Portfolio Analysis: The Mapping Tool For Developing Commodity Strategies

Author(s):

William L. Michels, C.P.M.
William L. Michels, C.P.M., Director of North American Consulting, ADR, Ltd., Whitmore Lake, MI 48189, 313/449-2010.
E.J. Hughes, M.A., M.I.P.M., M.I.T.D.
E.J. Hughes, M.A., M.I.P.M., M.I.T.D., Chairman, ADR, Ltd., Bracknell, Berkshire RG12 1RP, 44/344/303078.

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

INTRODUCTION
Portfolio Analysis is a Purchasing planning and decision support tool which helps Business and Purchasing Managers understand the nature of the purchasing portfolio. The portfolio matrix assists purchasing managers in planning the necessary actions to generate profit, reduce risk and secure competitive advantage. This technique will assist in planning the development of the purchasing team and in applying individual competence to the commodity profile.

Portfolio management for Purchasing was developed from the strategic marketing models of the Boston Consulting Group and the Dutch researcher Kraljic. The technique and its application to Purchasing has been refined by ADR International Purchasing Consultants. When this approach is applied correctly, it provides a road map of opportunity, vulnerability and strategic direction. It achieves this by concentrating effort and expertise on the critical activities to be pursued.

THE BENEFITS OF PORTFOLIO ANALYSIS
There are four primary benefits of portfolio analysis:

1. An understanding of the nature of the Purchasing portfolio, along with an improvement of the quality of Purchasing thinking.
   
   
2. An analysis of expenditure in a way that determines the required direction and action needed to influence the supply market effectively for a wide range of purchased goods and services.
   
   
3. The ability to pinpoint the options for actions to be taken to increase Purchasing's profit impact through aggressive cost management, vulnerability reduction and focused buying effort.
   
   
4. A plan for organizational and team development of the purchasing function by:
   1. structuring Purchasing along portfolio lines
      
      
   2. matching competence of the Buyers to the buying task and administrative requirements of the different segments
      
      
   3. developing the competencies required to impact the different supply markets
      
      
   4. putting the necessary management controls in place.
      
      

HOW PORTFOLIO ANALYSIS WORKS
In its simplest two factor version, analysis is made from a four segment matrix that measures profit impact / annual expenditure on the horizontal axis and the degree of supply difficulty (number of suppliers, internal constraints) on the vertical axis.

1. Acquisition: Low profit impact; low market difficulty.
   Example: stationery.
   
   
2. Critical: Low profit impact; high market difficulty.
   Example: specialty chemicals.
   
   
3. Leverage: High profit impact; low market difficulty.
   Example: corrugated packaging.
   
   
4. Strategic: High profit impact; high market difficulty.
   Example: company specific software.
   
   

By segmenting the market in this way, it becomes possible to clearly map out the required approach to suppliers and the most effective application of the buying resource.

STRATEGIC IMPLICATIONS
ACQUISITION QUADRANT. Items in this quadrant have a profile of low market difficulty and a low profit impact (expenditure). It is possible for a Buyer to spend a lot of time in this quadrant, however, it would not be a wise business decision. The return on time invested would prove minimal.

For items in the Acquisition Quadrant, ADR International Purchasing Consultants advocates a strategy of systemization, standardization, procedurization and simplification.

CRITICAL QUADRANT. Items in this quadrant have the profile of high market difficulty and low profit impact (expenditure). Typically, the supply market is difficult due to a small number of suppliers or an internal specification constraint. These items do not have a high profit impact until they are not available.

ADR International Purchasing Consultants advocates a vulnerability analysis risk management strategy for items in this quadrant. A cost reduction strategy is inappropriate in the Critical Quadrant.

LEVERAGE QUADRANT. The items in this quadrant have a profile of low supply market difficulty and high profit impact (expenditure). The return on time invested in this area will result in profit maximization.

ADR International Purchasing Consultants advocates a planned cost reduction strategy for items in the Leverage Quadrant.

STRATEGIC QUADRANT. Items in this quadrant have the profile of high market difficulty and high profit impact (expenditure). These items lend themselves to a partnering strategy and cost reductions in this area require a long term strategic plan.

ADR International Purchasing Consultants advocates strategies which can reduce risk and maximize profit. These strategies can take two directions: a partnering strategy or a strategy to create competition and drive the item to the Leverage Quadrant.

In all cases, the strategies that are developed should work to drive all of the items to the Leverage Quadrant.

RESOURCE IMPLICATIONS
Portfolio Analysis provides direction for resource allocation of Purchasing personnel based on their personal attributes.

CONCLUSION
Portfolio Analysis is a tool that Purchasing Managers can use to develop long term strategic Purchasing plans and to realign items to ensure that the correct resources are applied to the appropriate items.

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