August 2022 Volume 4

OPERATIONS & MANAGEMENT

And finally, the top right quadrant is deemed Strategic. Spending levels in both right-side quadrants can be similar. Still, the differentiator for the upper right Strategic quadrant is the level of integration and collaboration that can (and must) be achieved between buyer and supplier to generate a competitive advantage while negating the risk. The quadrant tool is very visual – first, create bubbles that represent the size of the commodity in dollars relative to other commodities being profiled. Work as a team to float the bubble into the correct position. Position the bubble based on the commodity spending and the level of risk to the company. Bubbles can sometimes straddle two quadrants to a degree. As a sourcing team, step back and look at the result. How you contract for the commodity will differ. How you generate productivity will vary. The length of the agreements you generate will be differentiated based on the quadrant. And so on. Now let's take another quick aside. Nothing says a supplier classified as Competitive will not have a long-running business relationship with the buying company. Buyers must realize that relationships in this context are demanding business relationships, not relationships in the conventional sense. Absolutely nothing stops buyers and suppliers from having enjoyable, fair, cordial, and even friendly dealings, but leverage is lost when a buyer forgets the demanding nature of relationships in the business world. For commodities in the Strategic Quadrant, productivity is generated primarily from value analysis and engineering. Agreements tend to be longer. In our group of companies, Strategic Alliance suppliers can enjoy commitments that exceed a decade. Both buyer and supplier acknowledge the importance of committing resources to nurture the business relationship. Benefits are shared, knowledge is exchanged, and the corporate direction of the companies is also openly discussed. How each fits into the other's business strategy may be confidential to the general marketplace, but it is well-known to both the buyer’s and supplier’s executives. Note that buyer and supplier executives are active in the best run sourcing programs in the Strategic quadrant! Suppliers living in the this quadrant are uniquely eligible for themost significant business acknowledgment a customer can offer – supplier involvement in the buying company's new product development. There is likely a question: Can a supplier be categorized as Competitive but then move up in the matrix to inhabit the Strategic quadrant? The answer is yes, but it is rare. However, the stories of where this has been successful are exciting. In most cases, it will involve the supplier sharing cost of manufacture detail and an extreme level of goal setting between the companies. Remember, whatever becomes the way of working must transcend what would otherwise be achieved through competition. And again, the buyer can ill-afford to lose a step with the marketplace in an actual Competitive quadrant commodity purchase. But sometimes, a solid commitment for a buyer's volume in a competitive spend category can enable the supplier to reach another level – possibly justify an investment or hit a critical mass that promotes their economies of scale. There are no hard and fast rules other than applying business creativity to create a competitive advantage!

A recap is in order – what are the objectives for sourcing strategy in each quadrant? • Administrative – The cost of securing these commodities is equal to or can eclipse the cost of the goods or services. Here the focus is on automation of the spend. • Critical –The critical nature of supply overshadows the cost of the materials. In the 'want of a nail' scenario, production stops if an inexpensive but essential product is not on the shelf. The emphasis is supply assurance. • Competitive –There is a natural, inherent competitive flow in these commodities, whether the purchasing company buys the commodity or does not. Buyers cannot afford to lose step with the marketplace. And every possible tool in the toolkit must be used to ensure available leverage gains the best price possible. • Strategic – Included here are higher spend categories that also harbor a more extreme supply risk. Deep thought and strategies are necessary; buyer and supplier tie-ups are more complex and descriptive. Value engineering dominates productivity generation methodology. The professional fun in this exercise is that companies large and small will benefit. But the categorization of your spending remains the foundational step in any company's sourcing strategy. Vic Venettozzi Vice President &General Manager Consolidated Industries, Inc. Email: Vvenettozzi@consolindustries.com Phone: 203-272-5371 x 273

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