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Procurement if often seen as a tactical funtion with the sole objective of procuring products and services at the least possible price. Purchases are not planned and often executed on short timelines without giving due consideration for the boarder issues. This results in purchases that cost too much in the long-run, customer dissatisfaction, quality problems, commitment to obsolete technologies, etc. An over emphasis of price as the key measure of procurement effectiveness has clouded the strategic importance of procurement function leading to various pitfalls that affects the organizations performance in the long term.

Here is a list of few common mistakes, classified as per Kraljic’s Purchase Segmentation:

1. Non-critical purchase
a. Ordering excess quantity to obtain price discounts and thus lower price without considering the carrying cost associated with excess inventory
b. Focusing on economies of scale without evaluating obsolescence cost for short shelf-life-items
2. Leverage purchase
a. Products from different suppliers only differ in pricing
b. Emphasis on lowest price without considering the impact on availability due to longer lead time and/or supplier reliability
3. Strategic purchase
a. Falling for a lower initial price without evaluating the total cost of ownership associated with the entire process of obtaining the product or service
b. Obtaining extended payment terms without considering the cost of capital and the possible discount for an earlier payment schedule
c. Supplier risk reduction by utilizing a large supplier base without considering the benefits of consolidation and associated volume discount
4. Bottleneck
a. Falling for a lower initial price without evaluating the total cost of ownership for its entire life cycle
b. Procurement of products without evaluating latest technological options which are available in market or discussing with suppliers on improved products in the final stages of development

Note: Non-critical purchases, leverage purchases, strategic purchases and bottleneck purchases are the four major categories of purchase segmentation proposed by Peter Kraljic. Kraljic, P.; Purchasing must become Supply Management; Harvard Business Review (October, 1983)

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  1. Kaushik Choudhury
    You have rightly highlighted  that price cannot be the pivotal decision in the procurement process .

    Sourcing department needs to take into consideration many other attributed viz. quality, delivery timeline , prospect of long term commitment  and  collaboration , scalability capability etc . Unless the sourcing team doesn’t jettison the short term gain and concentrate on big picture it is not possible for the organizations to optimize there procurement process.

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