6.3 Applying and Comparing the Purchasing Portfolio and Product Portfolio Matrices
6.3 Applying and Comparing the Purchasing Portfolio and Product
On the other hand, for the category of frozen potatoes, although organic products constitute a relatively low spend, these products also present a significant risk, since CT is only relying on one supplier for organic frozen potatoes. Organic frozen potatoes are thus positioned in the bottleneck quadrant. The strategic buyer claims that in order to secure supply, relying on one supplier is not enough, since if something were to occur to that one supplier, CT does not have any alternative suppliers that could cover the production. CT would therefore not be able to source organic potatoes until a new supplier is found. This implies that there is a significant risk associated with single sourcing and that multiple sourcing is preferable for CT. In terms of the dairy category, cottage cheese and allergy products are also considered as bottleneck items. Both products constitute the low spend (2% and 4%) and cottage cheese comprises solely of three product types procured from one supplier and allergy products are also sourced from one supplier. These products thus present a significantly high supply risk in the form of supplier dependency.
Special products, such as barbeque potatoes similarly present significant risks since CT also relies on one supplier for these products. The spend however, for these products is significantly higher than for organic potatoes and thus special frozen potatoes are positioned in the strategic quadrant. On the other hand, milk is situated in between the quadrants of leverage and strategic.
Undoubtedly, milk presents a high relative cost for CT and supply risks are as well high, since CT is solely relying on Arla for its twelve private label milk products.
Furthermore, in addition to considering the number of suppliers and substitution possibilities, CT also evaluates the qualifications, performances, and capacities of its current suppliers. Specifically, CT critically analyzes its supplier base and evaluates the extent to which it is composed of large and dominant suppliers and small, flexible, but capacity constrained suppliers.
On the other hand, CT does not explicitly seem to consider make-or-buy opportunities due to the fact that it is a sourcing company and thus relies on suppliers to develop products for the private label products that will be sold in the Coop retail stores. Furthermore, contrasting theory, CT does not directly take into account storage risks when utilizing the product portfolio matrix. This same argument can be applied to competitive demand, however CT does on a continuous basis evaluate how to most efficiently bundle volumes and harmonize PDs in order to offer its customers the most attractive product assortments at favorable prices.
Contrasting the theoretical framework, which extends the purchasing portfolio matrix with the supply risks of perishability and seasonality, CT does not directly apply these risks when using the product portfolio matrix. However, for the frozen potato category, it can be argued that both perishability and seasonality factors are considered through category management. This is especially relevant for the harvest category to which frozen potatoes belong in. The strategic buyer explicitly states that the quality, size, and accessible volumes of the products belonging to the harvest category depend upon weather and harvest developments. Additionally, a high degree of seasonality in terms of harvesting periods implies that buyers need to put forth a lot of effort in drawing up an annual sourcing strategy before the contract is renewed (CT Interview 1, pg. 9).
Perishability is also taken into consideration especially in terms of storage, since harvest products are usually bought once per year and thus the freshness and quality of for instance potatoes needs to be ensured through appropriate warehousing conditions. Overall, although agricultural-specific supply risks are not explicitly accounted for when positioning items in the product portfolio matrix, these risks have already been considered through the establishment of the category.
As opposed to the harvest category of frozen potatoes, which is significantly affected by seasonality, dairy products do not belong to a category where seasonality plays a significant role in terms of supply risk. Instead market and macroeconomic conditions as well as regulations and national customer preferences can present great risks. Naturally, perishability and reduced shelf-life risks are considered when deciding and managing logistical arrangements with suppliers. These factors are viewed as additional considerations and will be elaborated further in the subsequent section of the analysis.
Although the weighted factor score method is recommended as the manner in which buyers should prioritize and select the supply risks to consider when using the purchasing portfolio matrix, practice does not reflect this. In fact, CT does not utilize any form of method when selecting which supply risks to focus on. Instead, supply risks are decided on an ad-hoc and buyer basis. It can be argued that the manner in which supplier risks are prioritized leans towards the one-by-one method.
This is because although the strategic buyer claims to critically analyze the qualifications, performances, and capacities of its current suppliers when positioning products in the product
portfolio matrix, the reasoning process reflected that a greater emphasis is placed upon the number of suppliers and substitution possibilities. Furthermore, the fact that buyers do not discuss which supply risks to consider between other buyers or cross-functionally further contributes to the fact that the one-by-one method is utilized.
Overall, the product portfolio matrix is primarily utilized to position products in terms of spend and the number of suppliers as well as supplier substitution possibilities. Although additional supplier factors are considered, a significant focus is given to the number of suppliers when actually positioning products within the matrix. It can be argued that this enables buyers to easily utilize the product portfolio as an initial reference for the positioning of suppliers within the supplier view matrix. Nonetheless, the theoretical intention of the product portfolio matrix is to certain extent not aligned to theory and this will be elaborated further in the subsequent sections and discussion.
6.3.2 Alternative Considerations
Literature alludes to the importance of considering regulations and technological as well as socio-economic drivers when sourcing agricultural commodities. For both categories viewed it can be concluded that CT does take regulations into account. Especially the products included in the dairy category are subject to conforming to regulations due to their perishable nature. In fact, CT either sends required documents to suppliers or uploads them through the Scanmarket before performing a tender or e-auction. Such documentation includes a code of conduct, product and quality requirements, and the inclusion or omission of chemical substances, such as straw shortening chemicals (PPT About Coop Trading, 2016).
Furthermore, regulations can be either general or country-specific and the strategic buyer heavily expresses his frustration on this matter because the rules for what can be included in dairy products vary from country to country. In terms of the category of dairy products, some vitamins and aromas are allowed in some countries whereas they are prohibited in others and as a result “you have a lot of specialized products that are different from country to country and we are struggling with harmonizing the products” (CT Interview 2, pg. 8).
The presence and removal of quotas is also relevant to consider when it comes to the sourcing of milk based products. The recent abolishment of the EU Milk quota regime resulted in an oversupply of milk and thus the sharp decrease in milk prices. Overall, macroeconomic factors and regulations affect price fluctuation risks and thus the usage of fixed versus open-end contracts. On the other hand, quota restrictions do not seem to be prevalent in the supply market of potatoes and as mentioned above CT is accounting for product liability laws for all of the agricultural goods that it is sourcing.
Technological drivers in the form of novel technologies generating economies of scale, industry consolidation, or tighter control over product quality do not directly affect the sourcing process of potatoes done by CT. With regards to dairy products the need for differentiated product descriptions that conform to national consumer preferences complicates the utilization of economies of scale.
On the other hand, logistics clusters and the ability of suppliers to assume logistics functions play a rather significant role in the evaluations that CT makes when sourcing agricultural commodities. Although CT is generally in charge of managing the logistics functions itself when it comes to the sourcing of private label products, in some cases within the dairy category, suppliers individually dispose of the logistics function and this can result in significant cost reductions on the part of CT. Such suppliers often “base their whole business strategy on logistics and they have big seller advantages because they can deliver directly to the stores” (CT Interview 1, pg. 9).
Additionally, logistical arrangements and lead times affect the shelf-life of products and this can impose restrictions on the number of suppliers CT can use (Interview 2, pg. 11). Overall, it is especially important for CT to be able to rely on suppliers that possess adequate distribution capabilities and CT carefully evaluates which party is able to assume the logistics functions and compares the end-costs of each scenario.
Socio-economic factors in terms of national customer preferences and demands are also considered when sourcing private label frozen potatoes and dairy products. However, it can be argued that such considerations play to a large extent a much more significant role when it comes to the sourcing of milk-based products. In fact, the strategic buyer emphasizes that it has been
extremely difficult to formulate a strategy on a category basis for dairy products, since the category involves a multitude of suppliers and products that need to conform to national brands and customer preferences (Interview 2, pg. 8). This contributes to the complexity and number of PDs that CT has to handle.