Procurement and Supplier Management
This domain tests sourcing strategy, the bid-versus-negotiate decision, total cost of ownership and how supplier performance is scored and managed.
Category strategy
Kraljic plots profit impact against supply risk. Non-critical (low/low): simplify, catalogue buying, consolidate vendors. Leverage (high impact, low risk): competitive bidding, volume leverage, price focus, multiple sources. Bottleneck (low impact, high risk): secure supply, long-term contracts, qualify alternatives, hold buffer stock. Strategic (high/high): partnership, early supplier involvement, joint development, total-cost focus.
Sourcing process
Typical sequence: spend analysis, category profile, strategy, supplier selection, negotiation and contract, implementation, performance management. An RFI gathers capability information, an RFQ fixes specifications and asks for price, an RFP asks for a proposed solution. Competitive bidding suits large spend, clear specifications and a competitive market; negotiation suits unclear scope, few qualified sources or high switching costs.
Total cost of ownership
TCO adds price plus freight, duty, quality defects and rework, inventory carrying, transaction and administration, lifecycle and risk costs. Should-cost modelling builds a price from materials, labour, overhead and margin so the buyer knows what is reasonable. Contract types matter: fixed price shifts cost risk to the supplier, cost-plus shifts it to the buyer, incentive contracts share it.
Worked example: weighted scorecard
Weights: quality 40%, delivery 25%, cost 20%, capability 15%.
- Supplier A (90, 80, 70, 85): 36 + 20 + 14 + 12.75 = 82.75.
- Supplier B (80, 95, 90, 70): 32 + 23.75 + 18 + 10.50 = 84.25.
- Supplier C (95, 70, 60, 90): 38 + 17.50 + 12 + 13.50 = 81.00. B wins on the agreed weights. But run sensitivity: raise quality to 50% and delivery to 20%, cost 15%, capability 15%, and A scores 45 + 16 + 10.50 + 12.75 = 84.25 while B scores 40 + 19 + 13.50 + 10.50 = 83.00. The ranking flips, so weights should be agreed before scoring, not after.
Traps that cost marks
Awarding on lowest bid. Setting weights after seeing results. Confusing an RFQ with an RFP. Applying leverage tactics to a bottleneck item and losing supply. Ignoring maverick spend when calculating category leverage. Treating a supplier scorecard as a report rather than a trigger for corrective action or supplier development. Forgetting currency and payment-term effects inside TCO.