Supplier Plotting – The Ultimate Strategy for Better Deals
In this article, we are going to uncover what supplier plotting means. We’ll talk about how it can impact the procurement process and how companies and organizations can take advantage of their knowledge in supplier plotting.
Once you’re done reading this article, you should have a clear definition of how to use supplier plotting to your advantage.
So, What is Supplier Plotting?
Purchasers often hold the view that their profession is mainly a practical job and therefore should be based on experience. When browsing through the literature on the subject of purchasing anyone will find the possible harvest meager compared to the vast amount on subjects like marketing and sales. It is difficult to point the finger at the reason for this result. Perhaps it is the fact that purchasing has just recently come out of the backroom into the board room. Not long ago purchasing was often considered to be a simple job?
Present purchasing is more and more seen as a strategic tool and the actual placing of an order is just a result derived from the overall company strategy. The last action is simple and could be done by almost anyone, the first activity demands a good insight into all the aspects involved in the markets around the organization. This change is also pushed by the fact that more and more companies are reconsidering what will be part of their core business and what could be outsourced to third parties. Areas with low wages lure production away from the traditional industrial countries and this outsourcing strongly increases the volume of purchasing. Currently, more value is added by suppliers than ever before and this trend shows no tendency of slowing down. Purchasers have to be more aware than ever before that the survival of the organization depends on their ability to make the right decisions. Experience will still be in demand, but a good theoretical basis is also needed to succeed: otherwise, all knowledge could disappear in companies with the departure of a single purchaser.
Kraljic’s article ‘Purchasing must become supply management’ was published in the Harvard Business Review in 1983. Since then this model has been around and has become one of the cornerstones of modern-day purchasing theory. The power of the model is its simplicity.
Kraljic divided his model into 4 phases. The team of procurement tactics simplified them in order to make his model easier to understand for you.
Phase 1: Reflection
Phase 2: Analysis to determine the bargaining position
Phase 3: Plotting to identify the opportunities
Phase 4: Action plan: what to do?
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Hi there! My name is Marijn Overvest, I'm the founder of Procurement Tactics.
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The Kraljic model explained
Kraljic states that new strategies for purchasing could emerge if questions are answered like:
-Does my company use all possibilities for combined purchasing by all departments and divisions?
- Could anticipated disturbances and bottlenecks in supply be avoided? What level of risk is acceptable?
- What is the best balance between costs and flexibility when considering procurement decisions?
- How could cooperation with suppliers or even competitors strengthen long-term relationships with suppliers or could these shared sources be better capitalized?
Kraljic’s 4 Quadrants
We will explain the four quadrants of how to plot your own product, services, or suppliers in the model.
1: Minimize risk / Bottleneck quadrant
These are products with a limited source of supply. Their supply risk is high, but they do not have a major profit impact. This quadrant belongs in a “Supplier’s Market.” Here, the strength is in the hands of the supplier. The market consists of few suppliers that can behave freely and force prices upward. The purchasing strategy we would typically use for these types of items is twofold. Firstly, we need to ensure continuity of supply. Secondly, we need to develop plans to reduce our dependence on this supplier, by adapting our products and investigating alternative products and suppliers.
2: Leverage quadrant
Leverage items have a large financial impact on the organization; however, these items are in abundant supply. They are usually highly standardized and easily available. This quadrant belongs in a so-called “buyer’s market”. This means that buyers possess the balance of power in the relationship and leverage this strength to obtain greater returns. The purchasing strategies we would typically use for these types of items include tendering and competitive bidding.
3: Non-Critical quadrant
Non-Critical items are low risk and have a low-profit impact. They are usually the lowest on the priority list in a procurement strategy. There is a balance of power between buyer and supplier. These items cause the least problems for procurement managers because they can be purchased in different varieties and from different suppliers. By increasing product standardization, much time and money can be saved. Thus, the purchasing strategies we recommend for these types of items focus on reducing administrative costs and logistical complexity.
4: Strategic quadrant
Strategic items have high supply risk and high-profit impact and are bought mainly from strategic suppliers. These items are critical to the business. This power between buyer and supplier is balanced and the goal here is to ensure long-term availability. The company needs to look for a “win-win” negotiation that benefits both parties. The purchasing strategies we would typically use for these items include collaboration and strategic partnerships
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The Point in Supplier Plotting
Procurement managers know that supplier plotting is very important as a means of getting ready for what is to come. For example, one type of material or supply is very difficult to locate or source nowadays, which is why the prices for this type of material are set too high. Your organization procures the supplies anyway because these suppliers are important for the continued operations of your company.
And then a few months later, the same supplies suddenly come out with a price drop because there are too many supplies for too little demand. This is the perfect time to buy in bulk so you can store these supplies and then use them in the foreseeable future.
Supplier plotting relies heavily on the procurement manager’s knowledge of simple supply and demand. When there are too many supplies but little demand, price drops, and the organization can afford to buy or procure more supplies in preparation for a time when demand is heavy, but there’s little to no supply.
This is where prices often tend to soar high during the procurement process, so it’s always a wise move to watch how much your company is spending.
Procurement Process and Supply Plotting
During the procurement process, supply plotting should happen during the sourcing phase. Apart from finding out which suppliers have the best quality for the materials needed, there should also be data concerning the supply and demand of the said material. From here, the procurement manager can decide how to proceed for the next procurement phase.
In the old days, supply plotting is mostly done on paper. But because of the introduction of e-procurement, even supply plotting can now be done automatically. The e-procurement program has data available for supply and demand; from there, data is analyzed and the program will give suggestions on how to plot the supplies, together with choosing the best suppliers for the materials needed.
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