The Essential
Sourcing Skills
Handbook series
2.1
Portfolio Analysis
© 2010 SpringTide Consulting Ltd.
All rights reserved. Unauthorised
distribution in hard or soft form
prohibited.
The Essential Sourcing Skills Handbook series
Strategic sourcing
1.
2.
3.
4.
5.
Launch process
1.1. Category Profiling
1.2. Business Needs
1.3. Sourcing History
1.4. Stakeholder Mapping
1.5. RACI Matrix
1.6. Communications
Charter
1.7. Change Management
1.8. Transition Analysis
Current position
2.1. Portfolio Analysis
2.2. Seller’s Perception Matrix
2.3. Relationship
Positioning
2.4. Risk and Vulnerability
Analysis
2.5. Specification
Challenge
2.6. Supply Market
Analysis
2.7. Opportunity Analysis
Strategy development
3.1. Request for
Information
3.2. Conditioning
3.3. Price and Cost
Analysis
3.4. Supply Chain Analysis
3.5. Quick Wins
Strategy selection
4.1. Options Analysis
4.2. Request for Proposal
4.3. Supplier Selection
4.4. Capability
Assessment
Strategy
implementation
5.1. Negotiation
5.2. Contract Award
5.3. Debriefing
5.4. Implementation Plan
5.5. Savings
Post-implementation
management
6.
7.
8.
Supplier performance
management
6.1. Problem Solving
6.2. Service Level
Agreements and
Key Performance
Indicators
6.3. Total Cost of
Ownership
6.4. Contract Register
6.5. Relationship Audit
Supply chain
management
7.1. Market Movements
7.2. Industry Curves
Specification
management
8.1. Learning Curves
8.2. Value Analysis/
Value Engineering
8.3. Gainsharing
8.4. Exit Strategies
2.1
Current position
2.1 Portfolio Analysis
Introduction
The first portfolio matrix
was described by Fisher in
1970 and later refined by
Kraljic in 1983 and applied
to procurement. Portfolio
Analysis is now widely used
in identifying optimal
strategies for category
sourcing at global, regional
or local levels, based on
an assessment of two of
the most critical factors
affecting a supply market:
sourcing complexity or
risk
spend impact relative
to the buying
organisation’s total spend.
Summary
The supply market can
be divided into four
quadrants according
to the combination of
sourcing complexity/risk
and spend impact
Portfolio Analysis positions
a category in this matrix
The category’s quadrant positioning dictates the
most appropriate aims,
actions and approaches
for the sourcing strategy
Movement between
quadrants is possible
and sometimes desirable
By plotting these two elements in a matrix, an overall strategy
can be determined and an action plan developed for each
category of spend. Thus category management becomes
proactive rather than reactive.
Objectives
To segment supply markets for a spend category and to
position spend according to
sourcing complexity
relative spend and profit impact
To identify appropriate procurement strategy options
Relevance
Effective procurement strategy relies on an accurate
understanding of the organisation’s position in the market.
Portfolio Analysis enables:
the understanding and challenging of the organisation’s market position in each area of segmented spend
the determination of reasons why the organisation is so
positioned
the formulation of action plans to minimise market risk
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3
2.1
Current position
planning of actions to reduce supply chain risk
an assessment of where the balance of power lies
timing of events according to market vagaries
the realisation that action planning and extensive
Conditioning (see section 3.2) may be required in order
to move out of the Strategic quadrant and that this can
sometimes takes years to achieve.
A single supplier may provide a product mix across all
quadrants, for example capital plant (Strategic), essential
spares (Bottleneck), consumables (Routine) and maintenance
control (Leverage). Hence, the approach adopted must be at
the category level, otherwise the buyer–supplier relationship
could be distorted, with all products viewed as Strategic.
Portfolio Analysis should be considered alongside the Seller’s Perception Matrix (see section 2.2) to provide a 360° view and
to determine areas of misalignment; for example, a Bottleneck
category alongside a supplier’s view of the customer as a Nuisance with no contractual protection of a termination clause
presents a high-risk situation.
The data arising from the Portfolio Analysis are objective and
can therefore be helpful in gaining from both management and
customers support for proposed change.
When to use
Portfolio Analysis provides essential information to underpin
recommendations for the development of the category strategy.
It should be used as part of the assessment of the current
position, along with the Seller’s Perception Matrix and
Relationship Positioning (see section 2.3).
The Tool
The analysis determines the current status and indicates the
appropriate future supply position, allowing the development of
optimal strategic options which in practice reflect the analysis
output. Thus an action plan can be formulated for each spend
category and appropriate relationships with suppliers can be
adopted, i.e. the minimum relationship required to deliver the
desired results.
1. Portfolio segmentation
The calculation of expenditure is usually simple and quick,
assessing the organisation’s spend with each supplier and for each category relative to the total spend. A Pareto analysis is
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2.1
Current position
required to determine the level of spend relative to other
categories. A Pareto is achieved when approximately 20% of
spend categories give rise to approximately 80% of the spend.
The relative level of difficulty or risk of the supply market is
assessed for each category and graded from high to low. Then
each item can be added into the Portfolio Analysis matrix in the
most relevant quadrant.
High
Strategic
Routine
Bottleneck
Spend impact
Leverage
Low
Easy
Difficult
Sourcing
complexity/risk
The characteristics of each quadrant are distinct and thus the
quadrants can be considered as different types of marketplace.
Leverage
Example: Packaging
Strategic
Example: Outsourced services
•Low risk, high expenditure
•High risk, high expenditure
•Highly competitive market
•Many suppliers
•No internal dependency on
particular supplier
•Limited supply base
•design
•supplier behaviour
•lack of suppliers
Routine
Example: Plastic cutlery
Bottleneck
Example: Specialised software
•Low risk, low expenditure
•High risk, low expenditure
•High variety of products
•Competitive market
•Often related to spare parts
•Often products protected by
patent or copyright
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5
2.1
Current position
The balance of power for the spend category in the market
is reflected by its position in the matrix. In the Bottleneck and
Strategic quadrants, where sourcing complexity or risk is high,
the supplier has more power, whereas power lies with the buyer
where the sourcing complexity or risk is low, i.e. the Routine
and Leverage quadrants.
2. Challenging existing paradigms
Factors affecting sourcing complexity or risk can be either
external or internal.
External influences
Supply chain
Exclusive channels
to market
Tooling ownership
Intellectual
property issues
Switching costs
Make-or-buy
options
Capacity across
supply chain
Too many steps
Number of suppliers
to ensure supply
continuity
Industry curve
Level of market
competition
Creation of
competition
Potential new
entrants
Available
substitutes (now
and future)
Acquisition or
integration
Monopoly or
dominant suppliers
Supply versus
demand, local
versus global
Obsolescence
Market influences
(Porter's Five
Forces)
Political: tariffs,
government
interventions
Economic:
exchange rates
Social: ethical
issues
Technological:
supplier with
competitive edge
Legislative: new
regulations
Environmental:
carbon footprint
Supplier collusion
Aggregation
In considering the effects of these external influences on the
procurement strategy, the buyer should focus on the following
key questions.
What is the balance of power between the buyer and the
supplier(s) for each category spend?
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2.1
Current position
How can the balance of power be shifted towards the
buyer?
What would be the optimal balance between decreasing
costs, increasing value and managing risk?
What are the key priorities for an action plan?
Can new entrants be introduced to the market?
Is it possible to influence the end-customer?
Is an event a short-term anomaly or a new baseline?
Can elements of the supply chain be influenced in order to
perform differently?
Are alternative suppliers necessary to eliminate capacity
issues?
Internal influences
Stakeholders
Specifications
Contract options
Termination rights
Understanding of
items to be
procured
Product/service
designed around
supplier's solution
Undue preference/
prejudice towards
a supplier
Use of test facility
by supplier to
launch new
products
Tunnel vision
clouding the bigger
picture
Intellectual
property ownership
Failure of recent
supplier switch
Internal design
capability
Need for egos to be
overcome
Propensity to
assume risk for the
design
Lack of clarity
about total cost of
ownership
Business Needs
versus Business
Wants
Refusal to deal with
particular suppliers
Removal of brands
and trademarks
from specification
Knowledge of
standards
Customer/industry
requirements
Prevention by
framework
agreements of use
of alternative
suppliers
Understanding of
internal costs of
manufacture
Tendency to
procure domestic
products
Elimination of
suppliers through
pre-qualification
Supplier’s reluctance to accept
particular clauses
e.g. payment terms
Attractiveness of
organisation to
suppliers
Caps on the
contract term
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2.1
Current position
The focus around internal influences on the sourcing strategy
should be:
how much time is spent on issues within each matrix
quadrant?
does the category spend justify the time and effort
involved?
what additional skills would enable greater control to be
applied?
what changes within the organisation would be beneficial
to the management of this category spend?
does the current behaviour of the organisation accurately
reflect the Portfolio position?
Internal difficulties can be managed or resolved by,
for example:
increasing the awareness and understanding amongst
stakeholders of the difficulties and of their own role
engaging stakeholders in the resolution
developing creative options (outsourcing, buying from
multiple suppliers, longer-term contracting, joint ventures)
challenging the reasons why change is not possible
ensuring that the research accurately reflects reality.
3. Identification of appropriate procurement techniques
Each of the four quadrants is approached with a different
procurement strategy as they represent different types of
marketplace.
Spend impact
High
Low
Minimise
price
Avoid
long-term
relationships
Seek
competitive
advantage
Cultivate
relationship
Obtain best
deal
Aggregate
spend
Secure
supply
Minimise risk
Low
8
Sourcing
complexity/risk
High
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2.1
Current position
Movement is possible and often appropriate between certain
quadrants by adapting the procurement strategy.
Move to another quadrant
Routine
Leverage
Strategic
Bottleneck
Move to Leverage: Move to Strategic: Move to Leverage: Move to Routine:
 Aggregate
 Harness
suppliers
supplier
 Make package
capability
more attractive  Ensure that
to the market
relationship is
aligned
 Ensure delivery
of extra value
 Develop new
suppliers
 Remove entry
barriers
 Review
specifications
 Unsettle
current
supplier
 Remove
dependency
 Make-or-buy
decision
Aims, actions and approaches must be in line with the quadrant
position. The techniques proposed should also reflect the
organisation’s own objectives and its perception by suppliers.
Aims
Routine
Leverage
 Effective use of
 Effort
buying power
minimisation,
 Maximisation of
efficiency
specifications
maximisation
and
 Decrease in
performance
number of
 Minimisation of
suppliers
unit price
 Simplification
 Avoidance of
of requisition
inadvertent
process
move into the
 Standardisation
Strategic
 Clustering and
quadrant
moving into
 1–2-year
Leverage
aggregation
opportunities
Strategic
Bottleneck
 Achievement
of competitive
advantage
 Decrease in
total cost of
ownership,
continuous
innovation
 Consideration
of joint
ventures
 Commitment
relationships
 Obtain
competitor
intelligence
 Guarantees of
product/plant
availability
 Consideration
of make-orbuy options
and alternative
sourcing
solutions
 Removal of
criticality
 Substitution
 Forecasting
and modelling
to assess
dependencies
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2.1
Current position
Actions
Routine
Leverage
Strategic
Bottleneck
 Use of
e-sourcing
tools (e.g.
e-auctions)
 Product
standardisation
(ranges,
specifications)
 Inter-divisional
volume
aggregation
and data
sharing
 Simplification
of procurement
process (e.g.
introduction of
blanket order/
release
process)
 Automation of
communication
s with suppliers
 Outsourcing of
the spend;
collaborative
procurement
 Use of
catalogues
(preferably
e-catalogues)
if appropriate
 Use of
extensive
Conditioning
 Tactical and
firm/combative
negotiation
 Use of a wide
range of
techniques
 Use of
e-sourcing tools
(e-auctions)
 Unpredictable
behaviour
(short-/
long-term
contracting)
 Frequent
changes to
supplier/
category
 Rotation of
categories
 Unilateral
rejection of
price increases
 Application
of simple cost
analysis
 Continuous
market
monitoring
 Establishment
of long-term
relationships
framed by
appropriate
termination
clauses
 Sharing of
resources
(money,
people,
technology)
 Clear
understanding
of supply chain
and
opportunities
 Absence of
threatening
behaviour
 Application of
cost modelling,
open-book
costing
 Performance
measurement
by efficacious
means
 Use of
principled price
clauses and
negotiations
 Development
of suppliers
to expand the
market;
approval of
alternative
sources
 Application of
Risk and
Vulnerability
Analysis
 Extensive
sourcing
activity
 Extension of
notice periods
 Knowledge of
substitutes
 Application of
Supply Chain
Analysis
 Negotiation of
long-term
agreements
 Monitoring of
the market and
suppliers
 Use of frontend package
pricing,
contracting
options
 Application of
Specification
Challenge
 Reassessment
of customer
needs
 Consolidation
with Leverage
items to
improve
leverage
 Inventory
generation
 Testing of
alternatives
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2.1
Current position
Approach
Routine
Leverage
Strategic
 Absence of
 Participation in
 Task
long-term
joint ventures,
orientation,
contracts
partnerships,
simplification
 Blanket orders
mutual
 Limitation of
exclusivity
buyer–supplier  Development
of new
arrangements
relationships to
approaches
 Establishment
no more than
 Avoidance of
of long-term,
Approved
long-term
detailed
 Minimisation of
relationships
agreements
contractual
commitments  Maintenance of  Shared vision
simplicity
 Provision of
 Maximisation
management
of discounts
information by
suppliers
Bottleneck
 Use of detailed
financial skills
 Influencing of
Business
Needs
 Creative
options
generation
 Establishment
of closer
buyer–supplier
relationships
 Development
of sophisticated
stakeholder
engagement
models
4. Development of an action plan
The sourcing strategy should include actions and approaches
most suitable for the product in the light of the Portfolio
Analysis, for example:
cost reduction to achieve targets
cost containment of price increases to achieve savings
targets
optimisation of time and effort through prioritisation
introduction of effective management techniques
where the sourcing complexity/risk is high, i.e. the
Bottleneck and Strategic quadrants, identification of the
reasons for this, but more importantly the estimation of the
time required to remove the risk; for example, how long it
might take to introduce and test a new specification
for Bottleneck and Strategic quadrants, creation of an
advantage for the organisation
for Routine and Leverage quadrants, exploitation of buyer
power.
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11
2.1
Current position
Notes
It can take the buying organisation considerable time and
effort to move from the Bottleneck or Strategic quadrants.
Suppliers can push buyers into the Strategic or Bottleneck
quadrants through the creation of ‘internal market difficulties’;; for example, closing the specification or encouraging relationship-driven preference and prejudice.
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