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SUPPLIER RELATIONSHIP

 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

59% 93.5% 99.5% 100%

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%

 PARETO ANALYSIS REVEALS :


(1) 31% of invoices carrying face values > $1000 accounts for 93.5% or total
value of invoices.
(2) 31% of invoices carrying face value under $100 accounts for only 0.5% of
total invoice value.
These items may be subjected to a process of rationalization and
systematization to cut purchase effort/cost.
 THE PURCHASE MATRIX
The purchase matrix is of recent origin. It analyses the supply base according to
supplier’s strength and buyer’s strength and places them in four groups.
( Figure-6.2)
CONSTRUCTION OF THE MATRIX
 For constructing the matrix, company strength the (x-axis) and supplier
strength (y – axis) are to be evaluated. Factors to be considered for these are
presented in Table 6.2.

Bottleneck Strategic
Items: Items:
Co-operate
Supplier strength

Ensure supply

Leverage
Non-critical
Items: Items:
Handle Take advantage of market
efficiently potential

company strength

Figure 6.2 Purchase portfolio


 Table 6.2
Purchasing portfolio evaluation criteria

Supplier strength Company strength


1. Market size versus supplier capacity *Purchasing volume versus capacity
of main unit.
2. Market growth versus capacity growth * Demand growth versus capacity
growth
3. Capacity utilization or bottleneck risk *Capacity utilization of main units
4. Competitive structure * Market share with regard to main
competition.
5. ROI * Profitability of main end products
6. Cost and price structure * Cost and price structure
* Cost of non-delivery
7. Uniqueness of product and * Own production capability
technological stability
8. Entry barrier (capital and know-how *Entry cost for new sources versus
requirements) cost for own production
9. Logistics * Logistic
 Two problems faced in calculating indices are :
- Availability of information on above factors.
- The problem of weighting in order to get an index.

SIMPLIFIED APPROACH TO CONSTRUCT THE MATRIX

 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 .

Supplier’s strength/ risk No of suppliers


- Highly competitive ( low supplier’s strength ) 12
- Transition point from monopoly to competitive
6
( medium supplier’s strength)
- Monopoly ( High supplier’s strength) 1
BUYER‘S AXIS : BUYER’S STRENGTH

Buyer’s strength is measured as value of an item expressed as


percentage of buyer’s total purchase.
Or Buyer’s strength = ( value of an item / buyers total purchase )*
100
Example on Purchase Matrix:
A buyer’s total purchase in a year is worth Rs 5000.
His purchase includes two items A and B from two
different suppliers. Relevant data for these two items
are given in the table below. With the data given in
the table construct Purchase Matrix.

Item Value of items Value of No. of


(Rs.) supplies total Suppliers
sales (Rs.)
A 500 1000 10
B 200 500 2
High 1
2 Bottleneck Strategic
3 Item Item
Supplier’s axis (suppliers 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

Situation Focus Elements of strategy


Non – critical Balance Optimize inventory , routine
purchase
Bottleneck Diversify Insurance, close relation-
ships, fall – back plan
Strategic Balance Strategic inventory ,
long – term relationship
Leverage Exploit spot purchasing and long -
term deal

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