Week 3 | Session 3: Procurement Strategy — Make vs. Buy & Introduction to Kraljic Matrix

Course: Supply Chain Digitization

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Recap & Session Agenda

Note

• Session 1: Corporate strategy → functional strategies linkage
• Session 2: Operations–Finance interface → DuPont Model (ROA)
• This session: Procurement and Sourcing Strategy

Topics covered:

1. Three dimensions of SC strategy — Design, Operations, Procurement
2. The procurement process — five stages
3. Make vs. Buy decision
4. Supply Portfolio concept
5. Introduction to the Kraljic Matrix (full matrix in Session 4)

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Three Dimensions of Supply Chain Strategy

Note

★ These three dimensions are interdependent — a change in any one always impacts the other two.

Competition today is not between individual firms — it is between supply chains. SC strategy is the key competitive differentiator.

1. Design Strategy

SC Dimension 1

Concerned with: The structure of the supply chain.

Decision Area	Options / Considerations
Number and location of facilities	Plants, warehouses, retail points — where they sit geographically
Size of retail points	Organised (retail chain) vs. unorganised (kirana stores, pop-up retail)
Warehousing type	Stocking / storage vs. cross-docking / transshipment (8–12 hour turnaround)
Manufacturing type	Globally distributed? Contract manufacturing?
Channel to market	Brick & mortar (physical shop) vs. e-commerce (remote fulfilment)
Line feed storage	Storage arrangements that directly feed manufacturing or assembly operations

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2. Operations Strategy

SC Dimension 2

Concerned with: Day-to-day activities within the SC that carry long-term strategic implications.

Decision Area	Detail
Production sequencing	Ordering of production runs within manufacturing systems
Activity location	Where assembly, storage, labelling, and packaging take place
Scheduling	Timing of manufacturing runs and dispatch schedules — planned SKU by SKU
Resource organisation	Manpower deployment and equipment layout
Inventory & materials management	How stock and inputs are managed across the network
Product mix per facility	Which product combinations each facility is responsible for

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3. Sourcing & Procurement Strategy

SC Dimension 3

Concerned with: How the SC design is created and supplied — the sourcing layer that enables everything else.

Decision Area	Detail
Own vs. partner	Own all facilities or partner with third-party stakeholders?
What to procure	Raw materials, finished goods, packaging, technology (ERP systems), and equipment
Asset strategy	Own vs. hire vs. lease equipment — forklifts, vehicles, machinery
Geography of sourcing	Local vs. global vendor base
Vendor selection & contracting	Criteria for selecting suppliers and terms of engagement

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Why These Three Cannot Be Decided Independently

Interaction	Mechanism
Design → Operations	Where you package (at the factory or near the customer) determines the personnel and equipment needed at each node
Operations → Design	To improve operational efficiency, you may need to restructure the entire SC network
Procurement → Design	If key materials are only available globally, it reshapes your SC geography entirely
Procurement → Operations	Receiving, handling, and vendor negotiation all require people and facilities — i.e., they are operational activities

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What is Procurement Strategy?

Note

Definition: The process of identifying, contracting, and purchasing from the right supply sources.

What you procure, and from whom, determines the quality of the final product or service delivered to the customer. Procurement is directly linked to financial performance — it impacts COGS, asset levels, and inventory.

Benefits of Effective Procurement

Benefit	Description
Long-term buyer-supplier relationships	Reduce the need for repeated, costly negotiations on every order
Standardisation	Aligns expectations on product design, quality, and quantity across suppliers
Streamlined inter-organisational processes	Smoother SC operations overall — less friction at supplier interfaces
Vendor capability development	Vendors serving multiple clients accumulate expertise that accrues back to your SC

Tip

Application of Concepts: Procurement is one of the most commercially impactful roles in SCM at major MNCs. Sourcing and procurement positions are highly competitive precisely because procurement decisions directly drive cost structure and supply resilience.

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Procurement Process — 5 Stages

1. Needs Identification Determine what materials or services are required, how much (quantity), who the internal customers are within the firm, and what the budget envelope is.

2. Market Research on Sources Continuously review the supplier market — it is dynamic. New suppliers and technologies emerge regularly. Actively identify potential new sources even for existing products.

3. Identification & Evaluation of Suppliers Shortlist suppliers and evaluate them formally. Invite Quotes, Proposals, and Bids (RFQ / RFP) from shortlisted vendors. Goal: build a strong set of competitive options before committing.

4. Contracting Formalise the chosen supplier relationship through a contract. A contract can be one-time (a single purchase) or long-term (months or years), depending on the nature of the product and the strategic importance of the relationship.

5. Purchasing, Receiving & Clearing Payments The physical activity of placing orders, receiving goods, and processing payments. Having the right information systems at this stage is critical — poor systems here undermine all upstream procurement effort.

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Make vs. Buy Decision

First Decision in Procurement Strategy

Note

The Make vs. Buy decision must be made before developing any procurement strategy. It is not an all-or-nothing question — it applies component by component and service by service across the entire supply portfolio.

Question: Should the firm produce this in-house (Make) or procure it from external vendors (Buy)?

Reasons to MAKE (In-House Production)

Reason	Rationale
Unique / differentiated product	Proprietary in-house production = competitive edge that competitors cannot easily replicate
Lower cost of in-house production	Proprietary technology or process design makes making cheaper than buying
Internal resource deployment	Employees and equipment already available — lower additional cost to utilise them
Greater control	Over quality, timelines, and intellectual property protection
Capability accumulation	In-house capabilities compound over time — long-term competitive benefits accrue

Tip

Example: Running your own call centre rather than outsourcing customer service — gives direct control over communication quality and brand experience, and builds institutional knowledge about customer issues over time.

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Reasons to BUY (Procure / Outsource)

Reason	Rationale
No need to reinvent the wheel	Vendors have existing expertise, processes, and market access — leveraging them is faster and cheaper
Established sub-supply relationships	Vendor already has relationships in sub-supply markets — gives you a jump-start without building from scratch
Reliable availability	Vendor resources are readily and reliably available in the market
Lower cost of buying	Purchasing cost < in-house production cost, especially for specialised activities
Superior vendor capabilities	The vendor may simply be better at that specific activity than you are
Reduced operational complexity	Vendor handles multiple transactions on your behalf — removes that burden from your operations

Tip

Examples:

• A firm’s core competency is jewellery design. Its vendor’s strength is precision machining and fine manufacturing. Buying the machining makes strategic sense — the vendor is better at it and the firm stays focused on its differentiator.
• Outsourcing packaging to a 3P specialist: they do it cheaper because packaging is their core competency and they achieve economies of scale across multiple clients.

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Key Insight — The Modern Firm’s Model

Note

It is very rare today for a firm to produce everything in-house. The dominant model is:

Focus on core competency → outsource the rest

The firm’s value proposition to its customer = skillfully combining multiple outsourced elements into a coherent, high-quality product or service. Effective outsourcing is not a cost-cutting tactic — it is the foundation of resilient, focused supply chains.

★ Make vs. Buy is not a one-time decision. It must be revisited as markets evolve, costs shift, and capabilities change — both internally and across the vendor landscape.

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Supply Portfolio — Definition

Note

Definition: The amalgamation of all products and services that a firm procures from external sources.

Critical distinction: Supply portfolio = what is procured, not who supplies it.

All procured elements are combined to create the final product or service delivered to the end customer.

Why it matters: Comparing procured items against each other helps assess the current procurement strategy (as-is) and plan the future strategy (to-be) — including which items to make, which to buy, and how to prioritise supplier relationships.

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Kraljic Matrix — Introduction

Preview — Full Detail in Session 4

Note

Proposed by: Peter Kraljic

Source: “Purchasing Must Become Supply Management” — Harvard Business Review, 1983. One of the most enduring and widely used frameworks in SCM.

Purpose: Compare and classify items in the supply portfolio to define the right procurement strategy for each item type.

Also applied in: Demand-side management and inventory segmentation (covered in Week 2, Session 4).

Two Axes of the Kraljic Matrix

Step 1 — Segment the matrix using two dimensions:

Y-Axis: Profit Impact

How significantly does this item affect the firm’s profitability?

Measure	Tools Used
Proportion of total purchase spend this item represents	Spend analysis
Perceived impact on overall profitability	ABC analysis
Criticality to business continuity	VED analysis

X-Axis: Supply Risk

How risky or difficult is it to procure this item?

Risk Factor	Direction
Location of suppliers	Farther away → higher risk
Number of available suppliers	Fewer suppliers → higher risk
Perishability of the item	Higher perishability → higher risk
Other sourcing difficulty factors	Any factor that makes supply fragile or unreliable

Note

The full Kraljic Matrix — all four quadrants with their procurement strategies — is covered in Session 4. This session establishes the two axes and the logic of classification before the strategic application.

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Session Summary

Topic	Key Points
3 SC Strategy Dimensions	Design (structure) | Operations (day-to-day) | Procurement (sourcing) — all interdependent
Procurement Process	Needs ID → Market research → Supplier evaluation → Contracting → Purchase & receive
Make vs. Buy	Always the first decision. Make = control + differentiation. Buy = speed + expertise + cost savings. Component-by-component decision.
Supply Portfolio	All procured items combined — what is procured, not who supplies it
Kraljic Matrix	Classify supply portfolio on Profit Impact (Y) × Supply Risk (X) — full strategies in Session 4

Tip

★ Exam Tip — Make vs. Buy: This is always the first decision before any procurement strategy. Structure your exam answer using four lenses:

• Cost — is it cheaper to make or buy?
• Control — how much process, quality, and IP control is needed?
• Capability — does the firm have the capability, or does a vendor do it better?
• Competitive edge — does in-house production create a differentiator that cannot be replicated?

Apply all four lenses and justify the recommendation with a specific example from the relevant industry context.