How Kraljic’s Predictions Around Supplier Collaboration Still Hold True Three Decades Later

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Recent supply chain disruptions in the runup to Christmas have been widely documented, with Amazon issuing warnings to customers to “buy early to avoid disappointment”. These disruptions are threatening to cause low stock levels and could see some businesses without products at peak trading times.

Old habits are hard to shake off

External disruption is not the only factor to blame for these shortages. For decades procurement organisations have focused on squeezing their suppliers to optimise value, minimise costs, reduce inventories, and drive up asset utilisation. Over time this activity has effectively removed any buffers to cope with disruption and shortages and hampered flexibility and resilience in responding to issues. Now, due to the combined effect of Brexit and the COVID-19 pandemic, UK organisations are experiencing huge problems sourcing goods and raw materials. What procurement organisations have learned is that the closer and more collaboratively they work with their suppliers, the more likely they are to have early warning signals of shortages.

The real-world impact of these disruptions is significant – we only have to look at earnings announcements from Microsoft and Apple. Microsoft recently surpassed Apple’s market cap to become the world’s most valuable public company. This happened after Apple announced its 3rd quarter earnings – while it posted strong earnings, it revealed a loss of about $6 billion owing to supply chain issues.

Understanding the strategic potential of procurement

What is interesting is that thirty-eight years ago, Peter Kraljic, now known as the father of supplier management, made several observations about the strategic potential of the procurement function – especially in times of market volatility and disruption. Kraljic focused his methodology on the high risk inherent in the market and the natural scarcity of certain items, arguing that successful management of these strategic items should centre on securing long-term availability. Kraljic said that disruptions would impact strategic supply and this in turn would undermine the competitiveness of procurement functions who failed to adapt.

Kraljic recommended a methodology for segmenting supply items according to their strategic importance, paying particular attention to items that have the ability to make or break a business due to the inherent risk to their market and their impact on overall profit. Over the years, procurement thinkers have debated Kraljic’s work – both the benefits and the limitations of applying his methodology – but fast forward three decades and rather than losing relevance over time, his insights around how to ensure continuity of supply have become even more valuable in today’s environment.

Why long-term relationships help to defend against disruption

Kraljic’s solution for managing key suppliers was what he termed ‘supply management’. Central to this strategy is the development of long-term supplier relationships to defend against shortages and disruption. Today, forging co-operative, mutually valuable relationships to secure supply of strategic business-critical resources is known as Supplier Collaboration.

Supplier Collaboration encompasses a truly two-way method of managing relationships, emphasising ways to unlock significant new sources of value that benefit all parties. Procurement organisations have found that close collaboration is crucial to attaining a raft of benefits, in particular “customer of choice status” with key suppliers. Being a “customer of choice” can help to improve the cost and quality of solutions, in addition to providing privileged access to IP and future supplier innovation. It can also promote co-operation with sustainability initiatives and, crucially, secure all-important supply in times of shortage.

To this point, global management consultancy McKinsey found that ‘when buyers and suppliers co-operate, they can often find ways to unlock significant new sources of value that benefit them both’. Indeed, McKinsey found that supplier-sourced innovation is typically commercialised 40% faster than home grown ideas. With suppliers, this increased speed to market is frequently achieved at lower cost. But these benefits cannot be realised without forming those deep, collaborative relationships with key suppliers.

Meeting Scope 3 obligations

In the current climate, large organisations face more than scarcity issues. While trying to manage shortages, they are also grappling with increasing technological, regulatory, and sustainability challenges. Chief among them is the increasing focus on the sustainability of our supply chains, as large organisations are tasked with reducing scope 3 emissions in order to hit their net zero commitments by the mid-century; typically upwards of 80% of the total carbon emissions of the average consumer company originate in their supply chain.

With such huge hurdles to overcome over dwindling timescales, the imperative to act – and act fast – has never been clearer. With such an enormous proportion of corporate emissions sitting in the supply chain, transparent and collaborative relationships with suppliers has become mission critical. Supplier Collaboration is no longer a nice to have.

Back in 1983, Kraljic pointed to the importance of ‘co-operation’ with suppliers as a lever for procurement functions looking to evade disruption. But the potential of Supplier Collaboration to cement competitive advantage is much broader than just insuring against shortage; there is huge potential for increased innovation, resilience, and sustainable growth, just sitting in our supply chains. This potential cannot be unlocked unless organisations deepen their ties with suppliers and foster more collaborative relationships built on mutual value.