Supply positioning model is a strategic procurement tool that helps organizations categorize and prioritize their procurement activities based on strategic importance and risk associated with each item.
The model was first introduced by Peter Kraljic in his 1983 article, "Purchasing Must Become Supply Management," published in the Harvard Business Review.
Since then, the model has become a widely used and respected approach for optimizing procurement processes and achieving a competitive advantage.
The main objective of supply positioning model is to enable organizations to make informed decisions about which procurement activities to prioritize and focus on, based on their potential impact on the organization's overall performance, risk exposure, and strategic goals.
By identifying the most critical and high-risk items in the procurement process, businesses can allocate resources more effectively, strengthen their supply chains, and ultimately, improve their bottom line.
The supply positioning model is particularly useful for organizations that deal with a large number of suppliers, items and procurement activities. By providing a systematic and structured approach to procurement, the model can help businesses identify opportunities for cost savings, process improvements, and risk mitigation, all while ensuring that they remain focused on their strategic objectives.
Key Components of the Supply Positioning Model
The supply positioning model is built around three key components: the supply matrix, the classification of items, and the strategic action plan.
The supply matrix is a visual representation of the supply positioning model and serves as its foundation. The matrix is divided into four quadrants, each representing a different category of procurement item based on its strategic importance and risk:
- Non-Critical Items (Low Importance, Low Risk): These items have low strategic importance and risk, and include common, low-cost goods and services that are readily available from multiple suppliers. Examples include office supplies, cleaning products, and basic maintenance services.
- Leverage Items (High Importance, Low Risk): These have high strategic importance but carry low risk, and often represent significant opportunities for cost savings and efficiency improvements. Leverage items have a competitive market with multiple suppliers. These items can be bulk raw materials, commodity products, and standardized components.
- Strategic Items (High Importance, High Risk): These items have both high strategic importance and risk and are critical to business success. Strategic items may be unique or specialized, with few alternative suppliers, and may require significant investment in supplier relationships and long-term contracts. These items include specialized equipment, proprietary technology, and partnerships.
- Bottleneck Items (Low Importance, High Risk): These have low strategic importance but high risk and may pose potential disruptions to the organization if not managed effectively. Bottleneck items are typically characterized by limited supply options, long lead times, or potential quality issues. Examples are rare raw materials, specialized components such as semiconductors, and services with limited availability.
Also read: Is the Kraljic Model of Procurement Broken?
Classification of Items
To effectively implement the supply positioning model, organizations must first classify each procurement item based on its strategic importance and risk. This process involves evaluating factors such as the item's impact on the organization's revenue, profit margins, and competitive advantage, as well as the availability of alternative suppliers, the potential for disruptions or delays, and the level of investment required to secure the item.
Once items have been classified, they can be plotted on the supply matrix, allowing organizations to quickly identify which items fall into each quadrant and prioritize their procurement activities accordingly.
Strategic Action Plan
The final component of the supply positioning model is the development of a strategic action plan based on the classification and prioritization of procurement items. This plan outlines the specific actions and initiatives that the organization will take to optimize its procurement processes, manage risks, and maximize value for each category of item. The strategic action plan may include actions such as renegotiating contracts, consolidating suppliers, investing in new technologies, or implementing process improvements.
Guide to Implementing the Supply Positioning Model
- Gather and analyze data: Collect data on your organization's current procurement activities, including information on suppliers, items, costs, lead times, and quality. Analyze this data to gain a comprehensive understanding of your organization's procurement landscape and identify areas for improvement.
- Classify items: Using the criteria outlined in the previous section, classify each procurement item based on its strategic importance and risk. Be sure to involve input from relevant stakeholders to ensure a comprehensive and accurate classification.
- Plot items on the supply matrix: Once items have been classified, plot them on the supply matrix to visualize their distribution across the four quadrants. This will help you identify patterns and trends and prioritize your procurement activities accordingly.
- Develop a strategic action plan: Based on the results of your classification and prioritization, develop a strategic action plan that outlines specific actions and initiatives to optimize procurement processes, manage risks, and maximize value for each category of item.
- Implement the plan: Begin implementing the strategic action plan, ensuring that progress is monitored and adjustments are made as needed. This may involve renegotiating contracts, consolidating suppliers, investing in new technologies, or implementing process improvements.
- Monitor and measure results: Regularly monitor and measure the results of your strategic procurement efforts, using key performance indicators (KPIs) and other metrics to track progress and identify areas for further improvement.
Challenges in the Supply Positioning Model
- Incomplete or inaccurate data: The effectiveness of the supply positioning model depends on the quality and accuracy of the data used to classify and prioritize procurement items. Incomplete or inaccurate data can result in misaligned prioritization, leading to suboptimal resource allocation and decision-making.
- Resistance to change: Implementing the supply positioning model may require significant changes to existing procurement processes, systems, and culture. This can create resistance among stakeholders and make it difficult to achieve buy-in and support for the initiative.
- Complexity of the procurement landscape: The model can become more challenging to implement and manage as the complexity of the organization's procurement landscape increases, such as when dealing with a large number of suppliers, items, and procurement activities.
The supply positioning model is a powerful framework for optimizing procurement processes, managing risks, and achieving a competitive advantage. By categorizing and prioritizing procurement items based on their strategic importance and risk, organizations can allocate resources more effectively, strengthen their supply chains, and improve their bottom line.
Learn more about how to optimize your procurement with GEP.