Or do we?
Last week, I began writing on an important topic in today’s turbulent times – how Procurement can help organizations cut costs before they have to start cutting employees. I proposed that we’ll need to move beyond the three-bids-and-a-buy approach, and suggested starting with an examination of the Kraljic matrix for guidance. We started with the oft-neglected “Non-Critical” quadrant (check it out if you haven’t had the chance). We’ll move into another headache quadrant this week: the “Bottleneck” quadrant.
The Kraljic MatrixFirst, a brief review of the Matrix, itself. As discussed last week, Peter Kraljic developed a matrix back in the early 1980’s to describe supplier relationships through two key dimensions:
Complexity of the Supply Market (Supply Risk) – What does the market landscape look like in terms of product scarcity? Is the market owned by a few (or one) key players or are there low barriers to entry? Are there inherent supply chain risks? Are substitute products or services available?
Importance of Purchasing (Profit Impact) – How important is a product or service in terms of value added to an organization’s product? What percentage of that product’s total cost can be attributed to this purchase?
Mapping these dimensions as a quadrant map gives us four overarching supplier types.
Of all of the quadrants, “Bottleneck” is probably the most likely to cause heartburn among Procurement teams.
Bottleneck Supplier RelationshipsThis quadrant includes a few trickier commonalities:
- Similar to Non-Critical items, purchases often aren’t a primary component of an organization’s own products.
- Unlike Non-Critical items, the market isn’t flooded with suppliers here. A few suppliers may corner the market.
- Supply disruption risks are pronounced here.
There are several examples here. On the direct spend side, think of the paint used on a part of an organization’s product – a finishing step, but one that will halt production if that paint is unavailable. On the indirect side, think of waste management. Managing waste doesn’t directly contribute to an organization’s product, but imagine how jammed a production facility would be if it was never taken care of for weeks on end.
These suppliers are aware of all of this. The proof of the pudding is in the eating: take a look at your waste management agreement to see it. In many cases, contracts have long terms (five or more years), weak termination for convenience clauses, and incredibly painful penalties associated with terminating a contract early (sometimes 50% of remaining contract value). Don’t like those terms or the prices that go along with them? Tough – the incumbent owns the market, and you’ll pay huge transportation fees to go to the next-closest landfill or recycling plant with an alternate. Besides, that alternate’s terms aren’t much better.
Managing Bottleneck SuppliersTraditional advice for this quadrant is to limit an organization’s exposure to supply chain risk to the greatest degree possible. Low impact on an organizations profit combined with increased supply risk means we have more to lose than gain by disrupting this quadrant.
Cost-cutting can be difficult in this quadrant, and Procurement might be better off focusing on how to reinforce these relationships in turbulent times. The loss of a Bottleneck supplier would grind operations to a halt. This would be incredibly costly in the longer term, even if Procurement doesn’t believe a disruption could occur today. Better to be prepared (more on that below).
That said, there are several strategies we can use.
Quadrant Switch: Finding AlternatesA Bottleneck supplier’s strong position is rooted in the relative scarcity in the market. Getting better pricing means tipping that scale back in favor of the buyer – which means finding alternative suppliers that an incumbent would need to compete against.
The obvious choice is a direct, like-product competitor. We may need to expand our search to either include a wider geographic area or relax acceptable supplier KPIs to do so, which isn’t ideal but is potentially feasible.
Procurement will need to deeply review scope with stakeholders to evaluate this opportunity.
- How many attributes are more nice-to-have elements rather than requirements?
- Are any elements of the product over-spec’ed compared to the actual need?
- For anything that passes the above two questions, how much wiggle room exists among requirements in terms of tolerance levels?
Quadrant Switch: Changing ProductsThe problem with the strategy above is that a Procurement team on their game already has searched far and wide for alternates. In this case, a different solution is to find an alternative product entirely. Are there any alternatives that would do the job as well or better?
This is a less obvious path, and an example may be helpful. Consider product photography: Working with a single photographer for an entire brand ensures not just consistent quality, but a consistent brand image. You can’t just bring in a new studio and expect them to deliver the same look. So what if that essentially sole source photographer gets overloaded with other clients’ work? You’re now in a bottleneck situation. We could go through the pain of adding a second studio despite the brand image complications, but this will be a headache. This situation will exist for as long as we use product photographers.
So stop using product photographers.
The world of digital rendering is at a place where it can compete with photography at an acceptable price point. Beyond merely keeping up, rendering can do things photography can’t – and can more easily be repeated or spread across multiple suppliers. Now we have competition, which gives us some leverage back.
Reinforce the Supply ChainThe beauty of our photography-to-rendering example above goes beyond cutting costs. We’re also ensuring that if one photographer doesn’t have bandwidth or otherwise can’t shoot, we don’t grind to a halt in terms of marketing and advertising. In the end, this is the most important thing Procurement can do with Bottleneck supplier relationships in tough times… ensure that we’re building fallbacks and redundancies along our supply chains.
Finding alternate suppliers, or suppliers of alternate acceptable products, is one way to reinforce the supply chain. Procurement should also,
- Work with stakeholders to build out and refine need forecasts. Being able to anticipate needs is critical, as being caught unaware can have devastating consequences in markets with few alternatives.
- Increase inventory where possible during periods of higher risk. If, for example, a Bottleneck supplier’s production facility is impacted by hurricane season, stock up before that season begins.
- Identify alternative logistics strategies. If you typically ship by truck, having an alternative by air or sea could ward against any interstate travel disruptions.
This reinforcement may not cut costs in the here and now, but will greatly mitigate cost increases due to catastrophic events.
Let’s Keep Going!Here’s some good news and bad news. The bad news is… we’ll never be able to “solve away” a supplier’s market. Procurement will always need to have strategies in place to either mitigate or move away from suppliers who have the higher ground advantage.
The good news: The strategies we’ve reviewed today will help us develop such strategies. Beyond Bottleneck suppliers, these strategies will help us improve relationships in other quadrants as well.
We’ve made it through both of the lower two quadrants, where Procurement least wants to be. We’re ready to tackle the heavy hitters, starting next time with the “Leverage” quadrant.