CPSM Blog

Risk-value matrix - a modified Kraljic model?

Several considerations go into financing and leveraging strategies for purchasing. These include considering your cash flow because you have to pay for what you order,interest rates, setting payment terms,understanding commodity markets, currency markets for international purchases,tax laws  etc.

An understanding of market conditions is of strategic importance for the purchaser. For example depending on the product life cycle of the product in the buyer's organization the buyer must adjust her strategy. In the growth stage scalability with suppliers is important whereas exit and scale down in the decline stage is more important in the decline stage. The right time for focusing on lower cos and lean initiatives is when the buyer's organization's product is at the maturity stage.This was a rather cool  way of putting it - I thought!

Another interesting discussion, though very brief,  was the Risk/value matrix. This matrix seems to be a development of the Kraljic Model  . Here is a diagram of the modified model. Seems to make sense if you think about it. Download risk_value_matrix.doc

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Understanding costs and analyzing suppliers finances and the buy vs. lease

This section though large (20 pages) is broadly concerned with understanding what the total costs are and understanding the financial position of the supplier and the kind of contract one is getting into.

Thus it is not price alone that is important but the TCO (Total cost of ownership) these goes beyond the IT concept of TCO  and cover unit total cost,life-cycle cost, landed cost and total cost of performance for services.

Understanding the financial stability of the supplier is critical and therefore reading the supplier's balance sheet can give asense of the stability of the supplier and supply. Finally it's important to understand the lease vs buy considerations particularly for equipment as is the clarity on legal accounting issues like Uniform Commercial Code 2A, FASB 13 and SOX though is examined in more detail in a later section.

Why spend analysis is a challenge

This entire section is rather brief but very interesting. Before ERP systems became common it was hard to find data on spend in organizations. This data could be sitting in accounts payable, material requisitions, purchase orders or anywhere! Unless you have all the data by category - you cannot analyze it and you cannot advise or decide where you must focus attention with appropriate value analysis and negotiation.

Data mining modules in ERP systems like SAP and Oracle make it possible to retrieve and analyze  spend data. In addition other supply management softwares like Ariba,i2 also facilitate tracking your spend. In fact major consultants like AT Kearney and Deloitte offer services for analyzing spend.

How do you set up cost management program strategies?

Cost savings is either reducing historic costs or avoiding additional cost increases through the use of strategies that are clear, sit well with realities of the organizations market, economic environment etc.
Value analysis and engineering is part of these considerations. For example what exactly adds value (to the onward activity of the buyers organization) needs to be understood by the supply manager. For example, the seller might be emphasizing how great their service is because their sales/service executive makes a plane trip every 3 weeks to see your production folks. This routine trip - may or may not to adding value to your colleagues in production but you can be sure that the travel costs are added to the suppliers price! Solution: make a trip every two months - just call or email otherwise.

Cost modeling is another interesting idea of this section.  Modeling involves creating a formula - a regression  or just a spread sheet that allows you to plug in changing variables and see what the impact is on your purchased product. Thus, if  you buy a product or service that depends on oil prices - and if you have modeled what the per barrel price does to the costing of your buy (say freight) then you know that today you'd need to plug in $100/barrel and see exactly what it does to your freight .....

Budget and relationship with strategy and operations plans

The Cost and Finance section moves to considerations of budgeting including steps,purposes and types of budgets. I liked the way the strategic plan of the organization is connected to the operations and then supply management budget at the implementation level.

For example, if the Board and CEO decide to increase profits by  say 10% in a particular segment, Sales and Marketing have to find ways to do that and then Finance has to find the money but finally this has to be implemented at the department or lower level. Here extra people (HR is involved) might need more desks, manufacturing would need more materials and all of these have to be put in as costs with the inputs of supply management. In fact, the connection of the supply manger's work with the aim of the organization (its strategic plan) is something that is critical to understand. You get to know the broader purpose of your daily work...