Here’s one important issue we have discussed here. As a supply chain person, you should identify the critical items of your organization. According to that, you can prepare supply positioning model for different categories of items.
Thus you can save time and money.
Annual Expenditure Value of the SKU/Service
More the expenditure value for a particular SKU/Service, more it is important for your business as it will offer the potential for cost savings.
Criticality to the business
If the SKU/service is not available/delivered on time then how this is going to affect your company’s profit or operations? – This question decides the level of the criticality of the SKU/Service
Let’s analyze both the factors in the below matrix
Expenditure is plotted on the X-Axis and criticality is plotted on the Y-axis of this chart. As you move on the X-axis from left to right the expenditure value increases. Generally, as per Pareto’s rule, 80% of the Items/Services account for 20% of the expenditure and 20% of the item account for the 80% of the expenditure. You can use here ABC analysis to identify the items and services.
Now let’s analyze the characteristics of the items as per the quadrant
This quadrant is represented by items which are least critical to your business and account for least expenditure value. Normally these items are standard in nature, of low value and many suppliers. The examples for this quadrant are stationary items, housekeeping materials, IT peripheral like CDs, etc. Level of attractiveness for doing business for these SKUs/Services would be low for the suppliers.
SKUs/Service in this quadrant are similar to Routine quadrant, but the spend value is very high for these items. These are again standard services/SKUs and readily available in the market, but these SKUs/Services are of high values and offer great potential towards cost reductions and savings. Level of attractiveness for doing business for these SKUs/Services would be high for the suppliers.
These SKUs/Services are characterized by high risk and low annual expenditure value. These are mission critical items/services. Unavailability of these services and SKUs may immediately affect the operations and profitability of your company. Items in this quadrant can be MRO items for critical machines and equipment. Normally these items are highly specialized, not readily available in the market and have very limited suppliers. Since spend value is low for these items and services so it may not offer a high level of attractiveness to suppliers for doing business with your company.
Similar to bottleneck items, these items are very critical to your business. The spend value for these items is higher and offers a higher level of attractiveness to suppliers for doing business with your company. You may have a greater ability to influence the supply of these items. These items are the key contributors to the profitability of your company. The examples of these items are key components on which your Finished Products depend. Similar to bottleneck items, these items may not be readily available in the market and may have very few suppliers.
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The great work, thanks for sharing these types of theories for students.