The portfolio technique has originated in the financial management; there, the composition of the investment portfolio with the aid of portfolio analyses has been represented according to the factors of return and risk. Nowadays, this technique is used in modified form in diverse areas of business administration and has become one of the most widely used instruments of the strategic manage-ment. Thus, schemes such as the growth share matrix of the Boston Consulting Group, the growth share matrix of McKinsey, or the market-product life cycle matrix have been established.
Basically, the portfolio technique can be applied to different questions in the purchasing area. Applying it will always be sensible when one or more objects shall be related to two criteria. With regard to strategic considerations, often a company criterion (internal) will be singled out as the key factors. These two criteria form the two axes of a two-dimensional coordinate system. The coordinate system is then divided into four fields, and generic and standard strategies are being defined for each of the fields. Thus, a general scope of action is created.
In the next stage, the objects to be examined are being analysed and evaluated according to both criteria. By the evaluation the position of the object within the coordinate system is determined; all objects will in the end be found in one of the four defined fields. Conclusively, the selected generic and standard strategies can be specified and elaborated. Thus, the portfolio technique provides for a clear and simple visualisation of complex circumstances from which concrete courses of action can be deduced.
For better understanding, two usual examples of the use of the portfolio tech-nique in purchasing are given below.
7.4.1 Commodity Groups Portfolio
Establishing the commodity groups portfolio is a familiar and usual application of the portfolio technique in purchasing. The commodity groups are analysed according to the criteria of purchase volume and supply risk. The purchase volume is the company criterion and can be equated with the relevance of the commodity group for one’s company. The supply risk on the other hand is the environmental criterion and represents the availability of the material and the complexity of procuring it.
The commodity groups are evaluated with respect to the criteria with the help of a grid diagram. A fixed classification scheme is used to safeguard the objective positioning of the commodity group. The groups can then be classified according to four categories (see Fig.7.9), and generic strategies be applied to them.
With regard to leverage commodity groups, it is advised to make use of the existing market power in order to realise long-term savings e.g. by sourcing in best-cost countries. With regard to strategic commodity groups, the focus should be laid on supplier development and close cooperation with the suppliers, while with regard to non-critical commodity groups, bundling, standardisation, and automation should be the key strategies. With regard to bottleneck commodity groups, espe-cially risk management and material substitution will be called for.
Leverage Product group
Strategic Product group
Non-critical Product group
Bottleneck Product group
Purchasing volume
Supply risk
low high
high
Fig. 7.9 Portfolio technique to display the purchasing program
7.4.2 Supplier Portfolio
The supplier portfolio (Fig.7.10) represents an approach to make clear different constellations of market power by a comparison of the supplier’s supply power and one’s company’s demand power.
The individual suppliers are positioned as circles in the supplier portfolio according to the respective market power constellation. As the third parameter, the size of the respective purchase volume can be shown by the diameter of the respective circle—the bigger the circle is, the higher is the purchase volume. The diagram thus not only shows the power constellations with regard to the individual suppliers but also the purchase volumes they represent.
To the four categories, generic and standard strategies can be assigned that determine the basic orientation of the strategic measures:
A. The supplier has a strong position of power with regard to the buyer. Emanci-pation will be the strategic target in this case—the dependency on the supplier should be reduced by targeted internal and external measures; materials should be substituted if possible; and one’s attractiveness as customer should be better exploited.
B. Both the supplier and the buyer have strong positions of power. Both depend on each other, and both have many opportunities to exert influence on the other. In this power constellation, a close partner-like cooperation is advised in which the interests of both parties are being preserved.
A B
C D
power of supplier
Power of buyer
low high
high
Fig. 7.10 Positioning of suppliers based on market power position
C. Two weak and insignificant market partners meet. Both do not need the other, and normally their business relationship is loose and impersonal. Strategic considerations will, if at all, only be applied selectively as suppliers of that kind can be replaced at any time.
D. The supplier has a comparatively weak power position with regard to the buyer.
In this market constellation, the strategic considerations will focus on realising chances. Such chances may include generating savings but also the develop-ment of the supplier targeted to one’s needs. This market constellation is especially favourable to that aim as such suppliers are easily malleable because of their weak position.
As these two examples have shown, the portfolio technique can be applied variably if complex situations should be visualised in a clear form. By position-ing different objects strategically, the portfolio technique is useful to the planning process but also to daily questions.