Suppliers: Squeeze ‘em or Friend ‘em Part 1

Oct 7, 2014 by Tim Schmidt

Identifying the right supplier management strategies for Facility Managers… and everyone else

I was recently invited to speak at the International Facility Managers Association (IFMA) conference in New Orleans about Supplier Management Strategies. One aspect of the presentation that really resonated with facility managers was the idea of applying the correct procurement strategies to different types of suppliers. Many attendees shared that their organizations tend to apply the “friendship” or the “squeeze-‘em” approach to all suppliers. In my experience, facility managers are not unique in this approach. All organizations need to recognize that each strategy is appropriate for some types of purchases, to use the same strategy for all procurements results in higher costs and increased risk.

For example, if we squeeze suppliers of proprietary products or service for the absolute lowest price, when demand peaks, you may find yourself without any supplies. Conversely, if we give the renovation of the facility to our maintenance company without adequate competition, we may end up paying higher prices and exposing ourselves to unnecessary risks of non-performance.

To implement an effective supplier strategy, we must categorize suppliers then apply the appropriate procurement method for each category. In this blog, I will explain how to categorize suppliers and introduce the appropriate procurement strategies for each. In a subsequent blog post, I will detail the tactics presented for each category of suppliers.

Categorizing Suppliers

A cornerstone to the ideas presented here are based upon the work of Peter Kraljic, who published a famous article about strategic sourcing in the Harvard Business Review in 1983. In his article, he presented his Portfolio Purchasing Model that classifies spend into four categories based upon financial and risk impact.

Evaluating Financial Impact

Financial impact goes beyond the price paid. The classic example is for a tax accountant; while engaging a tax accountant can be relatively inexpensive, they can have a huge financial impact if they provide poor tax advice. In evaluating cost, identify the hidden costs of poor performance and factor in the expected product life and related costs.

Evaluating Risk Impact

In every transaction, there is a financial risk of losing the money paid. To evaluate risk we need to identify and consider other types of risk such as:

  • Reputational risk: Will they make us look bad and cost us business?
  • Strategic risk: Will we be a strategic disadvantage? (i.e. high cost structure)
  • Dependency risk: Will we be dependent upon the supplier or product? (i.e. cost of switching is high)
  • Physical risk: Are people’s lives or health affected or put at risk?

Facility managers should identify the type of risks and classify them by the risk represented.

Types of Suppliers

Using these criteria, categorize suppliers and/or spend into one of four categories.

Routine: Suppliers with low financial and risk impact. The classic example is office supplies.

Bottleneck: Suppliers with low financial impact and high risk impact. These are suppliers of specialized products or services that you depend upon and have few alternatives. This usually applies to proprietary products or services.

Strategic: Suppliers of high risk and high cost. This applies to suppliers that the company is highly reliant upon. Examples include Starbucks which is highly reliant upon coffee suppliers and software integrators that are reliant upon software suppliers. Few facility managers have suppliers that rise to this level.

Leverage: Suppliers with high financial impact but low risk. Typically capital project suppliers are in this category and could include construction or new equipment.

Below is a graphical illustration of the categories of suppliers in the Portfolio Purchasing Model Portfolio Purchasing Model

Kraliji_portfolio_purch_model

Figure 1 Kraljic’s Portfolio Purchasing Model

Procurement Strategies

Once you’ve categorized your suppliers, you can start applying the appropriate strategy for each segment. Kraljic’s Portfolio Purchasing Model identifies four procurement strategies.

  • Blanket Purchase Order
  • Secure Supply (+ Find Alternatives)
  • Partnerships
  • Competitive Bidding

The graphic below illustrates how each is applied to each supplier category.

Kraljic_purch_model_2

Figure 2 Applying the four procurement strategies in Kraljic’s Portfolio Purchasing Model.

Notice that the “friendship” (Partnership) approach really only applies to your Strategic Suppliers and the “squeeze ‘em” (competitive bidding) approach only applies to Leverage Suppliers. To use the same procurement strategy for all suppliers will increase costs and introduce unnecessary risks. In my next blog, I will explain each procurement management strategy and suggest different tactics for implementing them.