Focus on Costs: Day 6 – Power Regimes and Supplier Perception

Yesterday we analysed the Strategic Security and Strategic Critical boxes (see Fig. 1 below.) Spend categories in these boxes are defined by relatively high Supply Risk.  

Today the focus is upon the nature of relationships between buyers and sellers and specifically upon the concept of Relative Power in a relationship and the perception of suppliers, about you as a customer, for the spend category in question.  

The reason for looking in detail at these subjects is to develop insight into the type of relationships your organisation has or perceives that it has with different suppliers across the scope of the four boxes we have worked with over previous articles.  

This will inform decisions about searching for cost reductions against the backdrop of the need for security of supply and the expenditure of effort to realise them. It’s OK you wanted to develop a strategy for a spend category but how the supplier perceives you and your business will influence how successful you are in implementing that strategy.

Relationship Continuum

A good entry point into the analysis of supply side relationships your organisation may have or perceives it has is to use Fig.2 Relationship Continuum as a benchmark tool.  

The continuum informs us that there is no one panacea for supply side relationships and that the nature of each relationship is contingent upon the circumstances prevailing within any spend category at a point in time.  The following descriptions help you to classify supply side relationships you may have or perceive that you have?

Adversarial Arms-Length refers to market-based business relationships that are generally competitive and tactical in nature.

Preferred Supplier refers to a selected buyer-supplier relationship where there is a degree of shared working and account management.

Single Sourcing refers to a relationship where the vendor has been selected to the exclusion of all others, therefore making them the chosen partner of the buyer’s organisation.

Network Sourcing refers to the co-operative working in supplier networks and alliances, where all parties are interdependent and work together collaboratively.

Strategic Alliances / Joint Ventures refer to interdependence supply relationships of ‘co-density’ – often incorporating shared investment or capital funding.

Vertical Integration refers to the internal relationships found between internal service providers and their user / purchaser counterparts.

Source: Cox (1996)

It is highly likely that the spend category supply relationships, you have an interest in, fit onto this continuum.  OK, so what?  How does this static model help us with our Enlightened Procurement exercise to simultaneously reduce cost and increase value to our organisations?  It shows a starting point for our journey from ‘top right to bottom left’ (see Fig. 1).  

The realisation of Enlightened Procurement benefits requires some measure of disruption affected by you and your organisation or the market as suggested by Michael E. Porter in his seminal 1980 paper about competitive strategy.  

Porter’s model informs us about relative power of Buyers and Sellers in the markets for particular spend categories. Depending upon the relative state of the 5 Forces at any point in time – meaning that each Force is potentially highly dynamic – the buyer will be able to assert itself and reposition any spend category in the Krajic Matrix (see Fig.1) to realise its sourcing goals.  

The takeaway from this interpretation of Porter is that disruption is critcal in delivering our Enlightened Procurement goals and that, mostly, it is better to be the Disrupter than the Disruptee.  In other words ‘get on the front foot and dish it out!’.

How is this possible when the buyer is just one of 5 Forces?  ‘Control the controllable’ as elite sports stars and coaches tell us.  The British Cycling dominace of olympic track cycling has been founded on this pricnciple.  They keep an eye on their competitors and their technology but focus mainly on contolling those critical assets and capabilities under their influence.  OK so how does apply to my organisation?

Focus on the bargaining power of the customer is what you have to do.  Therefore understanding what your power is, relative to the supplier, is of utmost importance.  The power dominace model can help with this and to understand what suppliers think of you and your account.  We’ll look at these two tools below.

Power Dominance Model

The Power Dominence model (Fig.4) charts the four potential power structures between, in our case, buyers and sellers.  

It recognises that both parties have elements that gives them power and that these positions need to be charted against one another.  The authors refer to these elements as Critical Assets. JMCL further breaks this down in to Critical Assets and Capabilities (things that organations have and things that organiations do) as well as ‘tangibles’ and ‘intangibles’.

The JMCL perspective opens up the range of elements to include intangibles such as know how, reputation and culture, as well tangibles, such as intellectual property, brand and capital.   The trick with models such as this is to identify specifics as they relate to your organisation and relevent suppliers.  On this journey it is useful to understand what each of these new boxes mean:

Supplier B is dominent over Buyer A Supplier B has the power to secure superior terms at a point in time.  This is the case in a monoploy market for the product or services being sold.  

A and B are independent Neither party has power over the other.  This is typically the case of low value, spot purchases in a competitive markets.

Buyer A is dominent over Supplier B Buyer A has the power to secuer superior terms at a point in time.  This might occur in a market where the Supplier B needs the account of the Buyer A.  In this case the supplier is dependent upon the buyer.

Buyer A and Supplier B are interdependent In this case the parties are locked-in together through a balance of power at a point in time.  The lock-in maybe through contracts, intellectuall property protection or restricted market alternatives etc.

Typical Strategic Assets and Capabilities which confer Power include:

• Patents
• Registered Marks
• Brand
• Capital
  • Deep pockets
  • Facilities
  • Equipment
• Licenses
• Data
• Channels to market
• Reputation
• Knowledge 
• Connections 
• Influence
• Process
• Skills
• Culture
• Stock
• Scale
• Growth / Matruity / Potential

Once you have identifed your organiation’s Critical Assets you can begin to get a sence of the power you have in any buyer supplier relationship.  

It is possible to guage a supplier in the same way as it is highly likely that you do have deep knowledge of the supplier if you apply yourself to ‘mine’ it.  

Unfortunately, irrespective of how you think you may see the supplier, if the supplier does not perceive you as you might imagine, then this can lead to ill-informed decsions about the disruption you intend to bring to the relationship position.  

This is the final piece of the jigsaw in this article to enable you to assess your power and therefore ability to disrupt and reposition your trading relationship with a supplier, to deliver simultaneous cost out and value up, the ambition of Enlightened Procurement.

Supplier Perception Matrix

This model asks buyers to put themelves in the position of the supplier to understand how the suppliers might percieve your  account from the perspective of general attractiveness of the account and revenue generation compared with other customer accounts which which in turn affects how the supplier will manage its account with the buyer.  The general attractiveness of the account can be defined in terms of prestige, prospects, effort to sustain and even emotional or political dimenions related to trading history.

The following is an interpretation of the nature of each of the boxes:

Develop / Nuture: These are accounts which bring little in terms of value to a supplier but are very attractive in terms of potential.  They will often be seen as the supplier’s future and much focus is placed on developing this segment of their customer base.

Core / Protect: These are accounts of both high value and attractiveness. They are seen as core as the the supplier’s business and the suppliers place emphasis on levels of service in order to defend their interests while attempting to increase their business with the buyer.

Nuisance : These are accounts which bring ittle in terms of vale and general attractiveness.  They are business none the less, but perhaps the effort to support the account outweighs the benefits of the account and the supplier may be looking to withdraw.

Exploit : The supplier maybe be generating substantial revenue from the buyer’s account albeit from an account which is not seen to be attractive at a point in time.  Retention of the long term relationship is not considered to be that important so the account is managed to drive short term profits.

Summary

In short the tools, methods and insight we have shared to date in this series of articles sets out a platform from which buying organisations can deliver an Enlightened Procurement programme to simultaneously deliver dramatic cost reductions and drive value up.  

We have set out the position to start with segmentation of spend categories and explored the different characteristics using the Kraljic Matrix and described associated strategies to work with spend categories in each classification.  

We have also set out an approach to confirm the power of a buyer to be disruptive in any spend category and at any point in time.In the next article we are looking at the general strateigc procurement environment from an organisation and process perspective.