Background and Rationale for Choosing Kraljic Model
Supplier relationship management is necessary for long term success and sustainability of an organization. Apple Company has over the years been able to boost its supplier relationship by engaging competent suppliers who identify the need for technological advancements and sustained profitability. Among the factors considered by Apple is the need to reduce costs of sourcing for raw materials and reducing the risks associated with supply chain inefficiencies. The Kraljic supply chain model is a key tool that is applicable in Apple’s operations considering that there are two aspects Apple looks for when engaging its suppliers. The two elements include the profit potential from the transactions and the risks involved in the supply chain process. The model introduced by Kraljic in 1983 has promoted operating efficiencies in the relationships between companies and their suppliers since the model offers the best ways of evaluating supply chain and streamlining all the operations involved in the process. The Kraljic model incorporates a matrix that includes four quadrants; that is, strategic items, bottleneck items, non-critical things and leverage items. Kraljic advises supply chain executives to safeguard their businesses against destructive supply disruptions and handle incessant technological changes as well as economic growth. This implies that there is need to reduce supply susceptibility and take advantage of budding purchasing power with focus on finding suppliers capable of sustaining mutual dependence and power. Strategic products specifically require effective relationships since they are mostly sourced from a single supplier hence the need to ensure that the supply risk is reduced through maintaining strategic partnership. The report therefore relies on Apple as a case to discuss applicability of the Kraljic tool as key to improving suppler relationship.
Application of Kraljic Model in enhancing Supplier Relationship
Apple has made significant steps in promoting strong relationships with its suppliers with many of the suppliers having been with the company for several years. Apple leads the world in technological advancements with iPhone, iPad, Mac, Apple watch and iOS, being among the superior products that have so far been manufactured by Apple. Its ability to identify strategic suppliers has led to success that has over the years made Apple competitive in the industry Mutual trust and commitment with supplier has seen Apple cope with competition from global brands such as Samsung. The company is committed to expanding its supplier base to enable it accommodate the needs and expectations of its customers. With the need for all suppliers to meet the standards stipulated by Apple, every firm is committed to engaging with suppliers who are able to deliver high quality products and services. This implies making steps in reducing operating costs by minimizing supply chain vulnerabilities through involving its supply managers in guarding the company against supply chain interruptions. The purpose is to avoid incidences that could have damaging effects on the organizations and engaging suppliers who acknowledge the need for technological changes and growth of the firm.
Reliance on Kraljic conceptual model is key to enhancing supplier relationships at Apple. Through the model, four quadrants are identified with key resources identified in each of the quadrants. The model relies the need to take into account the profit impact of sourcing certain materials from suppliers and the risks involved in the transactions. This implies that the key goal in using Kraljic approach is to ensure mutual dependence and power that determine supplier-buyer relationship.
Figure 1: Representation of Kraljic Model
Strategic products are reflected in the model and are characterized by profit potential and supply risk involved in buyer-supplier interactions. The strategic items from Apple’s suppliers include custom components, microprocessors, liquid crystal displays, optical drums and application specific integrated circuits that call for efficiencies in the transactions. The fact that the items are supplied by few firms have led to Apple identifying suppliers such as Foxconn and Pegatron with whom it has established long term relationship. Mutual trust and commitment are among the drivers for supply of strategic items such that the main focus is on building a strategic partnership with minimal interruptions. Strategic partnership is key to reducing supply risks to minimal or zero levels with co-operation in terms of delivery of quality and reliable products that take into account the need to enhance lead times, improve product development and product design.
Previously, the main supplier for Apple was Foxconn but with the events that happened at Foxconn in relation to its unethical corporate practice, Apple felt the need to engage a second supplier, that is, Pegatron to reduce dependence on one supplier. The second quadrant has the bottleneck items with low earnings impact as well as huge supply risks involved in the transactions. The bottleneck objects have a modest effect on the fiscal performance of Apple and are susceptible with respect to their supply. Suppliers in this case have dominant power such they could force the company to incur higher costs in purchasing the materials needed in the production process. This implies that there is need to have contingency plans to be able to cope with any frustrations in the operations of the business. Among the plans to consider is the need to reduce dependence on a single supplier and seek for options that would enable contracts with alternative suppliers who are committed to serving Apple and enhancing long term strategic partnerships. Bottleneck issues have happened at Apple on several occasions as a result of inequilibrium in supply and demand.
Customers have to wait for longer periods before they can lay their hands on new models offered due to the incidences that cause supply to fall short of demand and the shipping time. This implies that Apple needs to seek suppliers who are committed to adhering to shorter shipping times and who appreciate the curiosity among customers in having access to the latest models of Apple’s products. The bottleneck problems led to the decision for Apple to consider diversifying its supply risks so as to have a stable supply chain with multiple of suppliers to ensure that Apple is able to react faster to supply constraints. With increased demand in markets with highest population such as India and China, Apple realizes the need to increase capacity to promote supply-demand equilibrium.
The need to diversify supply risks is also brought about by the fact that organizations identify the role of suppliers in promoting high quality products that is key to enhancing growth of both buyers and suppliers. Leverage items are also a part of Kraljic Model where a firm is faced with high profit potential and lower supply risks. This is because the items could be obtained from a range of suppliers hence enabling Apple to have a larger share of the end products cost price and relatively lower supply risk. This implies that Apple has several incentives to negotiate on the costs of the raw materials due to a high purchasing power. The key step for both supplier and buyer to take in this case is to look for ways through which they could enter into a strategic partnership since while Apple has a high purchasing power, the suppliers could gain from the mutual dependence while Apple could benefit from cost reduction of the materials purchased.
However, there is still the option for competitive bidding such that suppliers embrace buyers who quote the highest prices. However, for balanced power, Apple is focused on engaging its suppliers in a way that could develop strategic partnership. Products that could be part of the leverage items include flash memory, random access memory and LCD’s that are not vulnerable to frequent price fluctuations. Non critical items are also part of the Kraljic’s model where there is low earnings effect and low supply risk. The low supply risk could be attributed to the fact that there are many alternatives for the firms such that Apple is able to compare the prices and quality of a number of suppliers and chose the ones seen to be capable of meeting the objectives of the firm. The supply involving non critical items has few technical and commercial problems.
Efficient processing is needed for the non-critical items to reduce cost of logistics and administrative expenses as well as ensure that routine operation are done in the most efficient manner. Measures are taken to reduce ordering and invoicing costs involved in the purchasing process to ensure that the net margins for the firm remains desirable.
Conclusion and Recommendations
Kraljic Model offers one of the best approaches to evaluating supplier relationship to be able to streamline a firm’s operations. The model take into account the profit impact and supply risks involved with strategic products, bottleneck products, leverage products and non-critical products. The model provides an effective solution to deal with supplier relationships in all the quadrants identified such that managers are able to diminish supply exposure and profit from their purchasing power. This implies that managers have to ensure they guard the firm against damaging supply interruptions that could lead to longer waiting times before products are launched. Kraljic approach advocates for a balanced buyer-supplier power such that it is possible to relate in a way that shows mutual dependence and commitment.
Lasting co-operation is key to ensuring that there is continuous improvement in quality and reliability of the products. The model also makes it possible for firms to be able to involve suppliers in product development, products design and enhancing strategic lead times such that it is possible for customers to purchase the products without fear of shortages. There is need for firms to consider dealing with supplier who are able to identify the need to incorporate technological changes in their operations. This implies that suppliers need to be ones who are capable of meeting modern customers’ needs and expectations that are focused on ensuring that firms are able to deliver superior products.
Firms need to consider engaging supplier who are capable of meeting their objectives of larger profit impact with lower supply risks to ensure that their net margins is appropriate and that the firm is able to operate for as sustainable period.
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