What does sourcing strategy help us understand?
- How critical suppliers are to the business
- The appropriate level of time and resources to allocate to the sourcing process
- How to align the sourcing process with the firm’s strategic goals and direction
- How to manage the portfolio of suppliers
What is the Kraljic Matrix in terms of categorising spend?
Matrix based on degree of impact on business and complexity of the supply market
What is the category with high impact on business and low complexity of supply market under the Kraljic Matrix?
Leverage =
- Multiple sources
- Abundant supply
- Medium term focus
What is the category with high impact on business and high complexity of supply market under the Kraljic Matrix?
Strategic =
- Single/parallel sourcing
- Natural scarcity
- Long-term focus
What is the category with low impact on business and low complexity of supply market under the Kraljic Matrix?
Non critical =
- Multiple sources
- Abundant supply
- Short term focus
What is the category with low impact on business and high complexity of supply market under the Kraljic Matrix?
Bottleneck =
- Single/tiered sources
- Production scarcity
- Variable focus
How is complexity of the supply market classified?
Fundamentally concerned with risk in the supply market, measuring this risk will vary between orgs
What are the issues affecting risk in the supply market?
- Supply availability
- Quality requirement
- Safety and environmental reliability
- Organisational brand
- Dependance of supplier
How is the impact on business classified?
Fundamentally concerned with the impact on profit or the value obtained and measuring this will vary been organisations
What are the issues affecting the value obtained from suppliers?
- Volume purchased
- Percentage of total purchase cost
- Impact on product quality
- Impact on business growth
How are the axis of the Kraljic Matrix measured in practice?
Consensus method - process of reasoning and discussion
One-by-one - select one objective and measure for each axis
Weight factor score - MCDM - multi criterion decision making
What is multiple sourcing?
Having multiple suppliers for the same component - prevents a bottleneck where there is congestion in supply
What are the advantages of multiple sourcing?
- Alternative sources of material in case of delivery stoppage by a supplier
- Reduced probability of bottlenecks due to insufficient production capacity to meet peak demand
- Increased competition among suppliers = better quality, price, delivery, innovation and negotiating power
- More flexibility
What are the disadvantages of multiple sourcing?
- Reduced efforts by supplier to match buyer’s requirements
- Higher costs for purchasing organisation (greater number of orders, telephone calls, records)
What is sole/single sourcing?
One source of supply. Usually important - a strategic choice, sometimes forced where there is a monopoly
What are the advantages of single sourcing?
- Partnerships between buyers and suppliers = cooperation, shared benefits and LT relationships based on trust
- Reduced risk of opportunistic behaviour
- Large commitment from supplier that is willing to invest in new facilities or technology
- Lower purchase price resulting from reduced production costs, due to better knowledge of the manufacturing process by the supplier + EOS
What are the disadvantages of single sourcing?
- Great dependency between the buyer and the supplier
- Increased vulnerability of supply
- Increased risk of supply interruption, especially for asset specific products
What is delegated sourcing?
- Involves a tiered approach to supplier relationship management
- 1 supplier responsible for delivery of an entire sub-assembly as opposed to individual supplier
- This is the strategic supplier - “first tier supplier”
- Can be used to reduce the number of suppliers but maintain quality, cost and delivery requiremenents
- First tier supplier coordinates the rest of the component suppliers
What are the advantages of delegated sourcing?
- Reduction in transaction costs as working closely with one key supplier
- Enables knowledge sharing, employee training, cross functional integration and supplier development as close relationship
- Buying firm displaces some responsibility i.e time
What are the disadvantages of delegated sourcing?
- Strategic control over purchasing task could be lost
- Confidentiality of information could be breached
- Can become a very large system, first tier supplier can develop more power than than the buying firm
What is parallel sourcing?
- Splits suppliers by model, retaining sole supply per model with competition overall
- Allows buyer to work on single basis with each component supplier in product grip while maintain multiple sourcing across different product groups
- Suppliers have capacity to produce multiple components so there is threat of supplier switching
How do the different types of sourcing relate to the Kraljic matrix?
Leverage - multiple sources
Strategic - single/parallel
Non critical - multiple sources
Bottleneck - single/tiered sources
