Avoiding the Danger Zone

There is no greater risk than risking delivery of goods or services to your B2B relationship

Some purchasers will categorize their suppliers following the Kraljic Matrix. Peter Kraljic's reseach was published in 1983 in Harvard Business Review and still has relevance today. There are 4 major categories for suppliers of goods and services. Leveraged, Strategic, Non-Critial and Bottleneck. The riskiest position to be in is Bottleneck.

Purchasers primary job is to ensure that their organization has the products and services they need to function. They will take actions in each category to ensure that is possible.

Leverage Items:

• Supply is abundant. Capacity isn't an issue.

• Product matches need
  

• Low risk - dependable

• A Buyer can manage many of these items/ services with low effort.

• This is a relationship that the purchaser will appreciate, and leverage the best possible deal.

Strategic Items:

• Help improve the product or service of the customer

• Close relationships with these suppliers is important

• End product innovation can come from these innovations from the supplier and collaboration with the supplier

• Scarcity is expected.

• This is a relationship that purchasing will invest in. They want your heart and mind-share as a supplier.

Non-Critical items:

• There is low price tollerance, because there is abundant supply and plenty of suppliers

• Process efficiency, cost efficiency, service efficiency are the differentiators.

• A purchaser will work to standardize the offer in this category and spend less time with this supplier.

Bottleneck items:

• This is the highest risk box for a supplier

• There is scarcity. This can be because of lack of production capacity, lack of production capacity in the right location, very critical service with lack of skilled providers.

• The product or service is critical

• The purchaser will work hard to develop a back-up supplier, and alternative service provider. Purchasers need to deliver, and the way to ensure supply is to have an alternate.

Which one is the Danger Zone? How to avoid it?

• Bottleneck items can be the danger zone because this is the only box where the customer will actively look to de-source your business, or de-source part of your business.

• If a supplier is newly having trouble to delivering, failing to solve this issue will cause your customer to look elsewhere for someone more reliable.

• Good quality and support help avoid arriving in this box.

• During Covid, the supply chain crisis caused many suppliers to suddenly seem like big supply risks to their customers. This caused a lot of purchasing action to resolve bottlenecks.

• If a supplier threatens to stop shipping or stop providing services during a negotiation, you might cause big emotions on the purchaser's side because a supplier is suggesting they might become a bottleneck. Sometimes this is necessary to threaten stopping of shipment in a negotiation. It is not a step that should be taken without a clear strategy behind.

• Sometimes a company finds themselves unwittingly in the danger zone. They have a customer who seems to really love their product, gives them lots of attention and orders but the terms aren't quite as favorable as they want. In this kind of situation a supplier might undervalue the importance of that particular customer to the success of their product. Or they might underestimate the frustration level on the customer side with their capacity, service or delivery. This underestimation can cause the supplier to be too stubborn or difficult, and drive purchasing to try to reduce dependence. Tension in a customer-supplier relationship is expected to some degree. Doing everything a customer wants is usually not advisable. It is also important ot manage the frustration of the buyer to avoid entering the danger zone.

Reference:

https://hbr.org/1983/09/purchasing-must-become-supply-management