 So, this is Professor Sushmita Narayan from the Indian Institute of Management Mumbai. Welcome back to another NPTEL session on supply chain digitization and this is a part of several series of lectures where we have been focusing up till now on supply chain design and operations strategies. To give you an overview we have already covered some of the initial fundamental topics on how do we design strategies, how is it linked to financial strategies, corporate strategies and also we have seen some of the metrics that can be looked at in order to understand what is the impact of these strategies and some examples also that we have picked up. I am now picking up procurement strategies in which we have already seen an overview into the make and buy decision that the company is going to take and if it decides to make then it has a decision on how it has to figure out the processes, how it has to design the facilities and what kind of elements need to be used in order to create the product. But if it decides to buy then it has to now also look at how it is going to purchase or make the procurement strategy for its organization. Procurement strategies can be designed at the level of an entire organization or at the level of a specific facility. A facility could be a plant, a facility could be an office, a facility could be a warehouse or it could be a collection of several such facilities as well. Every organization looks at procurement strategies in a different way, however we have found that there are some interesting ways to look at strategic procurement one of which is through supply portfolios which is the Kralgic matrix. In the last session we had a brief introduction I would say into what the Kralgic matrix is and what is the nature of the segmentation that is carried out in the Kralgic matrix. The basis for the segmentation that is carried out namely the supply risk and the profit impact. So, when we speak about the supply portfolios which is used in the Kralgic matrix there are different types of matrix that are used such as the supply side matrix which we call as supply risk. And on the other hand we have matrix related to the profit impact through the procurement of these items. Now, the supply portfolio can actually be designed not just for procurement of products or items, but also for services, work orders. So, it can extend to any kind of procurement so to speak. We had a brief introduction into what the Kralgic matrix was and in this session I will get into a bit of detail as to what is the use of the Kralgic matrix and I will give an introduction to an example where we can see how the Kralgic matrix is being used. In this this would be the first lecture on the example and then we will have another lecture where we will look at how it can be implemented. So, going forward we have seen that the Kralgic matrix consists of bottleneck items, non-critical items, leverage items and strategic items that can be identified by considering two elements or two dimensions for the items or services that are being procured namely the profit impact and the supply risk. And when we speak about this particular segmentation we have seen that the segmentation is quite useful in the in the sense it gives these four categories, but post the segmentation the procurement team which has perhaps created this Kralgic matrix can actually review its existing procurement strategy and identify if something needs to be done further. So, it could be used in two ways. So, once you have done the segmentation you could either define a procurement strategy right from scratch let us say you are starting out and you need to understand what could be the potential profit impact and potential supply risk that you are going to face for this particular endeavor and in this you know in this particular fashion you would not have already procured the items. On the other hand let us say the organization has a history of working in this industry. Let us say it has been working for the last 10, 15 years and it has observed that the procurement strategy is not aligning very well with its business. There have been some issues that it has faced with its suppliers, there may have been missed orders, there may be some concerns with respect to how much cost they are incurring. There could also be some concerns that the items that they are actually procuring are not fitting well with the product itself and hence it is impacting the nature of business that it is going to have with its clients downstream of the processes. So, it has to look at its procurement strategy and it has to review. So, the first step that can be done is to categorize the items that it has procured based upon these dimensions. Post this let us say the organization has 30 to 40 items that it has procured different kinds of categories and classes and product types services types all of these which are going to be present. There is no fixed number as to how many items that a company can procure. So, this will definitely range from organization to organization and like I earlier mentioned the procurement strategy could also be defined at the level of a facility not the entire organization. So, hence the number of items that are going to be distributed within this cryptographic matrix will vary from scenario to scenario. Now once it has done the classification it has to now see what can it do with these items what can it actually derive as an insight from this classification and what could be done with this procurement that it is carrying out. So, there are few options that can be followed. One of the things that we can look over here is on this dimension we are seeing that the profit impact is increasing. Now like I mentioned earlier in the previous session on the cryptographic matrix the profit impact can be defined in terms of the purchase value or the cost of procurement. The profit impact can also be related to the final business outcomes as well how it has helped let us say client retention, customer satisfaction there are various elements. So, let us say we are defining the profit impact in terms of the total purchase value and the contribution of each item to the total purchase value. If that is the case then in this direction we would be seeing the items which are contributing to a large proportion of the total purchase value may be 30 to 40 percent and that means, these items would be expensive. On the other direction if we move towards the left these items would be less expensive that is the interpretation that we get. Now let us look at the vertical axis on the vertical axis if I am going upwards to this side in terms of supply risk it means that these items are presenting high supply risk and we have seen that high supply risk would indicate or could be interpreted based upon how we have defined the supply risk. Suppose the supply risk is defined purely in terms of how many suppliers are there for each item. We would find that perhaps there is a product which has just one supplier there is a product and there is another product let us say which has may be a thousand suppliers or a million suppliers. In which case the items that are going to have fewer number of suppliers are prone to higher supply risk and the items which have lesser supply risk are those which have more number of suppliers present in the market. So, in other words we would prefer to have low supply risk and we would prefer to have low cost impact upon our procurement portfolio or our purchase portfolio and this would be just non-critical items in that case. But think about it a business cannot have all items functioning as non-critical items it might be ideally possible, but in practice it may be tough. There may be some items that are extremely expensive needed for defining the final business there may be some items that are extremely cheap and there may be some items that are extremely risky in terms of the procurement and there may be some items that do not have that much risk. So, you are going to find a distribution of items across these four quadrants few items here, few items there there is no specific ideal as to how many items should actually be present in each category. What we can observe is that an organization is most likely going to have items in these four categories. If it was in this case that is if the business was functioning with purely non-critical items then let us look at the nature of such a scenario. It means that it is having absolutely no risk in what it procures and it has very low cost impact upon its procurement portfolio. Now, this is a company which is ideally in a very very good position in the market if it is able to also price its items or its business very well in the market that is the finished group. Now, such a kind of scenario would perhaps be possible if that organization is a monopoly player in the market. That means, there is no other organization except this particular company as it is able to get products very easily from the market from multiple suppliers and it is also able to reduce the cost that it is procuring. But this could be a very short lived strategy and there is a good likelihood that there may be competitors who enter in the market to the organization and the suppliers the large number of suppliers who were supplying to this organization will now find new clients to supply to. In which case what would happen is that the risk for this particular organization will start increasing. So, like I said this is a very sensitive space to be in and it might not even occur for the organization. When an organization let us say the producer of goods such as FMCG products, let us say there is an organization which is producing FMCG products and it has other competitors as well. Some of these suppliers may be distributed amongst itself and its competitors in which case the suppliers for this organization might increase. But it might also be possible to reduce the costs because there are multiple competitors who are purchasing from this set of suppliers. So, there are various combinations which could then occur. So, considering this fact that it is impossible to have a specific scenario only existing and it is more natural or practical to expect all of these scenarios to exist at some point. An organization would now look at what needs to be done for its strategy. So, there are few things that could be done. Like I said I would prefer to have as low risk as possible and as low cost impact as possible. So, I would start looking at items such as these which are bottleneck and I would try to lower the risk that they present to the organization. Similarly, I would look at items like these which are strategic items and I would want to lower the risk that they bring to the organization and if possible I would also reduce the cost that they bring into the organization. Which means I want to bring them from this quadrant towards this quadrant and I want to bring bottleneck items from this quadrant towards this quadrant. Similarly, if I have leverage items they are already presenting low risk, but I would like to see if I could bring them towards becoming more non-critical in nature. Now, again this is an ideal position that I would like to be in, but it might not also make a lot of business sense given the nature of the product. For example, and this is very easily seen in the case of strategic items. Strategic items by the nature of the product itself, these are items that have high profit impact and high supply risk meaning they might be very expensive and they might not be many suppliers for this product. So, in this case let us think about it. I am an organization trying to procure a strategic item. There is only one supplier available in the market. There are other competitors like me who would like to procure this item and even for them there is this one supplier only who is present. Hence, the supply risk for me is quite high. To lower this risk would be very very tough to lower the cost also would be very very tough because my competitor might offer a better price to the supplier. And since there is only one supplier unless other suppliers come into the market, it would be very tough to reduce the supply risk. So, this is a very difficult position to be So, what are the things that we could do if we were to consider reducing supply risk for the items? One is we would see whether we could add more suppliers. Let us say if it is a strategic item with just one supplier, is it possible to get another supplier? We might want to take over the supplier. Suppose this is very rare material that we are trying to procure and only this one supplier can help us procure it. And there is no other entity in the world which has the access to these resources. We are procuring high volumes and high value from this supplier. If that is the case then we might want to have a long term you know joint venture or takeover of this particular supplier. So, this could be one option that we choose. We might want to carry stock of the item. What we mean by carrying stock is one of the issues that could happen when there is high supply risk is let us say as an organization that is procuring and it has to make the final product or deliver the final service. There may be a case in which you get sudden orders from your clients. And since there is high supply risk, it may be very difficult to actually get the items well on time. And in such cases you might want to purchase excess in advance in anticipation that you are going to have business. So, this is what we mean by carrying stock. And this would be very much applicable in case of bottleneck items in which case this supply risk that may be presenting itself need not just be the number of suppliers. The suppliers in the supply risk which is going to be present over here may be related to other factors. For example, the geographical location of the supplier from your facility could be very very far away. And as a result it may make a lot of sense for you to procure large volumes from the supplier such that you are able to manage any demand shocks that you face on your downstream side. So, that is an example of lowering risk by carrying stock. The other possibility which was a joint venture could be applicable for strategic items. Another interesting way to go about it could be finding substitutes. Now, look at the very idea of risk that is being brought about over here. This particular item that you are procuring presents itself with high supply risk because the number of suppliers are few, because the distance of the supplier is very far away, because there is a specific nature to the product which is going to make it impossible for you to find the supply of this product from anywhere else. That means, you are highly dependent upon these suppliers just because of the nature of the product, which means it could be the chemical composition of the product, the design of the product, it could also be related to what is going to be the shape or size and other technical specifications related to the product. In this case we can take a higher level look at what we are procuring and we could see whether we could find substitutes that can bring in the same kind of functional benefits to us in comparison to what we are already procuring. So, for example, in the shampoo that we are going to produce perhaps there is a dye in the shampoo which is giving a certain color to the shampoo. And this particular dye presents itself with high supplier risk because there are very few suppliers available in the market. Now, this dye has a certain chemical composition, certain level of glow to it or certain kind of particles which are present which make it look very appealing and hence we want to use it to settle in the market as a part of the shampoo. But can we find substitutes that do the same job or do we really feel that those attributes such as the look and shine that is being brought about by the dye is so necessary to the final shampoo that we create. So, these options need to be evaluated such that we can perhaps change the nature of what we are procuring by finding substitutes. By finding substitutes if we are able to bring in the same kind of functional benefits then what happens is we now have more items that can be procured. We are able to distribute the supply risk among many items to be procured for the same functional purpose. So, as a result your supply risk is now going to actually reduce. So, this is one possibility which is going to be present and like I have mentioned over here this is applicable for bottleneck and strategic items. Now, the other issue or concern that we observe is although risk could be reduced, but costs could still be quite high. So, that is the other strategic intervention that can be looked at in order to define what needs to be done going forward. So, the other option that we have is to reduce cost. We could look at reduced cost by focusing on this side of the Kralgic matrix as we can see leverage items and strategic items are going to have high profit impact upon our procurement portfolio which means they might be very expensive. So, we want to reduce the cost of this. Now, how can we reduce the cost of an item in the market? Let us see whether we can do this for strategic items. For strategic items there is just one supplier in the market going back to the same example that I mentioned earlier and several other competitors for the organization that is procuring. It would be tough for you to actually reduce the cost of the product to a large extent because the organization that you are procuring from or the supplier that you are procuring from he is going to be the dominating party in this particular transaction. It will be very difficult for you to negotiate better terms and conditions for strategic items beyond a point because he is going to say or she is going to say that look I have this product I am the only seller of this product this is what you want and your competitors also want this if you do not purchase from me at the cost that I have offered to you I will go to your competitor and I will find other buyers who are going to take it from me and I will move my business elsewhere. So, negotiation can be very very tough over here which is why to lower costs it would be better to take some drastic long-term measures such as joint ventures or supplier takeover if it is possible. But if that is not the case then you will find it very tough in order to reduce the cost impact of the items which are strategic in nature. Now, let us look at leverage items. Leverage items are those items which have high profit impact which means they are expensive but they have low supply risk which means for example, you might have multiple suppliers which are present in the market for this particular item or this the suppliers for the item are located very close to you. If that is the case let us say that the number of suppliers in the market for the item is very large what you are seeing that the cost of procurement is very high. You can actually think of why the cost of procurement is so high when you have so many options available in the market that is so many suppliers who are present in the market. If that is the case when so many suppliers are going to be present in the market you are actually going to be the dominating organization in such a kind of relationship. In other words you can tell to the supplier or other suppliers that look there are many other options which are present in the market apart from you. If you are not going to reduce the cost that you provide to me I will go to other suppliers. Now, this can be done in order to reduce the cost of purchase. So, what we can observe here is one of the ways to reduce cost of purchase would be enable competition among suppliers allow them to bid for low cost for the volumes that you are identifying as your procurement. You can also try to reduce cost through internal processes by identifying what could be the optimal order quantity you need to procure. You can ask for volume discounts and if this is not going to happen you can still look at removing the item from your purchase portfolio and again looking at substitutes if possible. The final thing that could be done is to make a complete change in what you are procuring and how you are procuring which is streamlining your procurement transactions. One of the ways to do this is automation of procurement. We have seen a large growth of e-procurement portals electronic procurement which reduces the cost of searching for suppliers and connecting them to the buyers. You can also look at decentralization of purchase decisions very much applicable for the non-critical items where you can delegate the responsibility of procurement to the facility or to the committee or to that division which is looking at procurement since the value of procurement is very very low. It might not be necessary to look at this from a long-term perspective but allow for decentralized purchase to be carried out. The reason being over here these items present low supplier risk as well as low cost. If there is low supplier risk let us say there are many suppliers present in the market the costs for these products are well defined in the market. There is no possibility or very low possibility that suppliers are going to reduce their costs very much because if they are going to reduce the cost the competition gets impacted. So, over here you can actually allow for the committee or to the division to go into the market and make spot purchases based upon their requirement. So, this is the final you know the overview that we have of the Kralgic matrix and the segmentation and the potential that it has. What we are going to do in another session after this is to pick up a small example and see how the Kralgic matrix can be used to review the procurement strategy of that particular case firm that we are going to consider. So, I hope this particular session was useful in introducing the benefits of Kralgic matrix and in the next session we will pick up the example and see how it can be implemented. Thank you very much.