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PURCHASE PORTFOLIO
-Analysis of purchases portfolio helps in segmenting suppliers as well
as to maximize leverage .
- Tool used for this purpose are : 1. Pareto analysis and 2. Purchase matrix
100
VALUE OF INVOICES (%)
75
50
25
Face 10,000
& above 1000 - 9999 100 -999 up to 100
Value
0 3% 20 31% 40 60 69% 80 100
NO OF INVOICES (%)
Fig 6.1 PARETO ANALYSIS : A typical example
DATA
No. of invoices Face Value Value of Invoices
3% > 10,000 59%
28% 1000-9999 34.5%
38% 100-999 6%
31% up to 100 0.5%
Bottleneck Strategic
Items: Items:
Co-operate
Supplier strength
Ensure supply
Leverage
Non-critical
Items: Items:
Handle Take advantage of market
efficiently potential
company strength
This approach identifies simple and practical measures for supplier and
Buyer’s axis.
SUPPLIER’S AXIS
Supplier market index = No. of Suppliers who are able and willing to
supply.
Number of suppliers have been identified to reflect varying supplier risk and
strength .
4
5
No of suppliers
6
7
Non – Critical Leverage
8
Items Items
9
10
11
0.0 0.1 1.0 10.0 100.0
Low High
% of Buyers total purchase
Buyer’s axis (buyers strength)
RISK POSITION AND STRATEGIC THRUST
BOTTLE NECK ITEMS ( weakest of all situation from buyer’s point of
view)
This is characterized by low spend & high risk. High risk may be due to few
supplier or criticality of the product .
Strategy
Maintenance of strategic inventory
close relationship with suppliers
( Align your process with that of supplier)
Back – up plan in the event of non
– availability
In the long term, minimize the use
of bottleneck items in new products
with close involvement with design
team .
NON – CRITICAL
This is characterized by low spend and low risk (large supplier). Essential
problem is transaction volume .
Strategy
good choice of suppliers
LEVERAGE ITEMS
This is high profit impact and low risk . Power lies with buyer .
Strategy
Exploitation of full purchase power :
- vender selection
- material substitute
- order volume optimization
- spot purchasing
- long term deal
- targeting pricing strategy / negotiations
STRATEGIC ITEMS
This is high profit impact with high supply risk . Here , items may be scarce ,
difficult to substitute , fewer supplier and significant entry barriers .
STRATEGY
Accurate fore casting
Strategic inventory
Long term relationship based on top level negotiations
Detail market research
The purchase strategy of all areas is summarized in table 6.3
TABLE 6.3
Purchase Strategy