Share |

Focus: Sourcing/Procurement: Feature Article from Our Sourcing and Procurement Subject Area - See All

From SCDigest's On-Target e-Magazine

- July 8, 2015 -

Supply Chain News: Determining Relative Power Positions Key to Sourcing Success, New Book on Procurement Argues

Famous Kraljic and Porter Models have Too Many Shortcomings, Andrew Cox Says

SDigest Editorial Staff

We're still wading our way through a new book from Andrew Cox that offer a brand new - and extremely detailed - model for developing sourcing strategies, but before we attempt a more comprehensive review we'll start with a summary of Cox's thinking on analyzing the relative power positions of buyers and sellers.

Cox is a former academic in the UK, who in 2010 founded the International Institute for advanced Purchasing and Supply (IIAPS), a procurement think tank of sorts. He has co-authored about a dozen books on sourcing and supply chain before writing "Sourcing Portfolio Analysis" on his own, just recently released..

SCDigest Says:

Rather than determining sourcing strategies based on the characteristics of the general supply market, companies need to determine those strategies based on the characteristics of a particular buyer-seller dynamic.

What Do You Say?

Click Here to Send Us Your Comments

Click Here to See Reader Feedback

The book's primary mission is to offer an alternative to two of the leading sourcing models: the highly adopted Purchasing Portfolio Analysis model from Peter Kraljic in 1983, as well as The Five Forces model from Harvard's Michael Porter, first release around 1980.

Indeed, Cox spends two rather long chapters offering a thoughtful critique of both the Krajlic and Porter models, which we hope to summarize in a second and perhaps even third part of this review.

Key to both models is some assessment of the characteristics of the supply market, which could be highly competitive (and therefore to the buyer's advantage) and less competitive, and therefore more advantageous to the supplier. Appropriate sourcing strategies then depend in part on the analysis of that supplier environment for that particular good, commodity or service.

The problem with the Kraljic model, Cox says, is that it doesn't consider the specifics of a real buying company and potential suppliers - the analysis of the market is done at a macro-level, without considering the unique dynamics of a given set of potential buyer-supplier relationships.

"Kraljlic failed to understand that the analysis of the supply market must start with the analysis of the power relationships between the each of the potential suppliers that is capable of supporting them," Cox writes.

The supply market is not an abstract entity that exists in the absence of existing or potential exchange relationships between particular buyers and specific sellers, Cox adds. In other words, the market is not something that can be characterized universally, without the specific dynamics between a given buyer and seller - the power relationships will vary for each combination.

Though not in the book, SCDigest will offer a very simple example of this principle: within a given supply product market, one supplier could be operating a full capacity, while another has excess capacity. A buyer's leverage differs substantially depending on which supplier it is negotiating with.

And the appropriate sourcing strategies should be driven by the nature of the relative power of each side - with the goal of moving to relationships that give the buyer a stronger power position and thus the ability to gain a bigger share of the value generated from the relationship.

(Sourcing and Procurement Article Continues Below)

CATEGORY SPONSOR: SOFTEON

"In reality, what buyers need to understand most of all is which suppliers, of those potentially available in the supply market, are in the least advantage power position," Cox argues.

Further, this analysis of relative power positions becomes the starting point for deciding on the optimal sourcing strategies, Cox adds.

All that leads - of course - to a four box matrix approach for positioning those relationships. And again, this analysis is at an individual buyer-supplier relationship, not the market as a whole. Within a given product market, the positioning will often differ based on individual buyers and suppliers.

That four box matrix is illustrated below. The X-axis relates to supplier power sources, the Y-axis characterizes buyer power sources, in the common high-low positioning scheme.

That leads to four definable quadrants:

Leverage: This is the buyer-dominant power position in which the buyer has all or most of the power resources to leveraged improved value for money from the supplier, which possesses few countervailing power resources.

Alliance: This is the interdependence power position, in which both buyer and seller have many power resources that countervail those of the other party in the exchange relationship. Value will normally be shared.

Market: This is the independence power position in which the buyer and seller have few power resources with which to leverage the other. Market conditions and the relative competence of both parties in bidding and negotiation will normally determine the share of value in these relationships.

Dependency: This is the supplier dominant power position, in which the supplier has all or most of the power resources to determine value for money outcomes and retain the lion's share of the value from the buyer.

So, rather than determining sourcing strategies based on the characteristics of the general supply market, companies need to determine those strategies based on the characteristics of a particular buyer-seller dynamic.

While the graphic above provides key characteristics of each quadrant, Cox and IIAPS have actually developed 165 attributes to determine relative power scenarios. We don't quite room for all of them here.

What's more, Cox says, this analysis needs to be dynamic not static - in other words, buyers should want to move relationships for a given product/commodity to a position in which they have the advantage, not suppliers.

Relatedly, Cox takes some shots at supplier collaboration, which he says is often cited as the ideal in a "win-win" model, when in reality if the buyer has the power position, it should strive to obtain a greater share of the total value.

That's all we'll cover here on this interesting but very deep book. More soon, including how to translate that power analysis into sourcing strategies.

Do you know Brad Holcomb? Any thoughts on his career? Let us know your thoughts at the Feedback button (email) or section (web form) below.

Recent Feedback

No Feedback on this article yet