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CHAPTER 4
PROCUREMENT AS A SUPPORT AND STRATEGIC FUNCTION WITHIN COMPANIES
Users of the matrix segment their purchase requirements across two dimensions,
i.e., the number of active suppliers in the marketplace and the value of the good
or service to the buying organisation. For some requirements an active supply
market might consist of three or four suppliers. For other items there may be
dozens of qualified suppliers. The concept of value also does not have a specific
definition. Value can be a function of total dollars spent on an item, or it could
be a relatively inexpensive item that has a disproportionate effect on product
or service performance.
Perhaps the most important reason for using a tool such as the portfolio
matrix is its prescriptive nature. Once a supply manager or team quantifies
the total spend for each commodity or category, the good or service can be
positioned within the most appropriate quadrant. This will help identify (1) the
type of supplier relationship to pursue, (2) whether to engage in a win-lose or
win-win negotiation and relationship approach, (3) whether to take a price or
cost analytic approach, (4) the types of supply strategies and approaches that
should work best given the placement of an item, and (5) how best to create
value across different purchase requirements.
The portfolio matrix contains four quadrants where we position or place goods
and services. Part of the value that supply managers bring is an understanding
of their organisation’s purchase requirements and then knowing how to pursue
an appropriate supply strategy. There is also value in understanding how to shift
items across quadrants to realise even greater value.
4.4.2.1 Transaction Quadrant
The goods and services in the transaction quadrant have a lower total value
with a limited supply market. Reducing the transactions cost of the purchase is
the primary way for supply professionals to create value here, usually through
electronic systems or procurement cards. Even when an item has many potential
suppliers the cost of comparing sources outweighs the value resulting from the
search. Any price analysis that occurs is cursory due to the low value of the
good or service. In reality, relationships are not even a concern in this quadrant.
The number of suppliers that reside in this quadrant should not be a major
concern to supply managers. It is simply not worth the effort to get bogged
down with transaction items and suppliers. Reducing the transactions cost of a
purchase is the primary way to create value in this quadrant.
4.4.2.2 Market Quadrant
The market quadrant includes standard items or services that have an active
supply market, lower to medium total value, many suppliers that can provide
substitutable products and services, well-defined specifications, and low supplier
switching costs. Commodity chemicals, fasteners, corrugated packaging, and
other basic raw materials that do not have an unusually high dollar value are