Mastering Supplier Dimensions in Target Operating Models
Guide to Frameworks, Tools, and Best Practices
Discover a comprehensive analysis of supplier dimensions in operating models, including the Supplier Matrix, VIRO Framework, and Kraljic Matrix.
Overview
Background
In the Operating Model Processes, POLISM (Organisation, Locations, Information, Suppliers and Management system) presents supplier as a core zone, one sixth of its make-up, as does the business model canvas one ninth.
If you remove the customer, channel, relationships, revenue and proposition element from the BMC then suppliers represent a quarter of Osterwalder’s thinking on the operating model again a high emphasis.
Both come from the perspective of the value chain/stream, in identifying value contributors from outside of the organisational boundary or container.
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Table of Contents
In this guide you will learn about:
The Supplier Matrix
In the Operating Model Canvas (OMC), Andrew Campbell extends this concept in his core tool (one of five) the supplier matrix.
Here he simply looks at “activities” and maps them on a two axis matrix based on two questions:
- Is this a key activity in delivering value?
- How good are we at it compared to others?
This gives us four zones:
| How good are we at it compared to others? | BETTER | 1. Do it ourselves if it doesn’t distract | 2. We do it |
| WORSE | 3. Outsource | 4. Design a collaborative agreement | |
| NO | YES | ||
| Is this a key activity in delivering value? | |||
This is not a supplier matrix at all it is an analysis of activities as to how to deliver those activities. Those activities are actually the value stages of the value delivery chains or certainly decomposed value stages – lower levels. One could use capabilities as the interrogated items or processes the choice is up for debate. Beyond this the existing tool does no more. One could argue it is incorrectly named?
At no point does it specifically interrogate suppliers as to their current involvement in the operating model and misses most of supplier management as a body of knowledge. Beyond getting clients to think about what they do and benchmark it against the outside world and then to suggest how to deploy that activity with partners or not it adds, no more.
The VIRO Framework
The Supplier Matrix is a manifestation and modification of Barney’s Resource Based View on Strategy and his VIRO model which looks at competitive advantage against internal abilities of activities.
This used in a two-step process: identify competitive status of an activity and then indicate what to focus on.
| V | Which value adding capabilities are significant in delivering customer needs and can they be developed further? |
|---|---|
| R | Which capabilities does an organisation have that are rare compared to its competitors? |
| I | How easy is it for a competitor to imitate or copy this capability? Intellectual Property/ Patents. |
| O | What parts of the value chain support this capability, does it rely on organisation support beyond the capability itself. |
| 1.Valuable? | 2. Rare? | 3. Inimitable (impossible to copy) | 4. Supported by the Organisation | Competitive Implication |
| NO | Competitive Disadvantage | – | – | – |
| YES | NO | Competitive Parity | – | – |
| YES | YES | NO | – | Temporary Competitive advantage |
| YES | YES | YES | YES | Sustained competitive advantage |
Although similar and coming from a resource-based paradigm the VIRO model confirms the approach, but we may rethink bring this in in some way?
Suppliers versus Partners
One theme Campbell writes about is the concept of transactional suppliers where he describes a fully functioning market – perfect competition- in economic terms. He in contrasts identifies “collaborative” suppliers as those that the organisation needs to work with to extract and partner in delivering value.
This implies but does not state monopolistic markets whereby these suppliers provide a unique, or certainly a bespoke piece of value. In reality Oster alder’s Partners title is perhaps better than Campbell’s Suppliers because it depicts what we are really trying to identify.
The so called Supplier Matrix is another form of the Value Chain Analysis except in this case we are examining the value stages at an “Enterprise Level” as in the case of Graves.T who describes the enterprise as being beyond the organisational boundary. Here we are interrogating the value stages not for the prerequisites as before, but for competence. We then use this assessment to decide how to deploy the value stage.
Campbell seems to do the analysis by function; again Campbell’s HR organisational design origins come to the surface as this is about what to outsource or not. Doing supplier analysis on the AS IS organisation chart seems to be the wrong approach in first step and to do it by value stage or decomposed value stages or capabilities seems more intuitive. The functional breakdown is a separate view that may well have value later.
Campbell is not clear on the time line he doesn’t specify whether this is an AS IS tool but mixes TO BE with it he doesn’t give the reader clear guidelines on what to do- in the book whether this is explained in the course is another matter.
Procurement body of knowledge and the Kraljic Matrix
Procurement Body of Knowledge gives a slightly different but a thematic similar view. This could be used to separate out the transaction suppliers and identify the collaborative partners.
The Kraljic Matrix evaluates supplier portfolios It highlights categories where a more hands-on style of management may be appropriate (the Strategic/Critical quadrant in particular) and where it will be in the interests of the organisation to build relationships with providers.
It will also identify categories most suitable for automated, streamlined management through the use of frameworks or e-catalogues for example (the acquisition/routine quadrant in particular).
Kraljic (1983) introduced the first comprehensive portfolio approach for the determination of a set of differentiated purchasing strategies. The general idea is to minimise supply risk and make the most of buying power (Kraljic, 1983: 112).
This explains the choice of dimensions: accounting for risk on the one hand, and using buying power on the other hand. Kraljic’s approach includes the construction of a portfolio matrix that classifies products on the basis of two dimensions: profit impact and supply risk (‘low’ and ‘high’).
The result is a 2×2 matrix and a classification in four categories: bottleneck, non-critical, leverage and strategic items. Each of the four categories requires a distinctive approach, in proportion to the strategic implications.
Non-critical items require efficient processing, product standardization, order volume and inventory optimisation. Leverage items allow the buying company to exploit its full purchasing power, for instance by tough negotiating, targeted pricing and product substitution.
Bottleneck items on the other hand cause a lot of problems and risks.
Volume insurance, vendor control, security of inventories and backup plans are recommended. A further analysis of the strategic items is recommended. By plotting the buying strengths against the strengths of the supply market, three basic power positions are identified and associated with three different supplier strategies: balance, exploit, and diversify.
Purchasing portfolio analysis has subsequently become the dominant approach to what the profession regards as operational professionalism (Cox, 1997: 270). Kraljic (1983: 115) made a reasonable case for the usefulness of the portfolio approach by describing the experiences of some large industrial companies.
Now, many years later the purchasing portfolio approach is being used by several other large companies, for instance Shell, Alcatel, Philips, Océ van der Grinten en Siemens (Van Weele, 1994). In a survey of Dutch companies Boodie (1997) found that almost 50% of the responding purchasing managers said that they used Kraljic for formulating purchasing strategies. For large companies, with more than 5000 employees, 85% used portfolio analysis.
Creating a supplier dimension
The supplier matrix seems to ignore how to look at suppliers per se, so what do we need to do in creating a supplier dimension in an operating model?
- Re-visit value chain analysis from this different perspective of the wider chain and also the internal chain/network.
- There need to be analysis of suppliers to separate out suppliers (transactional) from partners (collaborative) this point; these two terms seem key.
- We need to filter out the transactional: “Stationary/Coffee Machine suppliers” from the mix.
- Certainly the RBV capability assessment needs to take place in some form.
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- There is a need for interrogation of the value chain beyond the organisational boundaries in facilitating this process as a starting point as the understanding of the greater value chain/net is essential.
- There is a need to identify partner risk (financial) and sustainability to inform particularly the M of POLISM.
- This needs some scale or measure of integration and attributes of the relationship.
- There is a need to identify Partner strategic risk (IP and take over) to the business model
- Identification of supply risk strategic items and services.
- There is a need to evaluate the AS IS supplier situation as above and then challenge the TO BE based on the new strategic drivers that sponsor the development of the operating model project.
Conclusion and key steps
The tool as described is fairly superficial and hasn’t been thought through in terms of integration within the “methodology” – the reality is becoming clear that there is no methodology here beyond a “quick canvas fill in” to facilitate discussion.
The supplier matrix as described is only a capability assessment and has little to do with assessing suppliers and their contribution to an operating model.
The underlying tools beneath the canvas seem to be a collection of useful tools rather than an integrated set. Even the 5 core tools, remember the supplier matrix is one of them, look a bit weak.
Many of the sections POLISM link with each area informing the other.
The Value chains seem to become a recurring theme used in different ways to elicit requirements for the operating models from the various views. These chains/streams seem to be the hub.
One can also see why business architects like capabilities as a means of pulling things together as it helps with integrating the mess of the detail. The procurement speciality gives us some interesting ideas which we could integrate as does RBV from Barney.
About the author
David Winders BSc (Hons), DTLLS
David is a strategic partner of The Sixsess Consultancy an organisation specialising in Business Architecture and the development of effective business change.
David has worked in business design and business transformation for over three decades with many large organisations including Centrica, Barclays Bank, Dell Financial Services and AXA.
David Winders
Business Architect - Principal Target Operating Model Course Facilitator.
References
- A, Osterwalder, 2010, “Business Model Generation” Wiley, London.
- A Campbell, 2016, “Operating Model Canvas”, Van Haren, Amsterdam and London.
