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CONTENT STRUCTURELearning ObjectivesPurchasing portfolio analysisBottleneck products

Monopolistic marketLarge entry barriersEnsure SupplyPerformance-based partnership

Strategic products

Critical for productDependence on supplier

Performance-based partnershipRoutine products

Large product variety

Systems contractingLeverage productsAlternative sources of supply availableSubstitution possibleExploit purchasing power & minimize costCompetitive biddingSupply riskHighLowLowHighPurchasing valueSOURCING STRATEGY: PORTFOLIO APPROACHPortfolio approach developed by Krajilic classifies items based onimportance of the item in terms of value of purchase (high versus low)and associated supply risk in the supply market4SUPPLY RISKREPRESENTATIVE DATA INPURCHASE PORTFOLIO MATRIXPur. vol. 5 - 8%% of parts 10 15%Pur. vol. 35 - 40%% of parts 2 5%Pur. vol. 15 -25%% of parts 80-85%Pur. vol. 35 40%% of parts 2 5%Low High Purchasing valueSupply riskHigh Low (Routine Products)(Bottleneck Products)(Strategic Products)(Leverage Products)ROUTINE PRODUCTSROUTINE PRODUCTSLEVERAGE PRODUCTSSTRATEGIC PRODUCTSBOTTLENECK PRODUCTSPURCHASE PORTFOLIO MATRIXPURCHASE PORTFOLIO MATRIXRECONFIGURATION OF SUPPLY BASERECONFIGURATION OF SUPPLY BASEAn example of a three tier system a) traditional structure b) tiering in suppliersAuto assemblerSupplier 1Supplier 2Supplier 3Supplier 25Auto assemblerSeat SystemSeat sub-system 1Seat sub-system 2Seat sub-system 3Seat sub-system 25Component supplier 2Component supplier 1Component supplier 3Component supplier 25....(a)(b)Tier IITier ITier IIIIII TIER SUPPLY SYSTEMEXAMPLE VENDOR RATIONALIZATION BY MARUTI UDYOG LIMITEDGiven the scale of internal operations, how important are the differential economies of scale between internal operations compared to supplierExtent of control and coordination problems in making part in-house- Presence of relationships-specific assets- Extent of coordination problems with external supplier- Possibility of leakage of strategic informationAdditional cost due to lower economies of scale in internal supplyAgency cost of internal control and coordinationTransaction cost of market exchangeBuyNoMakeYes+