Procurement portfolio

The core idea is to minimize supply risk and make the most of the buying power, where appropriate (Gelderman and VanWeele 2005). It classifies products in two dimensions profit impact and supply risk with two measures (high and low) for each dimension, as shown in Fig. 4.9. 

Consider restructuring purchasing strategies with a third dimension market volatility (Chakravarty 2010), in the context of Kraljic (1983). While for a low market volatility scenario Kraljic s framework is appropriate, it would need modification for high market volatility. For each of the four scenarios shown in Fig. 4.9, we discuss the implications of high market volatility as in Fig. 4.10. 

High purchase High unit cost High unit cost 

Scenario A High Unit Cost and Stable Supply 

The buyer would have several options to counter market volatility purchase-postponement, buy-back contract, and use hedging options such the option-to-purchase . The buyer gains by postponing purchase of the items to a time when demand becomes known. This would require the supplier to hold inventory that 

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Jammemegg W, Paulitsch M (2004) Portfolio Procurement Strategies and Speculative Inventory for Risk-Hedging Supply Chains. Proceedings of the Eu-rOMA Conference INSEAD Fontainebleau 323-332. 

The networked environment on the Internet offers a possibility of allowing such portfolio-based transactions. In essence, the desired auction mechanism must unbundle and rebundle offers and bids presented by both sellers and buyers. A prototype of such a mechanism is a portfolio trading algorithm developed for the investment community (Fan et al. 1999 Srinivasan et al. 1999). Its basic setup, however, can extend into procurement process in manufacturing as well as bundle trading in physical products tmd persontil services. 

HP has developed a successful portfolio approach to procurement. It is similar in concept to the portfolio approach in investment, where an investor buys several different stocks in order to reduce the risk of capital loss. HP emphasizes multiple sources for parts and different geographical regions for suppliers in order to reduce the supply and demand risks. Instead of one or two sources with long-term contracts, HP uses a portfolio of several options as follows ... 

A winning procurement strategy for products with high demand variability is to buy globally from fhe lowesf cosf counfry and handle demand variability through "spot purchases" from local sources. This is similar to FlP s portfolio strategy to handle supply risk we discussed in Section 7.7.2. 

Nellore, R., Soderquist, K. (2000). Portfolio approaches to procurement analysing the missing link to specifications. Long Range Planning, 33(2), 245-267. 

In this context, Kraljic introduced in 1983 the purchasing portfolio matrix which groups the procured items into four categories positioned alongside the two dimensions ... 

It is evident from Figure 5.4 that although ORP is not so detailed as MRPII the key steps of the process are similar. From the business plan, a sales and operations plan which covers key products and resources needed to deliver the business plan. The monthly sales and operations planning meeting by senior managers approves the master operations plan. The operations team will review the product portfolio, supplier stams and the capacity of own resources, and ensure that purchase orders are raised to procure appropriate resources or services from suppliers. If the capacity of own resources are adequate then an internal control document for the customer order is processed. But a partnership with customers and with suppliers can and will achieve very obvious benefits to... 

Assessing customer preferences, rapid response. Order processing, contract management, satisfying a portfolio of loyal and new customers, managing multiple procurement channels. 

However, not all suppliers are equally capable in all performance dimensions. Individual suppliers must decide what capabilities they would build, given changing customers needs (discussed in Chap. 2). Examples of such capabilities would be lean-processes, collaboration, procurement, agility, information transparency, responsibilities as tier-1 supplier, and innovation. The buyer, therefore, must carefully build a portfolio of suppliers that maximizes the fit between what it needs and what the suppliers can provide. 

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