“And, so this is Christmas……and what have you done?”
How many times already this holiday season have you heard John Lennon’s voice telling you another year’s over and asking “what have you done?” The question might prompt you to review family events or travel, sports, or cultural highlights of the year. If you work in procurement, like many of Cloudia’s clients, you might be looking back over your organisation’s annual spend. You may even be singing new lyrics like: “who did we buy from and what were the terms?”
Even though John Lennon and Yoko Ono’s 1971 track, which is now one of the most popular Christmas songs of all time, was originally a political message about world peace, the song is also about accountability and looking back. So basically, I think Lennon’s question, is a good one, especially when most people are already looking forward and obsessing about new trends. Yes, trendspotting is important too, but in procurement, there are a lot of fundamental things that don’t change. And there’s a lot to be gained from looking back at them, including as part of your future planning.
Planning is the foundation of good procurement and will help you create real added value instead of just blindly going after savings. If you have a strategic procurement plan in place, it’s easier for you to look back and see you chose a particular supplier over another, or why particular terms were agreed.
So, what have you done in procurement this year?
How did you manage your suppliers? Did you only focus on finding the cheapest deals? What were the results? Perhaps you’re having trouble finding clarity. You’ll find that segmenting your spending into supplier groups, will give you a clearer view of the past. Segmentation also lets you exert more control over your future spend. If you’re not familiar with supplier segmentation, it’s about dividing your supplier base into groups based on their impact on your business then tailoring your processes to manage them.
In supplier management divide and rule
And speaking of the things that don’t change, the Kraljic matrix, which has been around since the 80’s is like a good Beatles song, it never gets old, and remains a relevant place to start in segmenting your suppliers. Peter Kraljic’s famous 2×2 model (below) divides spend by its business-critical degree of importance against the complexity of its supply market – using the four quadrants of non-critical, leverage, bottleneck and strategic.
Non-critical items in abundant supply
So, if we start with the bottom left, noncritical suppliers. Here, you’ll have things like office stationery, coffee and lavatory paper. They’re in abundant supply, and even without them your business is not likely to come to a complete standstill. Don’t use too much time on these suppliers and automate as much as possible with a business as usual approach
Leverage items a chance to gain savings
At the top left, you have your leverage suppliers, which are still not business critical but their cost impact is high. So, here’s where you can try and generate some income. Using digital supplier management software, you’re well-positioned with this group to negotiate better terms by conducting auctions and pitting your suppliers against each other.
Bottle-neck items where supplier control is low
The opposite is true if you move down to the bottom right, where you group your so-called bottle neck suppliers. While items here don’t have a high profit impact, they are critical for business continuation. For example, it could be the software that runs your entire facilities. You will have very little leverage here to dictate outcomes so don’t go for aggressive bidding here and end up being left out in the cold. But do be proactive about keeping these suppliers on your side.
Strategic items need long-term supplier relationships
Finally, top right, strategic suppliers is where supplier management can come into its own. These are both high-risk and high-cost items like must-have components, so you’ll find some of your biggest challenges here as well as the greatest potential for value. This is less about price wars and more about finding opportunities together to advance your mutual potential. These are your top tier suppliers, so you will ideally have designated relationship managers, sharing knowledge, information and innovation with them, and working together to reshape the field to your mutual advantage.
Or let’s just say that Santa and the elves with their Christmas critical, non-negotiable 24-25 December deadline will have these suppliers at the top of their Christmas card list.
And so happy Christmas!
We hope you have fun.
And as you greet the new year, stay close to your strategic suppliers
The near and the dear ones,
the old and the young.
PS: Even Laku the black Labrador gets it. As his top tier supplier, he will proactively keep me on side this Christmas, especially when we bring out the ham.
Want to enhance your Source-to-Contract process, negotiate better contracts as well as deepen your cooperation with suppliers in ways that benefits both parties? Download our brochure about Cloudia Supplier Management!