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Sunday, April 12, 2009

Supply Positioning Analysis

This article intent to show Supply Positioning model. This model helps in prioritizing the efforts and developing supply strategy of your company

Following two factors are considered while developing this model

  • Annual Expenditure Value of the SKU/Service
    More the expenditure value for a particular SKU/Service, more it is important for your business as it will offer potential for cost savings.

  • Criticality to the business
    If the SKU/service is not available/delivered on time then how this is going to affect you company’s profit or operations? – This question decides the level of the criticality of the SKU/Service

    Lets analyze both the factors in the below matrix

Expenditure is plotted on the X-Axis and criticality is plotted on the Y-axis of this chart. As you move on the X-axis from left to right the expenditure value increases. Generally as per Pareto’s rule 80% of the Items/Services account for 20% of the expenditure and 20% of the item account for the 80% of the expenditure. You can use here ABC analysis to identify the items and services

Now let’s analyze the characteristics of the items as per the quadrant

This quadrant is represented by items which are least critical to your business and account for least expenditure value. Normally these items are standard in nature, of low value and many suppliers. The examples for this quadrant are stationary items, house keeping materials, IT peripheral like CDs, etc. Level of attractiveness for doing business for these SKUs/Services would be low for the suppliers.

SKUs/Service in this quadrant are similar to Routine quadrant but the spend value is very high for these items. These are again standard services/SKUs and readily available in the market but these SKUs/Services are of high values and offer great potential towards cost reductions and savings. Level of attractiveness for doing business for these SKUs/Services would be high for the suppliers.

These SKUs/Services are characterized by high risk and low annual expenditure value. These are mission critical items/services. Unavailability of these services and SKUs may immediately affect the operations and profitability of your company. Items in this quadrant can be MRO items for critical machines and equipment. Normally these items are highly specialized, not readily available in the market and have very limited suppliers. Since spend value is low for these items and services so it may not offer high level of attractiveness to suppliers for doing business with your company.

Similar to bottleneck items, these items are very critical to your business. The spend value for these items is higher and offers higher level of attractiveness to suppliers for doing business with your company. You may have a greater ability to influence the supply of these items. These items are the key contributors to the profitability of your company. The examples for these items are key components on which your Finished Products depend. Similar to bottleneck items, these items may not be readily available in the market and may have very few suppliers.

How to improve the supply Position?
The ideal situation would be to eliminate the criticality of the items/services and at the same time having strong position in front of suppliers i.e. leverage position. Here you do not have fear of unavailability of the items/services, offer higher level of attractiveness to your suppliers for doing business with your company and command the strong bargaining power with the suppliers.

So ultimately your objective should be to increase the leverage. This can be achieved as below:

  • Move Items/Services from Routine quadrant to Leverage- Here you can consolidate your requirements such as combining equipment purchase with installation and maintenance services, buying office consumable and computer peripherals from the same vendors etc.
  • Reduction in variety of specifications, specification standardization and supply base optimization.
    Consolidation of demands of all the sites for common categories
  • Forming purchase consortia with other industries to leverage the spend
  • Working with engineer to reduce the technical risks and try to use standard specifications as much as possible
  • Carry out study of market to search other sources of supply to reduce the risk of supply for critical items


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