Analyst Eye on how purchasing must really become supply management

Forty years ago, the Harvard Business review published Peter Kraljic’s article ‘Purchasing Must Become Supply Management,’ which debuted the supplier segmenting method that we now know as the Kraljic matrix. While Kraljic had his own vision when putting forward his method, Spend Matters senior analyst Bertrand Maltaverne believes that these decades later you can jokingly say “Purchasing must really become supply management.”

The point Kraljic made those decades ago was that the stability businesses once enjoyed had ended and now they needed a new strategy to address the constant threat of supply interruptions and the opportunities presented by new technologies. That strategy emphasized understanding the supply you buy, specifically by dividing it into four categories that cover different impacts to profit and their relative risk or complexity.

After the coronavirus pandemic and the near-constant supply chain disruptions that have defined the last few years, restating the need to focus on one’s supply might seem redundant. Bertrand agrees the rationale for supply management has become even more obvious, but he thinks that despite this not enough attention has been paid to it yet: “One could argue procurement has been heavily focused on supplier management, on ensuring they work with the most appropriate suppliers. Of course, procurement has cared about the goods and services (the ‘supply’) it was sourcing, but it did not necessarily make understanding the supply, how it was made, where it came from, and so on, a focus of its strategy.”

However, the increase in regulations and rising customer expectations has created a situation in which a business must deeply understand the supply. For example, the presence of forced labor in the supply chain has received greater scrutiny. The American Uyghur Forced Labor Prevention Act (UFLPA) has clearly impacted the flow of goods from China. According to statistics from the C.B.P., more than 4,000 shipments, representing $1,400 million, have been scrutinized, and 16% of them were denied entry in the USA, and 38% were cleared, with a staggering 46% being in ‘pending’ status, meaning that CBP is waiting for or analyzing documents from importers to make a decision.

Obviously, it is in one’s interest to comply with this Act, meaning one has to be able to show the absence of forced labor in one’s imports. For this, you really need supply management. The risk of focusing explicitly on the supplier is that you do not go deep enough. “You can check to see if the supplier uses forced labor,” Bertrand says. “Buy when you buy something from that supplier, you need to understand whether slavery exists somewhere in the lifecycle of the components that supplier uses, otherwise, you are still purchasing from slavery.” The same goes for Per- and Polyfluoroalkyl Substances (PFAS) and carbon management. If your immediate supplier can show that they are sustainable, that’s nice, but that sustainability is lessened if the cost is merely shunted further up the supply chain. “You have to understand what it is you buy,” Bertrand states, “even if you do not buy it directly.”

That is only the legally enforced standards, though. Recent research by Deloitte, which incidentally was also published by the Harvard Business Review, indicates that consumers increasingly want transparent information concerning a company’s impact on society and the environment. Again, it is good if you can show that your company and your direct suppliers are sustainable. “But,” Bertrand asks, “what is your supplier buying? After all, what your supplier buys finds its way into what you buy and, consequently, what you sell. So, you really need to focus on the supply level to have a proper picture of these elementary supplies coming from tier-2+ suppliers and how they impact each one of your products.” Supply considerations have evolved since Kraljic’s time to include reputational and regulatory risk in addition to the more standard risk of supply chain disruption. That evolution requires final-product-centric and supply-centric (provenance) capabilities to go beyond the direct-purchases and supplier-level views.

These are just examples of the changes that have happened since Kralljic wrote his article and that are transforming procurement and requiring an even deeper dive into ‘supply.’ Procurement technology can definitely support the challenges that these changes imply by, for example, making the invisible supply network visible, vetting suppliers at a deep and granular level, creating a supply-centric digital twin, etc. These are a few examples of capabilities covered by Spend Matters Insider, as illustrated by what we have written on carbon management. For even more granularity concerning what a solution can do to give you supply chain visibility, turn to TechMatch.