 to the NPTEL session on supply chain digitization. This is a lecture in continuation of procurement strategies which is part of supply chain design and operation strategies. In the last session, we had discussed about what is meant by the Kralgic matrix and how it is used in defining supply portfolios and what is the use of supply portfolios. In this session, I will be picking up an example application in order to demonstrate what is the use of the Kralgic matrix. So, I am picking up a very simple example over here. It is the case of a bottling plant for soft drinks which is reviewing its procurement strategy for eight of the items that it has purchased in the last financial year and the data on purchase quantity and cost is available in the table. Before I show you the table, just a bit of understanding of what we mean by this. This is a plant level decision making that is going on and like I mentioned in the last session, an organization could look at procurement strategies at the facility level, for example the plant or at the organizational level. And here we are talking about bottling plant which is going to be a core part of creating the final product. So, it is going to be little bit downstream of the value chain when we consider the production of soft drinks. Bottling is an important and very popular process which is well documented and you will find a lot of videos which are also present that can help you understand how the bottling process looks like. I will not be explaining the bottling process in detail and I would encourage the viewers to look this up. In this example, I have taken eight items that are being procured and like I mentioned in the previous session, the organization could look at procurement of items or services and it could have many items that it procures as well. So, I have only taken eight representative items, there could be many other items that the bottling plant is going to procure in reality. So, this is in the true sense of the word a very hypothetical example that I have picked up. We have data which is present on the purchases based on the last financial year and it is not necessary that we have to consider only the previous financial year, we can look at past historical data for several years as well. And in this case, we have data available for the financial year which has completed, but it might not always be the case in which case the organization would need to look at what are the prices in the market and what quantity it is looking at procuring before it defines the procurement strategy. So, let us look at the example that we have. So, as this is a bottling plant for soft drinks, we are looking at the procurement of some items like plastic bottle which is going to be containing the soft drink, the procurement of syrup which is going to be fed into the bottle in the bottling process. The labels which are used for the bottles and I have mentioned label A and label B kind of indicating that perhaps there are multiple types of soft drinks that the bottling plant is looking at creating, cartons which are going to be used in order to hold the bottles when they are finally bottled and these will be used in order to transport the product to other places. As you can observe over here, the labels A and labels B will be placed on top of the bottle in order to identify which kind of product it is. The carton is going to be used in order to hold the items. So, this would be part of the labeling and packaging process that would happen after the production has been completed. Then we have paper standard let us say A4 size sheets of paper which are being used by the office. So, a bottling plant can also have a back office which is looking at different administrative activities. We are looking at another item which is the printer ink cartridge for A and B. So, there may be some specific information that needs to be printed on the labels. A part of the label might be printed and already delivered to the organization or to the bottling plant, but there may be some additional information. Let us say the date of bottling, the batch number and perhaps also the location and maybe other attributes which are very very specific to the product that is being made. It might not be possible for this to be obtained from the supplier in a ready made fashion that is a likelihood that is going to be there and hence this printing process would be carried out in house as a part of the labeling and packaging process. Then we have a printer ink cartridge which is used again by the office because you know for whatever work they are carrying out using the A4 size papers they might need to also use some ink. Now, this is typical products that are being procured and they are all consumed by the processes which are carried out at the bottling plant. Like I said it is only representative there could be many other items that are being procured. For example, if this is a fizzy drink that is being made you might also look at some gases that need to be pumped into the product as well. There may be other elements to the taste that need to be considered, flavors that need to be added which might have to be procured separately and added in the process. There could also be other consumables that are procured by the offices for supplies such as stationary supplies like pens, staplers and all of that. There could be many items that the company is going to procure for the bottling process. Hence, this is only a representative example of what could be procured. As we can observe these items are being used in various processes. Now, what we can observe is that each of these items is available in some standard pack sizes. If I were to purchase plastic bottles I would need to purchase it in a pack of 500. This would be what is available in the market and or what is being negotiated with the suppliers. So, over here 500 for the plastic bottle whereas, let us look at the syrup. The syrup is available only in quantities of one in a pack. It could be several gallons of syrup, several liters of syrup, it could be available as a barrel. It depends upon the nature of the product and hence this is helping us identify how much is being procured in a pack. Again, if you look at the labels A and B we can see that we are obtaining the same quantity in a pack for each of these labels. If I look at the carton it is showing here that we are going to procure in a pack only one carton. This need not be necessary you could get many cartons in a pack, but this may be the way that the company has been procuring from its supplier. If I look at the paper we are getting let us say 10 in a pack. It could be 10 reams of paper, a ream may consist of may be 400 or 500 or even 300 sheets of paper. So, this is 10 reams in a pack that you are procuring and if I were to consider the printer ink cartridge we are procuring one in a pack whether it is for the labeling and packaging process or whether it is for office supplies. So, this is the quantity that we are purchasing in a pack and this is the quantity that the bottling plant has purchased in terms of number of packs in the last financial year. If you can look at it we can observe that if you look at this information which is present we can see that the highest quantity which has been purchased in terms of number of packs is the cartons 30,000, but this is one in a pack hence we have purchased 30,000 cartons in the past whereas, if we actually look at the plastic bottles a little closely we can see that we are purchasing or 2000 packs, but there are 500 which are being purchased in a pack. So, this is definitely a larger number than what we are otherwise observing we would be in the same way we see here for label A you are procuring 500 packs and in a pack we are finding 2500 labels. So, this would be a large quantity that you are purchasing in comparison to just the cartons. So, we can observe these different things across what we have over here in terms of quantity and again if we look at the cost of purchase it is at the pack level. The most expensive in terms of the purchase at a pack level is the labels and it sounds a bit counterintuitive as to why labels which are just going to be pasted on the bottle are so expensive, but remember this is associated with a pack and a pack is having 2500 labels. So, this is this could be misleading if you were to just look at it from a pure unit cost perspective we also need to understand all of these attributes. Now, similarly we can see the syrup is quite expensive in comparison only one syrup costs 6300 it could be per barrel and this is quite expensive considering what you are procuring and this could be a very important element which is a part of your purchase. Now, while we can understand these aspects and attributes from this data that we have we can go one step further and find out what is the total purchase value that is procured and this is what it looks like. The total purchase value is highest for the labels as we can see here this is coming out to be 75 lakh rupees and this is followed by plastic bottles and syrup very closely. On the other hand if we see the total purchase value for office supplies is quite low just about 1000 rupees, so this is quite low in terms of contribution to the procurement value and if we were to consider the cartons over here as well as paper they are also within the range of a few lakhs not much and hence we can see these are low value purchases in comparison to the first 4 or 3 items as we have defined over here. In standard ABC analysis we would identify label A as an A item and perhaps the plastic bottle and syrup as B items may be extended to label B as well or we would identify the first 3 as A items and label B and carton as C items B items and then the last 3 as C items and this is a standard ABC analysis which is carried out, but this does not really help us much in the procurement strategy. It has helped us in identifying or classifying the items and it can help us understand how we should maintain the inventory policies for these items. How do we store higher value items might require higher material handling costs because of the value associated with it and we might also need to consider what kind of review policies we have for inventory control periodic review or continuous review, but beyond that these are internal processes it does not tell us much about the procurement strategy as such. So, we would want to understand a little bit more which is on the supply side is there any other information that we can gather on these items. So, one information or one piece of information that we have is how many suppliers are present in the market and what is the average distance of a supplier from the bottling plant. So, this brings in a little bit of more dimension to our problem right now and we can now start understanding not just from the total cost perspective, but also in terms of what is the exposure of the bottling plant to supply side risk. As we can observe here we have 1000 suppliers present for the plastic bottle, but just one supplier which is present for the printer ink cartridge. So, in terms of supply risk purely on the basis of number of suppliers we can see that you know the printer ink cartridge for labeling and packaging of the bottles is presenting higher supply risk because there is only one supplier present in the market who is going to give you this ink. So, this increases the supply risk which is present for this item although if we see the total value of purchase is not really very high in compare in comparison to the highest value purchases that we have carried out. Similarly, we can observe that items like carton and paper have large number of suppliers present in the market and it is natural to expect this because these are products which would be used by other offices. These would be used for the logistics and transportation processes of other companies as well other bottling plants apart from your own bottling plant other competitors. It would also be because cartons are also used for other products hence it is natural to expect a large supplier base for such kind of items. The same thing for the printer ink cartridge which is being used in the office whereas on the other hand the syrup is something which is going to define what is the kind of soft drink that you make. The technical specifications that you have provided for the syrup might be possible to be you know accepted for development for production only by a few suppliers and over here we have just two suppliers who may be capable of making this syrup. Similarly, we have just four suppliers who are available for printing these specific types of labels that you want. Again these labels might have some attributes and characteristics that are not present in other labels in the market may be the material of the label may be the ink used in the label may be the design that might only be possible with a few suppliers. So it is possible that this kind of a scenario exists for these items and lower supplier risk which is present with the number of suppliers here. Now let us look at the distance over here we can observe that we are having some of the suppliers for plastic bottles available very very close to the bottling plant. So we have large number of suppliers available very close to the bottling plant. So the supplier risk over here purely bases the distance is quite low which means if you have a shortage you can quickly get the items and it is further more low because there are several suppliers if you do not get it from one supplier you might be able to get it from another. Whereas if I were to consider the syrup the syrup is being procured from a very large distance perhaps an international procurement that is being carried out and as a result of this this presents high supply risk for the bottling plant. The similar case is observed with the printer ink cartridge which is used for labeling and packaging this is also present in a very far away location and presents high supply risk. Whereas if I were to consider paper it is being procured from a slightly far away supplier it is moderate risk but not at all high when compared to what we observe for the printer ink cartridges for A and B as well as the syrup. This is the information that we have in terms of the supply risk that we have as an exposure for the bottling plant and the purchase value that we have for the various items. We can create a cryologic matrix from this point onwards. One of the steps that we could do is to present a metric that represents the purchase value and a metric that represents supply risk that is a metric which represents profit impact and a metric which is going to represent supply risk. So, we can create a dimension in order to present the supply risk. One of the observations that you can make here is in case of number of suppliers higher number of suppliers presents low risk whereas, in the case of distance higher distance presents high risk. So, these are slightly in terms of what they represent there at odds with each other. So, we need to find a way to represent supply risk in a way that that is demonstrating both these attributes in the right fashion. What can we do? So, over here we have scaled the purchase value we have scaled the number of suppliers on a range. So, for purchase value I have taken a scale of 0 to 10 where 0 represents low impact in terms of profit and 10 represents high impact. And 0 would be present closer to the items which are having very low total purchase value. So, for example, here this has very low purchase value and 10 represents that which has very high purchase value which is here the maximum. So, you can see the profit impact we have scaled from 0 to 10. On the other hand for the supply side I have considered a scale slightly different 1 to 10 it will be preferable to have both the scales as 1 to 10 or 0 to 10 I have considered 1 to 10, but it would be preferable to have similar scales it does not impact our analysis too much. However, it would be preferable to select the same scale. In this particular case if I were to consider low risk for average distance I would scale this close to 10 and I would scale this close to you know 1 for the supply risk. In terms of number of suppliers I would scale this close to 1 and I would scale this close to 10 which means higher number of suppliers is low risk and lower number of suppliers is high risk. So, you can observe what is the scaling that has been carried out, printering cartridges in terms of number of suppliers presents low risk whereas, in terms of distance if we were to consider the printering cartridge A and B it represents high risk. It is also in terms of high risk we can observe the syrup is high risk in terms of the distance, but we still do not have a single metric for supply risk we do have a single metric for profit impact. So, what do we do? We can create a weighted supply risk metric for the supply side, we pick up a weight for the number of suppliers and a weight for the average distance of supplier from bottling plant and we apply those weights. So, over here this would be 0.8 into 5.502 plus 0.2 into 1 which will give me the weighted supply risk. This would be again scaled on 1 to 10 because this is also 1 to 10 and this is also 1 to 10 in terms of scaling hence it is quite useful to scale it with the help of weights. Why did I select 0.8 or why did I select 0.2 for the distance of the suppliers? I have picked up weights and this is left to the judgment of the company perhaps the company feels that the number of suppliers has a larger impact on the supplier risk rather than the distance and the distance is manageable, but let us say we are working in a terrain which is very very poor and the distance would then have a higher impact on the supply risk. So, the weights have to be chosen in the context of application I have chosen these weights and these weights can also be changed. So, when we consider this if we were to find the supplier risk which is weighted for the items we can see that the supplier risk is highest for the syrup at 9.996 followed by the printer in cartridge and the least supplier risk is observed for the printer in cartridge which is used in office and a low amount of supply risk is also observed for paper as well as plastic bottles. On the other hand if we can look at the profit impact which is scaled on 0 to 10 although I would prefer 1 to 10, but 0 to 10 is also fine for the context of explanation. We can see that the profit impact is highest for label A followed by the syrup and plastic bottles. Now, let us put these two dimensions together and position the items on the matrix. So, we have on the x axis the profit impact and on the y axis the supply risk where profit impact is going from 0 to 10 and the supply risk could be scaled from 1 to 10. Now, we can observe that the printer in cartridge is representing very low supply risk and low profit impact whereas, syrup and label A are representing high supply risk and high profit impact as well. So, let us see whether we can create a classification of the cryologic matrix for these items. So, over here let us say the bottling plant decides that any value of profit impact that is higher than 6 on the scale of 0 to 10 and any value of supply risk which is higher than 6 on a scale of 1 to 10 is going to be considered in the other quadrant. Then we are going to have the quadrants created basis that. So, this is going to look at look something like this and we can observe that printer in cartridge label B carton falls in bottleneck items, non-critical items represented by paper, printer in cartridge, plastic bottle represented as leverage item, syrup and label A represented as strategic items. So far so good we have carried out the classification based upon some amount of judgment and selection of matrix. What do we do next? So, we review what is our current procurement process? Our current procurement process can be reviewed for each of the items, plastic bottles which are leverage items. We have been procuring for the same supplier for last 5 years. For the syrup which is a strategic item we are procuring from same supplier for last 10 years, but we are negotiating the contract on a yearly basis. For label A which is a strategic item we are again choosing the supplier on a yearly basis by negotiating cost. Remember for label A and label B we did not have many suppliers as well. For label B which is a bottleneck item because of the low value it represents again the supplier is chosen on a yearly basis. For carton we are which is a bottleneck item again we are choosing it on yearly basis. For paper the supplier is chosen as per need basis, it is a non-critical item. For the printer in cartridge A and B the supplier has been awarded a contract for 3 years and then we are going for a new supplier. And for the printer in cartridge used in office it is a non-critical item and the supplier is being chosen currently as per need basis. This is the current state of procurement. So, the organization might want to think what can we do going forward. So, this is what could be a recommended strategy. For the plastic bottle which is actually a leverage item we can try to reduce cost because there are many suppliers available in the vicinity. We can encourage vendors to come through a competitive bidding process which can reduce the cost of procurement instead of depending on the same supplier. If I look at the syrup we have been dependent on the same supplier, we could explore a potential of joint venture or negotiate rates to lower the cost. Since there are only two suppliers for the syrup maybe we could explore other alternatives which can reduce the risk of supply, but this is not necessary. If the syrup is going to define what the product is it might be difficult to explore other alternatives. For label A and B you can observe that these two items are different categories altogether. The first supplier is chosen on a yearly basis in both cases. Maybe it would be better to offer a longer term contract to a few suppliers which can do two things. One is it can lower the cost over a long term. Strategic items would have the cost implications over here which can be reduced. And we can reduce the risk because we are going to consider distributing the procurement between few suppliers rather than depending upon one supplier every now and then. For cartons there are many suppliers who will be present. What we could do is we could empanel multiple suppliers and we can reduce the risk which is being presented as a nature of the supply risk that is there. Similarly for paper perhaps we might want to identify whether the purchase value is really justified and we could explore pay-per-view processes to reduce the cost impact. It is a non-critical item it does not you know really represent much risk. For the printer ink cartridges and B this is actually a bottleneck item. We could explore the takeover of the supplier or other alternatives to the ink cartridges with near supplier. What was happening is we were dependent only on one supplier or so, maybe we can explore whether we can move to other suppliers of regular ink which can help us streamline our processes better. And for the last case also it is in alignment with the fact that we are procuring paper. So, we could explore paper fee processes in the office to reduce the cost impact. So, these are the recommended actions. One thing that we need to really keep in mind is considering the kind of segmentation that we have carried out. It may be a good idea to have a continuous improvement approach focused on the development of the Kralljik metric and a matrix and the procurement strategy. We can review the nature of selection and scaling of matrix carefully. We can review the weightages which we give to the matrix. We can also bring in a lot of consensus on the matrix. Perhaps someone is not very happy that we are looking at just the number of suppliers and the you know the distance. Maybe there are other attributes of the product we need to consider. And we need to also understand whether the link between strategy and segmentation is working out well. Currently this is more user defined. So, we need to also carry out sufficient deliberation and research whether these strategies really work with the kind of segments that we have. Remember this is the Wattling plant which is looking at its supply portfolio. There may be some good best practices also available in the market carried out by other bottling plants that can help us identify what could be the better procurement strategies that can lower the risk and reduce the cost of procurement. So, with that I conclude the discussion on Kralljik matrix as applied in procurement strategy and development of portfolios for procurement. I hope this was useful and it can help you identify different ways to develop the procurement strategies going forward. So, thank you very much and I hope this was a useful session. Thank you.