Assignment Sample on C11GB Global Purchasing and Supply

Introduction

Literature review refers to the survey of the books, published journals, scholarly articles, and other such related sources relatable to a specific issue, area or research field, a theory, model, etc. It provides a summary, description, and a critical analysis of the concerned work related to the research topic which is being investigated. Moreover, a literature review is designed to present an overview of all the sources explored while researching the concerned topic.

According to Geldermanand Van Weele (2005), Strategic supply and purchase refer to the management procedure, which includes product development, manufacturing, customers, vendors, and lastly, logistics. An organization employs a purchasing portfolio model or technique to enable the professionals to choose an appropriate strategy for supply chain management for each product/service based on its attributes or characteristics.  The present report emphasizes the Kraljic Portfolio Purchasing Model and its applicability. It also emphasizes the evolution of knowledge regarding the applicability of purchasing portfolio models over time. Lastly, the report highlights the impact of Kraljic’s work and its further development, and the range of criteria to design the purchasing portfolio models.

Literature Review

The Kraljic Purchasing Portfolio Model

As per the opinion of Padhi et.al. (2012), the Kraljic matrix or model is a method or a technique to classify or segment the suppliers or purchases of an organization, by dividing them into four groups/segments. The classification is done based on the complexity of the associated risk factor with the supply market and the importance of the suppliers or the purchases. The complexities of the risk factor associated with the supply market include barriers to entry, monopolistic conditions, and technological innovations or advancements. Whereas, the importance of supplier or the purchases is evaluated by its impact on the profitability of the organization (Rezaei and Fallah Lajimi, 2019). This classification or subdivision enables a firm to determine and formulate the best suitable strategies related to the supplier or purchasing decisions. According to Montgomery et.al. (2018), the Kraljic matrix or model has been widely used in various industries as an effective technique for the development of differentiating purchasing strategies. The studies and evidence suggest that an organization can obtain competitive advantages by managing strong relationships with suppliers. The increasing need and requirement to differentiate the relationships with the suppliers’ demand classification. So, the purchasing portfolios provide help and support to develop and build differentiated supply and purchasing strategies. In 1983, Kraljic introduced a comprehensive model of purchasing portfolio, which comprises a matrix that classifies a company’s purchased goods into four broad categories. The classification of the items or the goods is based on the risk associated with the supply and the profit impact. The four categories defined in the matrix are the bottleneck, noncritical, leverage, and strategic items (Park et.al.2010). Each one of the defined four categories demands a unique approach or a technique towards management of suppliers, and a strategic partnership for competitive bidding for leverage items, strategic partnerships for items, etc. It further includes systems related to the contract for non-critical goods, and lastly, the assurance of the appropriate supply of the items belonging to the bottleneck category.

The different categories differentiate and classify the purchased items in a specific manner. The leverage items are referred to as the best-placed items, as these goods hold a major business share, which further reduces the risk. In this category, the supply procedure is well-defined, matured, and established.

The strategic category is concerned with the future strategy or plan. This category imposes high implications on the organization as well as is associated with the high-risk factor (Sharmaand Yu, 2013). The effective management of this category of items refers to the difference between the survival and the demise of the concerned organization.

Bottleneck strategy or category refers to the most ignored or the underestimated products or services. Such items hold a very low impact on the company, but a high rate of risk factors associated with the supply.

Lastly, the noncritical items involve low risk associated and also low implications on the organization. This category holds the least importance, including low cost and high performance as the major drivers.

In the opinion of Caniëls and Gelderman (2005), the purchasing portfolio approach and models allow management of an organization to get a better and clearer opinion and a perception of the bargaining power. Moreover, it also defines an adequate and effective strategy, thereby, reducing the potential threats associated with the risk factor. The strategic importance of purchasing and supply can be evaluated or estimated by the material costs or the total costs involved, profitability profile, or the value-added aspects. Other than this, the risk factor through the supply includes the number of available suppliers for a specific product, the pace of technological advancements, prevailing conditions (oligopoly or monopoly), etc. Furthermore, it also comprises factors such as logistics costs, barriers in entry, complexities involved, etc.

The Kraljic matrix or model has gained much popularity and ground in both practices as well as academic researches (Dulmin and Mininno, 2003). It has also become a dominant approach and the foundation of purchasing models and the related strategies for several firms across different fields, industries, and sectors. The Kraljic model of purchasing portfolio is widely used and applied in the research databases which provided very few suitable outcomes. Various authors and researchers used the Kraljic portfolio model in different contexts such as measuring the risk associated with the availability and technical quality, price for profit impact, undeveloped logistics infrastructure, etc. In addition to this, the concerned model is also applied to analyze the independence and power in the buyer-supplier relationship, which was based on a questionnaire focusing on the purchasing professionals of different fields or industries (Nair et.al.2015). These are the applications and uses of the purchasing portfolio matrix highlighted in the literature.

Multi-period Portfolio models

Kraljic’s portfolio model was developed in the year 1983, which now seems to be a dominant approach or a theory in the field. The model failed to provide guidelines and support towards the strategic movement of goods or commodities and the suppliers within Kraljic’s matrix. Many authors and scholars used Kraljic’s model for developing similar models, for example, Syson in 1992, Lilliecreutz and Ydreskog in the year 1999, Gelderman in the year 2000, etc. Kraljic’s portfolio approach still dominates the discipline. But, it failed to answer some important questions and to solve the problems associated with suppliers and purchases.

The evolution of purchasing portfolio models overtime offers significant advantages and benefits over the traditional single-period methods and approaches. Such strategy formulation and frameworks enhance performance regarding risk management, thereby, supporting the investors to evaluate and measure the profitability aspects. The appropriate estimation and evaluation of profitability enable the firm and its investors or professionals to accomplish financial goals and objectives by linking the asset and liability policies (Salle et.al.2001). Multi-period portfolio models include three basic components, which are a policy stimulator, a stochastic scenario generator, and lastly, an optimization module that focuses on determining non-dominated solutions. The effective applications of the multi-period portfolio models are in insurance, pension planning, hedge funds, and the appropriate allocation of the business assets for the individual investors. Several authors and scholars have introduced variations in the original Karljic matrix, due to its failure in answering the key questions and solving problems. The other formulated and evolutes portfolio models are described below:

Portfolio for relationship management:

Effective management of relationships with the suppliers is a crucial task. According to Olsen and Ellram (1997), the three-step normative portfolio is ideal for managing and maintaining different kinds of relationships with the suppliers. Olsen and Ellram (1997) proposed this portfolio model which includes three steps and is based on the Kraljic matrix.

In the first step, the authors suggested a normative evaluation and analysis of the organization’s purchases in a matrix highlighting the strategic importance of purchase and the difficulties in the management of purchasing situations as the major dimensions of classification. Moreover, Olsen and Ellram presented ideal relationships for each category defined in Kraljic’s matrix, namely, Strategic, Leverage, Bottleneck, and the Noncritical category.

In the second step, the authors have analysed the actual relationships to understand how these are managed. In addition to this, the authors have used a second portfolio model based on analysis of the strength and attractiveness of the relative supplier relationship, existing between the organization and the concerned suppliers (Sanderson et.al.2015). The second portfolio model includes similar dimensions, which are related to the several factor categories. It includes factors such as performance, economy, strategy, corporate culture, etc. which eventually affect the relative supplier attraction. Moreover, the other factors related to the co-operation, character, economy, time and geographical aspects, etc. determine the strength of the relationship between the two parties.

The last step of the portfolio model designed by Olsen and Ellram includes the formulation of strategies and courses of action focusing on the improvement of the management of supplier relationship portfolios and to cater to the different categories of items.

Portfolio with the specification element:

In the observation of Nellore and Söderquist (2000), the modern portfolio approaches lacked specifications. The two authors argued that an outstanding procurement plan will fail if the specifications fail to adapt to the needs and capabilities of the suppliers. Hence, they considered the connections between purchasing, supplying, and engineering, and designed a specification portfolio. The designed portfolio is based on Kraljic’s matrix but shows some key aspects and specifications. The three stages of the specification portfolio are defined below.

The first stage is similar to Olsen and Ellram’s approach and Kraljic’s model, which is to categorize the products based on their strategic importance and the difficulties associated with the management of purchase. However, it is different from the other portfolios as the categories in the specification portfolio refer to the components, rather than products. Then the organization measures and estimates its competencies and abilities towards each category and decides generators for each of them.

The second stage involves the linkage between the specification generators and the categories of the components. The authors have defined specifications and the different aspects involved in the link and the results for each category. For example, the specifications in bottleneck category components are generated by the supplier with co-development by the concerned firm.

The final or the third stage of the specification portfolio comprises the link between the category of the supplier and the type of specification. Nellore and Söderquist defined the specifications into three types, which are restrictive, standard, and collaborative. Moreover, the categories of the suppliers are described as child, mature, partners, and mature. The table below describes the different relationships for each supplier category of the organization.

Supplier category Responsibilities and descriptions
Partner suppliers ( full-time providers) These are the suppliers of the first-tier, in which the suppliers have global reach, size, and technology. Also, they possess the skills to understand the interfaces and ensure the delivery of items that fulfil all the necessary interfaces in the end product. The items also fit within the defined budget and ensure the decided quality standards.
Mature or full-system suppliers The supplier is responsible for close guidance for the concerned firm. In this category, the organization has a superior position. Also, the supplier delivers the items fulfilling the decided quality standards and fits within the defined budget. Moreover, critical specifications generated due to the supplier involvement after the work of determining the critical dimensions and the overall design, comprise the functional data. Such specifications also include rough envelopes of functionality.
Child suppliers In this category, the supplier enjoys a superior position. Also, the specifications regarding the supplier involvement have been cleared in this category, and the supplier can deliver to the OEM specifications.
Contractual suppliers In this category, the components or the products are obtained simply based on the specifications on the catalogue of the concerned suppliers. This category doesn’t demand any decisions or discussions related to the concerned component being procured.

In addition to this, Nellore and Söderquist (2000) argued that stating the supplier’s characteristics related to the strength and attractiveness of the relationship. They considered it is wrong that such aspects would result in the component delivery in the terms of required quality standards and within the constraints of the decided budget. The authors also added that the organization should frame different strategies and guidelines to ensure the balanced management of each component category and to enhance the supplier performance and strengthen their relationships.

Portfolio for product development

According to Formentini et.al. (2019), the involvement of the supplier party in the development process of a new product holds utmost importance in the modern practices of supply chain management. The authors and the scholars believe that supplier involvement will enhance and increase the effectiveness of the New Product Development Process in the terms of quality, project costs, project efficiency, etc. However, such involvement of the supplier party may not always result in enhanced effectiveness and efficiency.

Wynstra and Pierick (2000), introduced a portfolio model focusing on supplier involvement based on the management study of the NPD projects. The portfolio acknowledges the differences in the supplier involvement types, the ways to decide the best suitable type of supplier involvement an organization should have in the process of NPD, etc. Moreover, it also includes effective communication strategies towards the suppliers to enhance the supplier involvement management in the NPD process. The portfolio designed by Wynstra and Pierick comprises two dimensions, which are the degree of responsibility towards the development held by the supplier party and the risk factor associated with the development of the product.

The degree of responsibility related to the development strongly relates to the differences in the expertise possessed by the suppliers, which can be further categorised into four levels, which are:

Levels of building blocks Responsibility of the suppliers
Specifications related to purchasing and technological aspects. The supplier formulates the process of production and manufacturing based on the specifications.
Detailed design. The supplier party sets the process of assembly and the production process which is based on the detailed design of the product.
Global design. Based on functional specifications in a global design, the supplier party is held responsible for the following aspects such as testing the design, creation, deciding the course of action related to the production and the assembling process.
Functional specifications. The supplier party is responsible for different factors based on the functional specifications, such as the global design, its creation and testing, and the assembling and setting procedures.

The next stage involves the developmental risk factor, which highlights the importance, complexities, and newness involved in the development process. Moreover, the authors also recommended measuring such risk factors by answering the different questions and problems determining the steps or the sequence of dealing with the building blocks. For example, the importance of developing or the ordering time involved in the building block to the entire project of the product development (Putri et.al.2020). It also includes the newness of the components or the production technology to the organization.

The next step involves the placing of the building block in the supplier involvement portfolio following the values of development responsibility degree possessed by the supplying party and the developmental risk factor highlighted from the portfolio procedures. It determines different kinds of involvement of the supplier party and also the course of action to involve them in the process. The four different types are strategic development in which the responsibility held by the supplier party and the developmental risk; are high. This type requires early supplier involvement in the NPD process. The critical development category includes a high rate of developmental risk and low responsibility of the supplier party. This type demands supplier involvement and also needs certain interfaces. Arm’ length development and Routine development, both the categories comprise of supplier involvement in the development process.

The next step or approach is to observe the interfaces of the supplier associated with the portfolio matrix positioning and determination. Lastly, the authors named, Wynstra and Pierick (2000) also offered some detailed suggestions and recommendations based upon the form and the intensity of communication strategies towards different supplier parties.

Hence, the literature section highlights the collection and presentation of all the data, information, and findings from different sources such as articles, publications, journals, books, etc. It analyses and compares the different portfolio models and the evolution of knowledge related to supply and purchase management (Olsenand Ellram, 1997). The portfolio models are applied in various disciplines, different fields, and areas, as well as different operational stages. Therefore, the aims of different portfolios that evolved over years are different, as observed from studying and understanding various sources. However, all the portfolio models share a common initial point, which includes the classification of the items or the components presented in a matrix/grid, consisting of two dimensions (Bäckstr and et.al.2015 ). Hence, different purchase professionals use and apply portfolio models based on their needs, company operations, profitability aspects, complexities in the purchase, supplier relationships, and lastly, the associated risk factor in the management of supplier and purchase.

Conclusion

The above-presented literature review section emphasizes the evolution of different purchasing portfolio models over years. The first-ever portfolio model was Kraljic’s purchasing portfolio model or matrix, which categorised the items into four types, based on two broad dimensions. Furthermore, it can be concluded that the study highlighted the similarities and the differences in various portfolio models and their impacts on the supply and purchase decisions in an organization. Also, strategic management requires the effective application of different purchasing portfolios to facilitate the purchasing decisions and managing strong supplier relationships. Lastly, it can be concluded that the evolution of Kraljic’s portfolio model highlights a wide range of criteria, in the terms of its use and implementation by various authors and scholars. It has been widely used as a base to develop and design the purchasing portfolio models to analyse the complexities, profitability, risk factor, etc.

References

Books and Journals

Bäckstrand, J., Tiedemann, F. and Hedén, E., 2015, March. Competitive advantage based purchasing matrix: a portfolio-approach to differentiated purchasing strategy. In 24th Annual IPSERA Conference, Amsterdam, March 29-April 1, 2015 (Vol. 24). International Purchasing and Supply Education and Research Association (IPSERA).

Caniëls, M.C. and Gelderman, C.J., 2005, March. Power and interdependence in Kraljic’s purchasing portfolio matrix. In 14th annual IPSERA (International Purchasing and Supply Education and Research Association) conference (pp. 20-24).

Dulmin, R. and Mininno, V., 2003. Supplier selection using a multi-criteria decision aid method. Journal of purchasing and supply management9(4), pp.177-187.

Formentini, M., Ellram, L.M., Boem, M. and Da Re, G., 2019. Finding true north: Design and implementation of a strategic sourcing framework. Industrial Marketing Management77, pp.182-197.

Gelderman, C.J. and Van Weele, A.J., 2005. Purchasing portfolio models: a critique and update. Journal of Supply Chain Management41(3), pp.19-28.

Montgomery, R.T., Ogden, J.A. and Boehmke, B.C., 2018. A quantified Kraljic Portfolio Matrix: Using decision analysis for strategic purchasing. Journal of Purchasing and Supply Management24(3), pp.192-203.

Nair, A., Jayaram, J. and Das, A., 2015. Strategic purchasing participation, supplier selection, supplier evaluation and purchasing performance. International Journal of Production Research53(20), pp.6263-6278.

Olsen, R.F. and Ellram, L.M., 1997. A portfolio approach to supplier relationships. Industrial marketing management26(2), pp.101-113.

Padhi, S.S., Wagner, S.M. and Aggarwal, V., 2012. Positioning of commodities using the Kraljic Portfolio Matrix. Journal of Purchasing and Supply Management18(1), pp.1-8.

Park, J., Shin, K., Chang, T.W. and Park, J., 2010. An integrative framework for supplier relationship management. Industrial Management & Data Systems.

Putri, S.K., Suliantoro, H. and Pujotomo, D., 2020, April. Strategic planning in procurement of raw materials based on Kraljic’s purchasing portofolio model. In AIP Conference Proceedings (Vol. 2217, No. 1, p. 030100). AIP Publishing LLC.

Rezaei, J. and Fallah Lajimi, H., 2019. Segmenting supplies and suppliers: bringing together the purchasing portfolio matrix and the supplier potential matrix. International Journal of Logistics Research and Applications22(4), pp.419-436.

Salle, R., Cova, B. and Pardo, C., 2001. Portfolio of supplier-customer relationships. In Getting better at sensemaking. Emerald Group Publishing Limited.

Sanderson, J., Lonsdale, C., Mannion, R. and Matharu, T., 2015. Portfolio approaches to improving procurement and supply chain management practice. In Towards a framework for enhancing procurement and supply chain management practice in the NHS: lessons for managers and clinicians from a synthesis of the theoretical and empirical literature. NIHR Journals Library.

Sharma, M.J. and Yu, S.J., 2013. Selecting critical suppliers for supplier development to improve supply management. Opsearch50(1), pp.42-59.

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