Sourcing Strategies and Supply Base Management
Spend analysis and the Kraljic portfolio
Start with spend analysis: the Pareto rule (80/20) tells you where money and risk concentrate. The Kraljic matrix plots profit/spend impact against supply risk and yields four strategies: non-critical (low/low - simplify, catalog buying, e-procurement), leverage (high impact, low risk - competitive bidding, volume consolidation, reverse auctions), bottleneck (low impact, high risk - secure supply, dual sourcing, buffer stock, long-term agreements) and strategic (high/high - partnership, joint development, early supplier involvement, multi-year contracts).
Supply base design
Decide make versus buy on core competence, total cost and intellectual property, not on headcount. Choose the number of sources deliberately: single sourcing concentrates volume and builds partnership but raises risk; dual or multi-sourcing adds competition and resilience at the cost of leverage. Rationalize the tail, tier the base and manage the strategic few through supplier relationship management. Global sourcing must be justified on landed cost - freight, duty, currency, inventory carrying cost - not unit price.
Traps
Questions often swap the Kraljic axes, imply strategic items should be re-bid annually (they should not), or suggest single sourcing is always wrong. "Lowest price" is never correct when total cost or risk is in scope.
Worked example
A firm spends $50M; $20M sits with three suppliers of commodity electric motors (low risk, many alternatives). That is a leverage quadrant: consolidate to two suppliers, run a reverse auction and a volume negotiation. A 7% reduction on $20M saves $1.4M - far more than attacking the $2M tail.