Is this a right course of action?

A procurement team is categorising their purchased items into four quadrants of Kraljic’s supply chain portfolio matrix. They realise that there are some low-value items which come from very few suppliers in the market. The organisation is critically dependent on these suppliers. The team plans to reduce the dependence by finding alternative sources.

Is this a right course of action?
A . Yes, the organisation needs to reduce the supply risks
B. No, the organisation should run competitive biddings to exploit the competition
C. No, there is no way to escape this dependency
D. Yes, this action will dramatically increase the supplier’s bargaining power

View Answer

Answer: A

Explanation:

According to Kraljic portfolio matrix, the low-value items with high supply risk are bottleneck items.

The purchasing strategy that is commonly recommended for these products is primarily based on acceptance of the dependence and reduction of the negative effects of the unfavourable position. An alternative strategy suggested by purchasing practitioners is to find other suppliers and move towards the non-critical quadrant.

– Accept dependence, reduce negative consequences: The main focus of this strategy is to assure supply, if necessary even at additional cost. Examples of this strategy are keeping extra stocks of the materials concerned or developing consigned stock agreements with suppliers. By performing a risk analysis firms can identify the most important bottleneck products and consider the implications. A possible action for dealing with unexpected bad dependence positions for certain products is to employ contingency planning.

– Reduce dependence and risk, find other solutions: This strategy is geared towards

reducing the dependence on the supplier. The most common way to achieve this is to broaden the specifications of the product or to search for new suppliers.

The procurement team in the scenario has selected reducing dependency by finding

alternatives. This is a right strategy for bottleneck item.

Reference:

– CIPS study guide page 82-84

– Purchasing strategies in the Kraljic matrix―A power and dependence perspective, Marjolein C.J. Caniels, Cees J. Gelderman

LO 2, AC 2.1