Procurement by the strategic requirements of the product

Once a need has been identified, next is to determine the importance which is applied to the product or material that is required. ABC/Pareto analysis provides a basis to identify where the spend is the greatest and where most effort should be directed to reduce costs. Here, the 80/20 rule states that, in most cases, 80% of purchase value is concentrated within 20% of the items purchased. Additionally, risk and other factors are involved.

These risk factors can be viewed from high to low, against the following criteria :
Experience with product / service (high risk for a new, untried product to a lower risk for repeats)
Supply/demand balance (short supply/excess capacity)
Supply chain complexity (many parties involved to “direct” purchases)
Financial aspects of supply disruption (high to low hazards)
Design maturity (new to established designs)
Manufacturing complexity (complex to simple)
The other factors can also be rated from high to low against the following criteria :
Market structure (many sources to a monopoly supplier)
Value of spend (high to low spending)
Supply/demand balance (spare to no capacity)
Efficiency of buying process in the company (users agree specification to cross functional reviews)
Knowledge of suppliers pricing (cost plus to market based pricing)
To account for both spend and risk from non supply (due to there being few suppliers); based on the walk of Kraljic, the range of purchased items can be broken down into four categories :

This indicates that different product have different strategic requirements to a business. It also gives a broad indication of how buying and the supplier relationships can be conducted into the following four basic strategies :

Excellence in Procurement

Routine items: Routine buying of commodities, needing efficiency. Relationships may be conducted at “arm’s length” for these low value items
Leverage items are those where a high volume is purchased with a high level of supplier numbers giving competition. Here therefore the lowest cost can easily be found
Bottleneck items: The need here is to ensure the supply and reduce the risk of non supply and disruption to the business. Suppliers are often few in number, for example, a monopoly
Critical items require closer supplier relationships to ensure they are always available. These will involve usually involve longer term relationships and partnering approaches with suppliers

Some examples of different product from the oil and gas and chocolate confectionery industries, for each of these categories, are as follows :

In general terms the following will be involved :
Leverage; Low risk, high spend items
The would be a need to create competition in the market place for these items to drive down price. The supply market is competitive with many available sources, hence buyers are able to leverage by maximising economies of scale and by offering large spends

Routine; Low risk, low spend items
Minimal effort is needed for sourcing these items due to the relatively little impact purchasing can make to reducing purchasing costs. Therefore acquisition costs are targeted by the use of credit cards, EDI, internet ordering and call-odds with users directed to place orders with the selected supplier; who report on usage.

Critical: High risk, high spend items
These items rank high in the Pareto analysis of spend but are also difficult to source due to low numbers of suppliers or complex logistics. Close supplier relations are needed with possible use of joint working and multi-functional teams.

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(Excellence in Procurement ‘ How to optimise cost and add value’ – Stuart Emmett & Barry Crocker)