This article explores the key factors that contribute to attracting and retaining strategic suppliers (outlined in the Kraljic matrix) while highlighting the importance of humanized supplier relationship management. By understanding the needs and aspirations of suppliers, cultivating trust, and avoiding unfavorable practices, companies can build sustainable and mutually beneficial partnerships with the best suppliers in the market.
The Kraljic matrix
Attracting and retaining suitable strategic suppliers requires more than just transactional interactions. It necessitates a comprehensive approach that values collaboration, transparency, fairness, and mutual respect.
Step forward the Kraljic matrix, also known as the Purchasing Portfolio Matrix! This is a strategic sourcing framework developed by Peter Kraljic in the 1980s. It is widely used in supply chain management and procurement to assess and categorize different types of goods and services based on their impact on the organization’s profitability and supply risk.
The matrix helps organizations identify the most effective procurement strategies for each category of goods or services, enabling them to allocate resources appropriately and manage their supplier relationships more strategically. The Kraljic matrix considers two key dimensions: supply risk and profit impact.
1. Supply Risk
This evaluates the potential risk associated with the availability of a particular item or service. It considers factors such as supply market dynamics, supplier concentration, scarcity of resources, geopolitical risks, and technological disruptions. High supply risk can lead to disruptions in the supply chain and negatively impact the organization’s operations.
2. Profit Impact
This assesses the financial impact of a particular item or service on the organization. It considers factors such as cost structure, value-added potential, profitability, and market differentiation. Items or services with a high-profit impact are often critical to the organization’s operations or significantly influence its financial performance.
By considering these two aspects, the Kraljic matrix classifies items or services into four quadrants:
The Kraljic matrix’s four quadrants:
- Non-critical items: These items have a low impact on the company and are found in abundance and/or in low-risk markets. As a result, they can be sourced from the lowest-cost supplier.
- Leverage items: These items are important for the company but are sourced from low-risk markets with an abundant supply. As a result, they can be used to negotiate better prices or terms with suppliers.
- Bottleneck items: These items have a low business impact in economic terms but where supply continuity is at risk. As a result, it is important to have a reliable supplier for these items and to have a plan in place in case of a supply disruption.
- Strategic items: These items are important for the company both in terms of economic impact and supply conditions from complex and/or risky markets. As a result, it is important to have a long-term and strategic relationship with a supplier for these items.
Managing ‘Non-critical’ and ‘Bottleneck’ items
For non-critical and bottleneck items, a relatively basic sourcing, quality control, and inventory management approach works well because these items have a low impact on the company. As a result, there is no need to make a lot of effort to attract and please suppliers for these items.
Non-critical items typically include office supplies, basic maintenance materials, and standardized components that are readily available in the market.
Bottleneck items are typically those components, materials, or services that are essential for the smooth functioning of the organization’s operations, despite their relatively low economic impact. The absence or disruption of these items can significantly impede production processes, cause delays, and impact customer satisfaction.
QC for these items can often be managed through standard industry certifications and general product specifications. Rigorous QA processes may not be necessary for these items, as they are typically produced using standardized manufacturing processes and have lower quality risks compared to critical or specialized components.
Inventory management for them can often follow a more simplified approach, as demand fluctuations are often predictable and inventory levels can be maintained based on historical consumption patterns. Just be conscious that some bottleneck items may still require a more hands-on approach to reduce the risk of going without them, so using strategies such as dual sourcing, safety stock management, inventory buffering, or strategic alliances with backup suppliers can be effective.
Managing Leverage items
Leverage items are goods or services that hold significance for the company in terms of their contribution to overall operations, but they are sourced from markets where there is a low risk of supply disruptions. These items are often readily available in the market, with multiple suppliers competing to fulfill the demand. The abundance of supply in low-risk markets provides organizations with an advantageous position to negotiate favorable pricing, terms, and conditions with suppliers, hence the name ‘leverage.’.
Managing Strategic items
Strategic items are critical components, materials, or services that have a significant economic impact on the company’s operations. They play a pivotal role in the production process, product differentiation, or market competitiveness. These items may be unique, proprietary, or specialized, making them crucial for maintaining the company’s competitive edge or meeting specific customer demands. For example, cutting-edge technology components for electronic devices, patented ingredients for pharmaceutical products, or specialized consulting services can be considered strategic items.
Moreover, the supply conditions for these items are often complex and may involve inherent risks, such as market volatility, geopolitical factors, technological advancements, or stringent regulatory requirements.
Given the importance and complexities surrounding strategic items, establishing a long-term and strategic relationship with a reliable supplier is vital. A strong partnership with a supplier who possesses the necessary capabilities, expertise, and commitment ensures a consistent supply of high-quality strategic items, even under challenging circumstances.
Building such relationships involves aligning goals, sharing information, and collaborating closely with the supplier. This can include joint product development initiatives, co-investment in research and development, or mutually beneficial agreements that create a sense of shared destiny. Long-term contracts and strategic alliances help create a stable and predictable supply chain for strategic items, fostering trust and commitment between the company and its strategic suppliers.
Supplier development and continuous improvement are crucial aspects of managing strategic items. Regular monitoring and performance evaluation of strategic suppliers is also essential to maintain the desired level of quality, responsiveness, and innovation.
How to ensure the right strategic suppliers will be attracted?
To ensure the right strategic suppliers will be attracted, it is crucial to focus on enhancing the overall supplier satisfaction of the buyer. This can be achieved by considering various factors that contribute to their satisfaction:
- Reputation: A customer’s company’s reputation is important to suppliers because it signals the company’s ability to pay its bills and meet its obligations. A good reputation can help a company attract better suppliers and to negotiate better prices.
- Optional growth: Suppliers are attracted to companies that are growing because it means that there will be more demand for their products and services. A company that is growing is also more likely to be able to afford to pay its suppliers on time, too.
- Profit: Suppliers are attracted to companies that are profitable because a profitable company is also more likely to be able to invest in new products and services, which can benefit suppliers, as well as being less likely to suffer from financial problems that could impact the supplier.
- Core values: Suppliers are attracted to companies that share their core values. This is because these companies are more likely to have long-term relationships and to work together to achieve common goals.
- Operational excellence: Suppliers are attracted to operationally excellent companies because they are more likely to be able to meet their demands. An operationally excellent company is also more likely to be able to provide high-quality products and services, which can benefit suppliers.
- High quality: Suppliers are attracted to companies that produce high-quality products and services as their products and services will be seen as being of high quality by their customers. A company that produces high-quality products and services is also more likely to be able to charge a premium for its products and services, which can benefit suppliers.
By focusing on these factors, companies can attract and retain the right strategic suppliers. This can help to improve performance and quality, which can lead to increased profits and market share.
Supplier relationship management tools do not help!
Using a supplier relationship management (SRM) tool that treats suppliers in a dehumanized way is not effective. This is because suppliers are people, and they want to be treated with respect and dignity. When suppliers are treated as just a means to an end, they are less likely to be motivated to provide their best work. This can lead to a number of problems, including:
- Lower quality products and services.
- Increased costs.
- Delays in deliveries.
- Damaged relationships.
- Increased risk of supplier disruptions.
A humanized supplier relationship management approach recognizes that suppliers are key stakeholders who contribute to the overall success of the buying company. It involves regular face-to-face meetings, joint planning sessions, and collaborative problem-solving efforts. These interactions enable a deeper understanding of each other’s goals, challenges, and strategies, fostering a sense of shared purpose and commitment to achieving mutual success.
👉 You can learn more about fostering good relationships with suppliers here: DIY Sourcing From China Part 5: Building Rapport [Podcast]
Playing Hardball with your suppliers
Squeezing profit, delayed payments, putting the blame on the supplier for everything, and engaging in other unfavorable practices can significantly deter the best suppliers from partnering with a company. Let’s look at the various ways a buyer will turn off their suppliers:
- Squeezing profit: When a buying company attempts to excessively negotiate prices or demands unjustifiably low pricing from suppliers, it can create an atmosphere of distrust and strain the supplier-buyer relationship. Suppliers have their own costs, overheads, and profit margins to consider. Continuously squeezing profit margins can undermine their financial viability and motivation to work with the buying company.
- Delayed payments: Consistently delaying payments to suppliers can have a detrimental impact on their cash flow and overall business operations. Suppliers rely on timely payments to manage their own financial obligations, invest in their businesses, and maintain healthy working capital. Persistent delays in payments erode trust, disrupt supplier cash flow, and may lead to shortages or compromised service quality.
- Blaming the supplier: Placing the blame solely on the supplier for any issues or challenges that arise without fair assessment and investigation can create an adversarial relationship. In a healthy supplier-buyer partnership, both parties should collaboratively address and resolve issues by identifying root causes and exploring mutually beneficial solutions. Blaming the supplier without considering other factors can lead to strained relationships and hinder future cooperation.
- Unreasonable demands or requirements: Imposing unreasonable demands, such as excessive product specifications or short lead times without proper consideration for the supplier’s capabilities and limitations, can discourage high-quality suppliers from engaging with the buying company. Suppliers may feel overwhelmed or unable to meet unrealistic expectations, leading to dissatisfaction and a reluctance to continue the partnership.
- Lack of transparency and communication: Poor communication and a lack of transparency in the buying company’s operations can create an environment of uncertainty and mistrust. Suppliers value open and honest communication, access to relevant information, and clear expectations. Keeping suppliers in the dark or providing inconsistent information can undermine their confidence in the buying company’s reliability and commitment.
These practices not only damage existing supplier relationships but also deter potential high-quality suppliers from considering partnerships with the company.
The Kraljic matrix is a valuable tool for companies that want to improve their supply chain management. By understanding the profit impact and supply risk of their products and services, companies can develop strategies that will help them to reduce costs, improve efficiency, and increase profitability.
Here’s a summary of the benefits of using the Kraljic matrix:
- It can help you to identify the most important products and services in your supply chain.
- It can help you to develop strategies for managing your suppliers.
- It can help you to reduce costs and improve efficiency.
- It can help you to increase profitability.
If you are looking for a way to improve your supply chain management, the Kraljic matrix is a great place to start.
P.S. You may also like…
- Get help from Sofeast’s supply chain management team to find your next supplier: New Supplier / Factory Identification
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- How To Find A Manufacturer In China: 10 Verification Steps [eBook]
- Not sure where to start with sourcing from China? Click here to listen 👉 DIY Sourcing from China Series
- Ultimate Guide To Sourcing From China And Developing Your Suppliers [eBook]