For Procurement professionals applying the Kraljic matrix, leverage is the quadrant that represents spend categories with high spend and high risk or market complexity.
Typically, the approaches recommended for this quadrant include competition (or the threat of it) and assertive price negotiation.
For those of us buying in this quadrant, we know things are rarely that simple. We can’t just ‘kick out’ a supplier as a knee-jerk reaction to perceived poor performance.
Frequent switching of suppliers can result in:
Increased total cost – This can occur during switching and beyond, through internal contract management costs
Customer dissatisfaction – This is especially problematic if the supplier had direct contact with customers / users
Inconsistent quality – This is most noticeable when materials / people are swapped out or in warranty claims
Leverage quadrant strategies require a refresh in organizational sourcing models. If we are too blunt, leverage tactics have risks, for example:
- Price-based discussions ultimately mean that we don’t know – or don’t care – about the supplier’s cost base. This lack of transparency makes understanding the business model and negotiations difficult
- A ‘just get it done’ attitude to cost opens the buyer up to a multitude of risks related to financial health checks, sustainability, ethics and fraud
- Threats don’t segue into conversations about value-add, innovation, waste reduction and cost down
There are reliable value-based Procurement practices for consistent, proactive suppliers in the leverage quadrant. For example:
- Business growth / reduction based on supplier performance
- Application of partnership-style behaviors and practices without shifting supplier status to “strategic”
- Avoiding supplier complacency through reward / sanction schemes tailored to each vendor
Maintaining competitive pressure is still possible, but it is best approached in the context of supply chain interdependency and the operational realities this presents. Where leverage suppliers are genuinely providing advantage to the business, there are other approaches. For example:
- Constantly maintain awareness of supplier profit for the contract and protect it. Where appropriate, suppliers boost profit through productivity initiatives
- Give suppliers interesting work when they contribute to continuous improvement
- Arrange skills transfer from suppliers to in-house teams, to develop capability in up-to-date methods and enable good end of project handover
- Help internal colleagues to manage suppliers well – with regular feedback, dispute resolution tools and opportunities to develop their business
Eroding supplier profit year on year doesn’t make them hungry. It makes them look for shortcuts. Leverage is the right label; it just needs a little adaptation sometimes.