Suppliers’ Relationship Portfolio: Frameworks and Models

After examining how Supplier Relationship Management (SRM) can be a competitive advantage for the company in a previous post, this post will critically evaluate three framework and models that can be used to manage the suppliers’ relationships in a supply chain. Normally, a company does not have one supplier; it has different suppliers for which a portfolio of relationships is needed.

Suppliers relationship portfolio is defined as managing the company’s suppliers via different management strategies because one approach does not fit all (Kraljic 1983; Gelderman & Van Weele 2003; Dawei 2011, p.85; Rezaei & Ortt 2012).

An enormous amount of scholars developed models and frameworks for such a purpose. For example Jubert (2009) presented 15 appraches, Day et al. (2010) presented a list of 15 approaches while Rezaei and Ortt (2012) presented a list of 10 approaches. The scope of this post is to examine the most famous approaches and frameworks, therefore, these lists where checked against Google Scholar Website to find the most cited approaches. Accordingly, Kraljic (1983), Bensaou (1999) in addition to Rezaei and Ortt (2012) will be discussed below.

Kraljic’s Model

Kraljic approach is considered as the first and the most famous model for managing suppliers’ relationship portfolio (Gelderman & Van Weele 2003; Day et al. 2010; Rezaei & Ortt 2012). The model uses two dimensions; financial impact and supply risk to group the items that are going to be sourced under four groups namely, “leverage products”, “strategic products”, “routine products” and “bottleneck products” (Kraljic 1983). Each group has different supplier management strategy as shown below.krujiski

The model has many advantages, yet it has been criticized too. On the first hand, Kraljic’s model is considered as a foundation stone for any discussion in suppliers’ relationship management, a simple visualization tool that helps the managers to understand the internal weaknesses in their SRM and how they can manage them (Fenson & Edin 2008), it provides a direction on what is the best supplier management strategy (Day et al. 2010) and finally it has influenced the creation of many other frameworks by other scholars as illustrated by Rezaei and Ortt (2012). For example:

  • Masella and Rangone (2000): “[They] viewed the nature of the relationship between buyer and supplier as one dimension. One level of that dimension was strategic integration, which refers to arrangements that involve, for example, joint development of new product and technology. This approach to segmentation, in fact, shows a transition from the focus of the Kraljic’s approach on purchasing an arm’s length relationship towards an approach that includes more functional areas as well as a strategic integration between buyer and supplier”.
  • Hallikas et al.’s (2005) “[They] considered the management of risk involved in buyer–supplier relationship through collaborative learning, while the strategy suggested by Kraljic with regard to handling supply risk focuses on diversity, which means changing Suppliers”.
  • Bensaou (1999): “[He] included other involvement-related aspects which were the inter-dependency between buyer and supplier”.
  • Kaufman et al. (2000): “[He] included other involvement-related aspects which were the partnership concept”.
  • Kaufman et al. (2000): “[He also] included other involvement-related aspects which were the partnership concept”.
  • Svensson (2004): “[He’ included other involvement-related aspects which were supplier’s commitment as one dimension of the segmentation”.

On the second hand, the model, which was designed based on manufacturing background and for commodity products (Fenson & Edin 2008), has been criticized for neglecting some external and external factors that might affect the decision process. Internally, the model tends to neglect the company’s culture and the transparency when sharing sensitive and confidential information with the suppliers. Instead, suppliers’ relationship management should be examined product- by-  product rather than a generic segmentation grid (Lamming et al. 2004). Externally, the real business environment has many complex factors that might affect the decision process which comes from interdependencies between products, suppliers’ networks and many more (Gelderman 2005).

Within this context, the model also does not have a clear measurement scale when applying the segmentation criteria, it neglects the actions from the suppliers’ side and results in simple and independent recommendations (Gelderman 2005).

Finally, on the long term of implementing this mode, it will not provide clear directions on how to move the supplier across the 2×2 matrix when the company is doing a strategic change, it does not include the supplier’s reactions within a supply chain and assumes that the two factors- profit impact and supply risk- are the only two factors in this relationship and does not provide a deeper view of the risks associated with each supplier’s segment (Day et al. 2010).

Bensaou’s Model

Bensaou’s approach focuses on understanding the external conditions of the company; the market and its products when selecting the optimum suppliers’ relationship. The factors that he used to segment the suppliers’ relationships where the “level of specific investment” from the buyer’s side and the supplier’s side (Bensaou 1999). Level of investment means how much each of the partners contributes to the success of this partnership; either by tangible items such as materials and buildings or non-tangible items such as trust and knowledge (Bensaou 1999; Day et al. 2010).

Bensaou (1999) argued that the purpose of having these four types of relationships, ‘captive buyer’, ‘strategic partner’, ‘market exchange’ and ‘captive supplier’ in the below figure is to select the right balance of relationships when dealing with the suppliers. Accordingly, he proposed three contextual factors related to product, market and supplier in order to help the managers to select the best relationship (Bensaou 1999). The final result is a portfolio of relationships as shown in the same figure.Bensaou.jpg

Similar to Kraljic’s approach, Bensaou has been criticized due to different reasons. Bensaou’s model is one of many other models that were developed to amend Kraljic model and overcome its limitation (Rezaei & Ortt 2012) and emphasized the importance of moving from “arm’s length relationship” to a “longer-term collaborative” partnership (Fenson & Edin 2008). However, the model has been criticized due to the limitations in using two factors only when segmenting the suppliers; supplier’s specific investment and buyer’s specific investment. Fleuren (2011) emphasized that there are other factors, needed when deciding on the best suppliers’ relationship portfolio such as performance satisfaction, trust, reputation, social bonds and adaptation. In addition, he argued that although Bensaou built the model based on questionnaire results from 447 managers from USA and Japan, such suppliers’ relationships should be discussed per specific condition not by following a general approach.

Rezaei and Ortt Model

Rezaei and Ortt (2012) analyzed 10 frameworks and models for suppliers’ segmentation and argued that these models have two limitations:

  • Firstly, they are not comprehensive and were developed based on different set of segmentation criteria. Accordingly, the models recommend different strategies which might create a confusion;
  • Secondly, these models are only applicable for selecting the suppliers when initiating the purchasing act for the first time; however, they do not address the other types of supplier-buyer transactions that will happen over the time.

Accordingly, a multivariable approach was developed based on three requirements namely suppliers’ willingness, capability and functions. A supplier can move between the four segments if he develops his capabilities and willingness which gives this model the capability to manage the supplier’s relationship over time as shown below (Rezaei & Ortt 2012).third approach.jpg

The advantages of this model are that it overcomes two major limitations in the other supplier’s segmentation which are the confusion of the assessment criteria themselves and the limitation in addressing the long term suppliers’ relationship (Rezaei & Ortt 2012). However, the model has been criticized because it does not provide weight for each segmentation criteria which will result in grouping suppliers in the same category although they have different performance under each of the criteria (Haghighi et al. 2014). Accordingly, Haghighi et al. proposed a new model based on two steps. Firstly, they assigned a value for each segmentation criteria using “Fuzzy Linguistic Preference Relations (LinPreRa)” and “Analytic Hierarchy Process (AHP)”. Secondly, they used “Fuzzy c-means algorithm” in order to group the suppliers (Haghighi et al. 2014).This new model is shown below.third approahc - second pic.jpg

It is worthy to mention that this model has been combined later in a multi-criteria decision-making method called “Best Worst Method” which consists of two steps (Rezaei et al. 2015). Firstly, the two dimension, suppliers’ willingness and suppliers’ capabilities, are still used to segment the suppliers. Secondly, selection criteria are weighted to determine the optimum pair of the best and the worst selection criteria as shown in the below figure. Rezaei et al. argued that this combined approach makes the segmentation process helpful for not only the buyer’s side, but also will help the suppliers’ side because the results can be used when setting suppliers development programs.

As a conclusion, each model has advantages and limitations (Gelderman 2005), however, managers should always remember that there is no standard blueprint that can be used when implementing them, and a mix of critical thinking skills is needed when developing the final recommendations (Akman 2015). The models should be always amended and re-evaluated because there will be always new concerns in the business environment, for example, Akman (2015) argued that most of the segmentation models lack assessment criteria that include supplies’ green performance. Accordingly, he developed a new five- green segmentation criteria which are: green design, pollution prevention, green image, green capability and environment management system.

References

Akman, G., 2015. Evaluating suppliers to include green supplier development programs via fuzzy c-means and VIKOR methods. Computers and Industrial Engineering, 86, pp.69–82.

Bensaou, M., 1999. Portfolios of buyer-supplier relationships. Sloan Management Review VO – 40, 40(4), pp.35–44.

Dawei, L., 2011. Fundamentals of Supply Chain Management [e-book], Dr. Dawei Lu and bookboon.com. Available at: http: //bookboon.com/en/fundamentals-of-supply-chain-management-ebook.

Day, M., Magnan, G.M. & Moeller, M.M., 2010. Evaluating the bases of supplier segmentation: A review and taxonomy. Industrial Marketing Management, 39(4), pp.625–639. Available at: http: //dx.doi.org/10.1016/j.indmarman.2009.06.001.

Fenson, C. & Edin, P., 2008. How purchasing practitioners use the Kraljic matrix. Stockholm School of Economics. Available at: http: //www.impgroup.org/uploads/papers/170.pdf.

Fleuren, B.H.M.J., 2011. Bensaou ’ s buyer-supplier relationships. Open University of the Netherlands.

Gelderman, C.J., 2005. Purchasing Portfolio Models : A Critique and Update. The Journal of Supply Chain Management, (August), pp.19–28.

Gelderman, C.J. & Van Weele, A.J., 2003. Handling measurement issues and strategic directions in Kraljic’s purchasing portfolio model. Journal of Purchasing and Supply Management, 9(5-6), pp.207–216.

Haghighi, P.S., Moradi, M. & Salahi, M., 2014. Supplier Segmentation using Fuzzy Linguistic Preference Relations and Fuzzy Clustering. International Journal of Intelligent Systems and Applications, 6(5), pp.76–82. Available at: http: //www.mecs-press.org/ijisa/ijisa-v6-n5/v6n5-8.html.

Jubert, N., 2009. Strategic supplier- buyer relationships: a marriage of convenience. University of twente.

Kraljic, P., 1983. Purchasing must become supply management. Harvard Business Review, 61(5), pp.109–117.

Lamming, R., Caldwell, N. & Harrison, D., 2004. Developing the concept of transparency for use in supply relationships. British Journal of Management, 15(4), pp.291–302.

Rezaei, J. & Ortt, R., 2012. A multi-variable approach to supplier segmentation. International Journal of Production Research, 50(16), pp.4593–4611.

Rezaei, J., Wang, J. & Tavasszy, L., 2015. Linking supplier development to supplier segmentation using Best Worst Method. Expert Systems with Applications, 42(23), pp.9152–9164. Available at: http: //dx.doi.org/10.1016/j.eswa.2015.07.073.

2 thoughts on “Suppliers’ Relationship Portfolio: Frameworks and Models

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s