Category Archives: Supplier Management

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on Procurement Leaders noted how the author had several recent conversations about how the Kraljic Matrix has become outdated (and, as per our series last week, it has) and how one consumer goods company came up with their own approach to supplier segmentation to “leverage critical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.)

Safe Vendor Selection is Hard!

Every week another vendor is going bankrupt or calling it quits. Every week another vendor is getting acquired. Most of the startups, even the over-funded ones, are not going to make it. Even assuming you know what functionality you need, it’s very hard to select a vendor that is not only good for you but likely to be around for the length of the initial engagement, which is probably 3 to 5 years (mid-sized to large) because, any shorter, and you’re spending more time on vendor evaluation, selection, implementation, and integration than actually using the vendor’s product! (And even if you can get a year-to-year contract, you know you still want the solution to last for at least three years to get a return on the time you spent investigating, selecting, and implementing the solution … which might only hit majority adoption at the end of the first year!)

So how do you select a vendor that is not just “good” but “safe”?

Well, let’s go back to our process for vendor assessment and selection.

Stage 0: Find a reasonable candidate pool based on your needs based on quick high level assessments.

Stage 1: RFI Creation

This is where you focus on weeding out vendors that

  1. don’t have technology that might actually solve your problems (without getting into deep details and demos)
  2. don’t have the necessary (cyber) security and privacy protections (especially if you are processing payments or private data and have to comply with industry and governmental regulations)
  3. are just too risky from a viability perspective for you to deal with
  4. don’t give you a back-up plan if something goes wrong

If it’s a point-based best-of-breed solution designed to solve one problem that could be replaced with another solution through the API, you can probably take a bit of a risk. But if it’s a foundational sourcing execution or procure-to-pay platform that is going to power your sourcing events and category management or your procure-to-pay process, this is not a vendor you can afford to have shutdown or get acquired by a buyer who doesn’t want to support it (because they’re buying for the customer base or dev team).

So how do you figure this out? It’s not perfect, but as we pointed out before, you calculate the relative corporate debt. If it’s too high, the vendor is not financially viable, even if it is “well funded” because most investors, even PE, won’t wait more than 5 years for their return — which is hard to get in tight economies when they invested at a multiple that’s (way) too high — and typically any multiple above 5X to 7X IS if you want a return in 5 years. (That’s why you always need to ask who’s funding your ProcureTech Vendor. If it’s customers, you’re safe. If it’s PE, you have to investigate deeply. A few firms are willing to wait [more than 5 years] for their return if the long-term is very profitable. But a lot of firms are of the “strip-and-flip” mentality, and that’s not good for anyone. And those in between start losing patience around the 3-year mark if they don’t see the sales growth they want, even if their growth expectations are ridiculous!) Collect the key financials and run the equation.

As for security (and privacy), you ask for their SOC 1/2 and certifications and any other certifications that are mandatory or designated as essential by your risk management department. If they don’t have the minimum, you drop them (unless they are in process).

As for functionality, you ask them to describe (at a high level) how they support your key core requirements. The in-depth descriptions and demos come during the RFP process later. The key to selecting a “safe” vendor and not being pressured to select a possibly “unsafe” one because you didn’t do all the right checks until after you fully verified the tech (and you can’t start the process again) is to do the majority of key non-tech validations up front, not at the end.

Moreover, by doing this analysis up front, you ensure that you aren’t wasting time analyzing vendors you can’t risk from a business perspective! Capability assessments take time. If you wait until the end to look at viability, you’re wasting a lot of time whereas the RCD calculation, certification verification, and verifying key requirements of other stakeholders often takes a fraction of the time as the in-depth tech assessment.

As for the back-up plan, here’s all you need to ask up-front:
Can I export 100% of my data, in a standard format, anytime I want it?

Not 90%. Not 95%. Not 99%. 100%!

Not submit a request and ask them to export a database or wait for a weekly backup process to backup and shoot you a copy. Request on the fly, it zips up (possibly into a multi-part archive) on the fly, and you can download on the fly.

If you can always get all your data, then, even if you mess up on the risk or viability assessment or something unforeseen by both parties happens, you have the most critical thing — your data — and you can always go with the next best solution! (And then make sure the clause is in the contract because it’s the most important clause in the contract.)

Now, this isn’t a complete list of requirements, as it will depend upon the industry and geography you are in and what type of solution you are selecting, but it’s a good start!

What is a Strategic Supplier Relationship?

Simple question. Sophisticated answer.

This was posed by THE REVELATOR in a recent LinkedIn article referencing his recent post on Procurement Insights’ Influence on Walmart’s Supplier Management Transformation.

First of all, the supplier has to be strategic.

For it to be strategic, it should be a supplier that is strategically selected, strategically engaged, strategically developed, and strategically managed. The goal of all of this should be to identify, build, and maintain a stellar supplier, as per a series we did here on how do you identify a truly stellar supplier.

But it’s more than that. Because strategic is more than just identifying long-term aims and interests and the means of achieving them, it’s execution. And when two parties are involved, its execution on both sides.

This means that it’s also critical that you are a strategic customer for the supplier. And while it’s hard to completely define what that is, as every supplier could have their own definition, at a minimum, just like a supplier should be stellar for you, you should be a customer of choice for the supplier, a topic we’ve also covered in the past.

But that’s not enough, because you can classify a supplier who supplies high-volume components as strategic with stellar service based on a set of KPIs, and the supplier can classify you as strategic based upon spend threshold and the fact that you always pay your invoices on time, and there can be nothing strategic about the relationship.

Unless there is active collaboration, a mutual commitment to mutual development, a shared goal along strategic objectives, and trust, there is nothing strategic about it and the relationship will fall apart the minute a major disruption or event occurs such as a supply shortage two or more tiers down in the supply chain that forces a supplier to choose which customers get their orders and which don’t (because it cannot fulfill all its contracts due to a force majeure event), or a sudden bankruptcy from your customer that forces you to cancel a big order (which will result in them not bidding/accepting further business from you).

For a relationship to truly be strategic, there has to be regular communication and collaboration on the shared goal of supporting the upstream supply chain of your current and potential customers utilizing the same values (sustainability, quality, performance, etc.) and a commitment to work together to solve problems when the going gets unexpectedly (and almost catastrophically) tough. When there is a shortage of a critical material, you will get your supply first, or if that’s not possible, the supplier will work with you to design an alternative (that uses a different raw material) or find alternate sources. When your biggest customer goes belly-up bankrupt, you will work with them to find additional, substitute, business you can give them to maintain the relationship and the business until you find a replacement customer.

Strategic means dependable, and that the dependability is both ways.