Purchasing Portfolio Model (Olsen & Ellram)
This article provides a practical explanation of the Purchasing Portfolio Model by Olsen and Ellram. After reading, you will understand the basic concepts of this powerful purchasing portfolio tool for the different relationships that exist between buyers and suppliers.
What is the Purchasing Portfolio Model by Olsen and Ellram?
Academics Rasmus Friis Olsen and Lisa M. Ellram developed this purchasing portfolio model based on the the Kraljic portfolio purchasing model with the idea of managing the different relationships that exist with suppliers. The model proposes several axes of approach to buyer-supplier relationships: the relative attractiveness of the supplier and the strength of the supplier relationships.
The attractiveness of the supplier has elements that are divided into five groups: economic factors, performance factors, technological factors, organizational, cultural and strategic factors among others. These elements are vital for the efficiency that the buyer and the supplier have with each other. This shows the importance of social interaction in this model for commitment, comparison and good relations between the passage of time.
The strength of the supplier is the connection that is established between two companies that are divided into the following groups: economic factors, terms of trade, cooperation between buyer and supplier, the distance between buyer and seller.
Action plan for relationships where the attractiveness of the supplier is high or medium and the strength of the relationship is low or moderate. The plan that is recommended is to strengthen the relationship by allocating resources.
Second action plan, where the attractiveness of the supplier is low, the plan that is suggested is the commitment of resources to the development of that supplier, developing the strength of the relationship high or moderate.
The third action plan is to recognise relationship management in a review of the limitations of a company’s portfolio, examining all the relationships the organisation has.
The line of measurement for the supplier relationship matrix is: 1 is very low level and 5 is very high.
With the above, the Purchasing Portfolio Model by Olsen and Ellram conforms four categories: supplier attractiveness, mutual attractiveness, lack of attractiveness and buyer attractiveness, with these categories different strategies are offered according to each category.
By taking the categories into account, an action plan can be developed so that each purchasing category is related and can implement procurement strategies. Thus, in this Purchasing Portfolio Model by Olsen and Ellram, four types of action plan are suggested.
Supplier attractiveness category
Relationships with a high supplier attractiveness and low relationship strength. In this category the relationship with the supplier is strengthened where loyalty is maintained. The relationship can be improved by good communication, getting more volume from the supplier’s material or product development.
Buyer attractiveness category
Relationships with a low supplier attractiveness and relationship strength. The company in this category will not allocate large resources to the relationship as the relationship between the two is just beginning. When you have a solid relationship you could already generate more volume with the orders to the supplier since the trust is strong.
Mutual attraction category
Relationships in which the supplier has a high relative attractiveness and the relationship is strong. Use strategies that reallocate resources in order to maintain a strong relationship with the supplier.
Relationships with a low supplier attractiveness and low relationship strength. If there is no attractiveness the buyer must change the strategy and one of these is to change the supplier. However, if the supplier offers a significant material or is a bottleneck purchase, the company needs to develop an action plan to ensure deliveries and strengthen the relationship. It is more efficient to develop more solidity with the current supplier than to look for a new one. The objective of the action plan is to improve the attractiveness of the supplier or the relationship.
Background on Purchasing Portfolio Models
Purchasing management has been characterized for decades by bringing organizational principles to companies with respect to inventory, suppliers, materials, strategic planning and care of the economy. Also the importance of the relationship with suppliers in order to have a high level of competitiveness in the market and the success of the organization.
To achieve this there are several portfolio management models that are part of the process of developing efficiency in this specific area of a company. One of these models is the Purchasing Portfolio Model by Olsen and Ellram, and another is the Kraljic portfolio purchasing model.
The Kraljic Portfolio Purchasing Model
Peter Kraljic proposed the first purchasing and supply management portfolio matrix that classifies the materials and services to be purchased, considering the risks these have for the company and how they influence the results and their impact.
The Kraljic Portfolio Purchasing Model seeks the good functioning of the business logistics with the purchase of the resources with the suppliers. The classification of the materials will help the purchasing strategy with the supplier is determined by the position of their supply in Kraljic’s Portfolio Purchasing matrix.
With this it will be possible to know what the customer’s supplier is looking for based on categories such as: creation of strategies for the supply of products, bottlenecks, use of products and resources in the best way among others.
This classification basis of resources and the importance of these to understand the supplier more and give more structure and responsibility to the purchasing management Olsen and Ellram focused on the importance of the relationship with the suppliers for the success of the company and its resources.
Strategic purchasing requires a close relationship with suppliers. To achieve this closeness it is necessary for the company to organize frequent visits and exchange of information in order to retain the supplier’s attention in a friendly and full manner. The more time passes, the stronger the relationship between the two, and this will bring about loyalty.
With this the strategic purchasing alliance must persist in advancing the relationship with the supplier.
Leveraged purchasing: here strategies are easier. Purchases can be made from different suppliers, by a selection according to purchasing power, prices.
Bottleneck purchases have low strategic importance, although they are difficult to control. They can cause problems with the number of materials needed, if there is not enough for production as there are few suppliers. With this the recommended purchasing strategy is to ensure the volume of materials, this means that purchases should be managed by controlling suppliers, safety stock, alternative suppliers among others.
The importance of these purchases is low and they are easy to control. Orders are placed to various suppliers and the logistical and administrative costs are high. The purchasing strategy is to reduce transaction costs through efficient processing, standardize the product and optimize order volumes in the inventory. The number of suppliers will be reduced by material category management.
Relationship between Kraljic Portfolio Purchasing Model and the Purchasing Portfolio Model by Olsen and Ellram
Olsen and Ellram on the basis of the Kraljic portfolio purchasing model show how this can be extended to the more strategic approach to buyer-supplier relations in the purchasing categories that Olsen and Ellram’s matrix focuses on.
For the analysis of the relationships Olsen and Ellram focus on two axes that were mentioned above in this article:
The relative attractiveness of the supplier and the strength of the relationship. The attractiveness of the supplier is analogous to the competence or capacity of the supplier, which is measured by economic factors, technological factors according to resources, and organizational and cultural factors according to social exchange.
The components for assessing the relationship are the effectiveness with which the buyer and the supplier interact with each other. Cooperation, commitment and longevity in a relationship also depend on social exchange.
With the specifications of the above, the action plan for good relations in each purchasing category is carried out.
Summary of Purchasing Portfolio Model (Olsen & Ellram)
Nowadays there are many companies that are dedicated to the same thing, same products or service provision, so the buyer has more alternatives and chooses the one that most interests him, whether it is for convenience, opinion or professional or economic access. However, it is necessary to understand the importance of being able to establish portfolio management relationships with suppliers.
Olsen and Ellram complemented the matrix to be able to sustain business relationships over time and thus avoid difficulties in the organisation’s portfolio of material and resources. This matrix presents the strategies to be used with the supplier in order to achieve success.
How attractive the relationship between buyer and supplier should be, the development of this relationship and how this can bring more performance and good quality with the products and services you want to offer to the final customer.
The importance of the portfolio flow is important, the staff that works towards being able to offer the best in the market, but in this matrix Olsen and Ellram focus on the relationships that come to be built or how to build them with the supplier who in this case is the protagonist to achieve good results in a company’s purchasing portfolio.
This is how a company’s purchase portfolio is not only dedicated to logistics, accounts, collections, inventory, etc., but also the human management part takes on an important role for new relationships and those that are present grow and develop positively over time.
The initial matrix was developed over the years by more theoreticians with the importance of portfolio management in the company as a priority for achieving the economic results they want to achieve, without forgetting the human factor as it is essential to be able to exist over time and be a good competitor with other companies in the market, where relationships with suppliers are important for achieving success with the product or service offered in the end.
It’s your turn
What do you think? Do you think that Purchasing Portfolio Model by Olsen and Ellram is a complementary model to the Kraljic matrix? Have you implemented the Olsen and Ellram model in your company, if so, has it worked for you to improve the buyer-supplier relationship? Will a good relationship with suppliers give longevity?
Share your experience and knowledge in the comments box below.
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- Gelderman, C. J., & Van Weele, A. J. (2005). Purchasing portfolio models: a critique and update. Journal of Supply Chain Management, 41(3), 19-28.
- Murphy, S. A. (2007). The effects of portfolio purchasing on a specialized subject collection. Journal of the Medical Library Association, 95(1), 9.
- Drake, P. R., Lee, D. M., & Hussain, M. (2013). The lean and agile purchasing portfolio model. Supply Chain Management: An International Journal.
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