Purchasing Portfolio Procedure

Definition
The process in which the purchased items are assigned to four product categories that indicate
the relationship between their contribution to operating results on the one hand and supplier
risk on the other, within the context of the position of this package with the suppliers, taking
into account that share in the supplier’s turnover and attractiveness of this package and/or the
customer to the supplier are determining factors.

Objective
To arrive at a differentiated purchasing strategy for these product categories and a
corresponding supplier strategy.

Method
The Purchasing Department prepares a Purchasing Portfolio Analysis for each product or
product group. The analysis contains the following items:
 General data
 Product data
 Market data
 Financial data
 Market analysis
 Product positioning
 Positioning at suppliers
 Current purchasing strategy
 Future purchasing strategy
 Evaluation of purchasing results

The first analysis leads to the assignment of items to four product categories:
 Routine products are products that represent little value per unit and for which alternative
suppliers can easily be found. The purchasing policy for these products aims to reduce the
complexity of logistic and administrative operations.
 Leverage products are products that can be obtained from different suppliers, entail limited
supplier risks and represent a high share in the cost price. The purchasing policy aims to
maintain a competitive pricing policy and promotes a “divide and rule” strategy.
 Bottleneck products represent relatively little value and are vulnerable in terms of supply.
In the purchasing policy, the emphasis is on securing the supply of these products.
 Strategic products are products whose supply cannot be taken for granted, for example
because they can only be obtained from a single supplier. They represent a high value per
unit and/or are purchased in high volumes. Long-term cooperation and partnership are the
main features of the purchasing policy for strategic products.

High
 Leverage products Strategic products

Value
Divide and rule Partnership
Routine products Bottleneck products

Simplify Secure supply

Low Supplier risk High

The Value axis represents criteria such as:

• total sales for the category in relation to total purchasing within the division and/or the
total business
• total sales for the category in relation to a main category (e.g. the cardboard category
within the packaging group)
• total sales for the category in relation to total sales for the market concerned

The Supply Risk axis represents criteria such as:

Product-related:
• Financial consequences of non-availability (low/high)
• Quality impact of the category on end product (strategic or not)
• Predictability of internal demand (low/high)
• Product specification (commodity/specialty)
• Actual stage in life cycle (mature/new launch)

Supplier-related:
• Historical performance of the supplier in question (good/bad)
• Free capacity available on the market (much/none)
• Regional risks (stable/unstable)
• Possibility to switch to another supplier (easy/difficult)
• Complexity of the supply chain (one party/several parties)
• Financial position of the supplier(s) in question (strong/weak)
• Predictability of the supplier’s market (low/high)

The second model concerns the supplier matrix and charts the dependency of, as well as the
attractiveness to a particular supplier. Four categories are distinguished:

• Nuisance : If the package represents only a small part of the supplier’s sales and
the customer or the package are not particularly attractive to that supplier, he will not
spend too much time on us and can afford, or even wants, to lose us.
• Develop : If the customer/the package is quite attractive but represents only a
small part of the supplier’s sales, he will try to further develop the package/the customer,
increase the number or look for alternatives.
• Exploitable : In this case the package is relatively unattractive, even though it
represents a considerable share in the sales. The risk is that the supplier will try to impose
very high prices (exploitation).
• Core : In this situation the package is both significant, in terms of sales, and
attractive. The supplier will go to any lengths to pamper and defend his customer and
possibly to further expand his share.

High Develop Core

Develop Cherish/expand
Attractive-
ness
Nuisance Exploitable

Ignore Exploit

Low Share in supplier’s sales High

The Attractiveness axis represents criteria such as:

• Overall image of the customer (attractive/not attractive)
• Willingness of the supplier to share knowledge (pro-active/not pro-active)
• Exclusive development programmes between customer and supplier
• Logistic performance of customer (good/bad)
• Commercial performance of customer (good/bad)
• Term of the contract (long/short)
• Growth potential for the supplier (existent/non-existent)
• Margin to be gained by the supplier on the product in question (high/low)
• Potential spin-off from other categories within customer (high/low)

The Share in Sales axis represents such criteria as:

Financial:
• Share of customer in supplier’s total sales (substantial/small)
• Degree of competition on the supplier’s market (low/high)
• Purchasing power (substantial/small)
• Selling power (substantial/small)
• Potential new entrants on the supplier’s market
• Potential pressure from substitutes on the supplier’s market

By merging the two models a differentiated purchasing strategy is obtained. This strategy can
then be used to formulate the policy per individual purchasing package.

Develop Core Develop Core

Encourage cost Intensify Cooperate Enter into
reduction cooperation closely strategic
partnership

Nuisance Exploitable Nuisance Exploitable

Mismatch. Raise interest High Risk Risk
Go to another by offering Increase Increase
supplier an attractive attractiveness. mutual
purchasing Find an alternative dependence
package
 Leverage Strategic

Routine Bottleneck
Bottleneck
Develop Core Develop Core
Expand Find ways Examine mutual Monitor
purchasing of reducing dependency partnership
package integral costs. Check
Outsource specifications
Nuisance Exploitable Nuisance Exploitable
Go to another Find an Go to another Go to another
alternative. supplier. Try to supplier.
Examine the make the package Monitor price/
supplier’s service more attractive service levels
package