signals that will, in short order, impact the suppliers and their ability to serve you. This includes border closings, strikes that shut down docks and ports, natural disaster that cut off entire regions and disrupt flows, and geopolitics that have sweeping implications globally and that’s why, as Koray Köse says, Geopolitics Now Lives Inside the P&L.

So integrate with your supply chain, or realize that you’re still operating in a static bubble when the world is a very dynamic one and that if the static bubble pops when you’re unprepared, your supply chain pops with it and then you’re in trouble.

We Need Exact Purchasing … But It’s NOT a New Matrix!

We all know the Kraljic matrix is broken, and that it has been broken for a while. As Jason Busch starts off in his article on how Supply Management Must Become Exact Purchasing, Kraljic was right at the time, but it’s time to come back to where we started. And, more importantly, recognize that the Kraljic Matrix was designed as a starting point for supply management to think critically — and Supply Management was supposed to evolve from there. But it never really did.

Sure we got the Purchasing Chessboard by Kearney to supplement a host of seven step methodologies, procurement game plans, new techniques for managing indirect spend, lean supply management, and a slew of techniques from every niche consultancy to enhance your supply, and category management, strategies, but almost all of these are based on the classic 2 * 2 Kraljic matrix with refinement.

In his post, Jason, who rightfully says that procurement at scale is not one-size-fits-all tells us that answer is Exact Purchasing, or more specifically, The Exact Purchasing Quadrant, where he tries to map cost influence vs contract-and-supply complexity because Kraljic told you what a category is when he mapped profit impact vs. risk / complexity, but he didn’t tell you what to do with it. According to Jason, if you have:

  • low cost influence and low complexity, you transaction capture
  • low cost influence and high complexity, you govern the relationship
  • high cost influence and low complexity, you manage market risk
  • high cost influence and high complexity, you architect the cost

And Jason’s mostly right. Depending on the category in question, you’re generally going to apply one of those approaches.

Jason doesn’t stop there. He tells you that the thread that ties all four of these together is data at the core. And he’s right. Without a data-based (not necessarily database) approach, you’ll never effectively manage, and thus never effectively purchase, a category. Moreover, Jason does a great job at telling you what the core data is, where it resides, and where it could sit in your next generation enterprise Supply Management Solution (SMS). But he falls short when dictates the velocity, because that depends on the criticality. And even worse, the depth of data required depends on the criticality — which can also change the quadrant a category falls in!

For example, while packaging, print & marketing, and NPD are definitely strategic (Kraljic) cost architecture (Busch) categories for some companies (i.e. CPG, Advertising Agencies, and Manufacturers), they are tail-spend for other companies (i.e. Retail Store, Luxury Brands, and a Services Consultancy).

Jason’s improved approach still fails because it suffers from the same fallacy as the original Kraljic matrix — that complexity and risk are a single dimension. They’re not. Complexity is a factor of the product or service that you design and is an internal dimension that you have complete control over. Risk is a factor of the external environment that impacts your ability to create and deliver the product or service and depends on the financial stability of your supplier, the geopolitical situation in which it operates, the trade routes that exist between your supplier and your location, your supplier’s supply chain, and everything else in between — these are all factors you can’t control. Furthermore, it’s not profit impact (Kraljic) [which is short term] or cost influence (Busch) [which depends on spend], but criticality, which is measured in value impact [and what happens if the buy is unprofitable, of poor quality, or unavailable]. A category with zero savings potential can risk a 100M product line if your products can’t be completed without it (and we’ve seen this many times over the last two decades as critical sensors or single-sourced components shut down automotive lines or lack of RAM [from the decennial plant fires] or custom control chips [from trade slow-downs or insufficient production] greatly impacted personal computer / laptop or game system production — costing major brands hundreds of millions of dollars).

The reality is that Supply Management / Exact Purchasing / Get My Stuff (and Git-r-Done) is NOT a 2 * 2 matrix. It’s a(t least a) 2 * 2 * 2 pocket cube (and a 3 * 3 * 3 cube in large Enterprises) that is different for every organization where you take into account:

  1. complexity – low (med) or high
  2. market risk – low (med) or high
  3. criticality – low (med) or high

And as you progress from the lower left of the cube (where all dimensions are low) to the upper right of the cube (where all dimensions are high), you’re simultaneously following a three-dimensional path down a bi-furcating decision tree that takes you from non-critical items where you are simply managing as transactions to highly strategic items that you are cost architecting to the best of your ability, monitoring at least weekly, and alerting the category manager to on every major market event. In the middle, you will deal with your leverage and bottleneck items using well-timed market events to mitigate risk and managed relationships to ensure smooth supply, with the depth, and velocity, of the data correlated to the criticality of the item to your operation.

You do that, and you’ll finally be on the road to Exact Purchasing.

And I’ll leave it to Jason to work out the details of the starting cubic, as he’s so intent on fixing Purchasing (now that he’s semi-retired and can pontificate on the philosophical of purchasing).

(And once Jason does that, I’ll tell you how execution differs between small, medium, and large enterprises because “strategic” doesn’t mean the same thing at different levels, there is no one-size-fits-all platform, and, after a lack of operational readiness [which THE REVELATOR will happily fill you in on], this is likely the second biggest reason new technology acquisition projects fail in our space.)