What is a Product Portfolio?
The term“product portfolio” refers to the collection of all the products that a company deals in. A product portfolio may be broken down into different product categories, different product lines, or simply individual products. If an organization offers a wide range of products to various target markets, then it is very important that it analyzes its product portfolio so that it can achieve the organizational goal of increased sales and profits through higher market share and enhanced brand value.
Product Portfolio Classification
One of the most popularly used classifications of the product portfolio is the BCG growth-market share matrix that was developed by Boston Consulting Group’sthen CEO and Founder Mr. Bruce Doolin Henderson in the 1970s. There BCG matrix consists of two axes –the X-axis that represents the relative market share and the Y-axis that represents the expected market growth rate.
Based on the two axes, the entire matrix is divided into four quadrants, where each quadrant represents a particular stage of the product in its life cycle. The four different quadrants are – Cash cows, Stars, Question marks, and Dogs.
- Cash Cows: This quadrant represents those products that enjoy a high market share in a slowly growing market. The products in this category can generate maximum revenue because of their high market share in a market that is not growing. As such, the Cash cow products require the least amount of investment while it has the potential to give higher returns, which helps in enhancing the overall profitability of the company.
- Stars: This quadrant represents those products that have a low market share in a high growth rate market. As such, an organization faces steep competition for the products in this segment and thus it can’t afford to be complacent even when it is among one of the top few. However, if the organization can plan properly, then the Star products can potentially become the Cash cows in the longer term.
- Question Marks: This quadrant represents those products that may have a high market share in a market that is growing fast. However, it is not sure whether the market for the product will go up or down in the future. In case the product loses customer attention, it won’t be able to gain market share and the growth rate will fall and the product will eventually become a Dog. On the other hand, if the product is able to grab more customer interest to gain a higher market share, then it can potentially become a Cash cow. This uncertainty results in the dilemma of whether to invest more money into it or not as an organization is not sure if the investment will give adequate returns or end up becoming a complete waste of money.
- Dogs: This quadrant represents products that have a low market share in a slowly growing market. Hence, these products neither require higher investments nor generate high returns. Consequently, these products have an adverse impact on the overall profitability and thus it is advisable not to invest any more in products from this segment. However, sometimes companies decide to revamp these products to make them saleable again and in this way, they also increase their market share.
Product Portfolio Analysis
The process of product portfolio analysis help organizations to focus on products that operate in a fast moving market faster, while at the same time reduce investments in failing products. An organization analyzes the entire product offering to have a broad idea of how each product is performing in the markets. Based on the analysis, a clearly defined matrix can be constructed that provides useful insight into the current market position, which is then used to build future strategies.
For instance, for Apple Inc., the iPhone is the most profitable segment and it mostly drives the top-line of the company. Hence, the iPhone segment can be categorized as the Star product of the company. On the other hand, the MacBook and the iPad can be categorized as Cash cows.
How to Manage a Product Portfolio?
Product portfolio management is a very important part of any business strategy as it helps in achieving the overall objectives of the organization by planning future tactics for different product lines. Some of the strategies for the above-mentioned product categories are discussed below:
- Cash Cows: For this segment, companies just intend to retain their market share as the market isn’t growing much. They introduce customer loyalty programs and other similar promotions to ensure high customer retention.
- Stars: For this segment, companies undertake various sales promotion and advertising strategies in order to beat the high competition and increase market share. Basically, the investments are primarily focused on marketing activities.
- Question Marks: For this segment, the best strategy is to acquire new customers so that the question marks can be converted to the stars or the cash cows. Also, it is important to monitor the market to understand consumer psychology, which can be used for enhancing the market share for the products in this category.
- Dogs: For this segment, the companies may need to take the hard decision of divestment. Otherwise, they can also revamp the products in this category through rebranding, innovation, etc. Nevertheless, it is very difficult to convert the Dogs into the Stars or the Cash cows.
Key Takeaways
- The product portfolio is the ensemble of all product offerings of a company, which can be broken down into different product categories, different product lines, or simply individual products.
- Based on the relative market share and the expected market growth rate, the product offerings of a company can be divided into four categories – Cash cows, Stars, Question marks, and Dogs.
- Product portfolio analysis, as well as management, helps a company achieve its objectives of increased sales and profits.
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This is a guide to Product Portfolio. Here we also discuss the introduction and how to manage a product portfolio? along with key takeaways. You may also have a look at the following articles to learn more –
This chapter addresses RQ4, which asks: what are the different approaches to improving P&SCM practice and which are likely to work best in the different contexts and types of NHS organisations? As we have seen in previous chapters, the P&SCM process is complex and involves multiple contexts, phases and actors. As we have also seen, there are a very wide variety of practices or management interventions that can be used in each phase of the P&SCM process. With this in mind, we suggest that arriving at an answer to RQ4 requires an approach that enables us to simplify the complex interplay of contexts, phases, actors and practices in the P&SCM process. In order to do this we need to be able to categorise different P&SCM contexts and relate them to particular types of management practices aimed at achieving particular intended outcomes. Our review of the literature suggests that the most appropriate way of tackling this question is to use a portfolio approach.
The notion of a portfolio approach to management is rooted in the finance literature, in particular the work by Markowitz464 (see also discussion by Turnbull465) on the management of risk in equity investments. The basic premise of this work is that rational investors will categorise investment opportunities according to their particular risk–return ratios and then choose a balanced portfolio of investments that maximise the overall expected return for a given level of risk. There are two broader insights from this argument, which have subsequently been applied to various areas of management thinking and practice including P&SCM.465 The first is that decision-makers will typically face a range of different contexts, each requiring particular management practices to deliver intended outcomes. The logic of portfolio models is thus in tune with the CMO logic of realist review. The second insight is that the decisions made and the practices deployed in these different contexts should be seen as interdependent, because organisations are resource constrained. The portfolio approach emphasises the need for managers to make trade-offs in their decision-making to achieve an appropriate balance of outcomes across the different contexts which they face.
Turnbull465 points out that references to portfolio approaches to management first started to appear in the P&SCM literature in the early 1980s. The paper by Kraljic167 has been particularly influential, spawning the development and testing of a number of similar procurement portfolio models by other authors. The limited empirical evidence that exists suggests that portfolio models are popular with procurement practitioners252,466 and their use is associated with greater sophistication in the procurement function.467 Broadly speaking, we can categorise these various models into one of three types based on their main focus or unit of analysis. These are purchase category-focused analysis,167,248,252 relationship-focused analysis249,405,468,469 and supply chain-focused analysis.168
In the remainder of this chapter we discuss these three types of portfolio analysis. We show in particular how each type of analysis focuses our attention on a different phase of the overall P&SCM process and a different underpinning literature. We suggest that each might therefore help us to address one of the three knowledge gaps in the NHS research literature that we identified in Chapter 5.
Kraljic167 is generally recognised to have made a seminal contribution to the development of portfolio analysis in the P&SCM literature. His ideas appear in some form in the portfolio models developed and discussed by many other authors.248,249,252,403,466,468,469 The basic aims of Kraljic’s work are to provide a framework for categorising an organisation’s purchases according to the level of risk associated with each and to give advice about how best to manage these different types of purchase in the form of general procurement strategies and related practices.
Kraljic suggests that organisations should categorise their purchases based on two broad dimensions, the complexity of the supply market and the importance or profit impact of the good or service. He argues that supply market complexity should be assessed in terms of criteria such as the number and availability of potential suppliers, the level of competitive pressure, the pace of technological change, entry barriers, substitution possibilities, and logistics or storage costs. The importance or profit impact of a good or service is defined by criteria such as the volume purchased, the cost as a percentage of the organisation’s total purchasing expenditure, and the impact on the quality or reliability of the organisation’s end product. Using these criteria, assessed on a simple ‘high’ or ‘low’ basis, organisations can allocate their various purchases into one of the four categories shown in Figure 7.
As Figure 7 shows, Kraljic’s argument suggests that organisations are faced with four broad levels of purchase risk. These different levels of risk are based on a combination of the likelihood of the buying organisation facing problems in the supply market and the impact that any problems might have on the buying organisation’s ability to successfully and, if relevant, profitably deliver its good or service. So, for example, strategic items are very high risk because the buying organisation is highly likely to face supply market problems, and those problems, should they occur, will have a significant impact. Leverage items, by contrast, pose a lower risk because, although they are important to the buying organisation’s success and any supply market problems would have a big impact, the likelihood of such problems is minimal.
The other key elements of Kraljic’s work are the general procurement strategies recommended in each category and his advice on how the buying process should be organised and managed. His work therefore clearly focuses our attention on the demand management phase of the P&SCM process. His core argument is that ‘each of these four categories requires a distinctive purchasing approach, whose complexity is in proportion to the strategic implications’ (p. 112).167 Kraljic illustrates his argument with the experiences of four case study companies. His different purchasing approaches are summarised in Table 7.
The guidance in Table 7 clearly picks up on the idea expressed in the organisational buying behaviour literature that the buying process is expected to be undertaken differently depending on the level of risk associated with a purchase. For example, Kraljic’s recommended strategies and associated practices have clear echoes of the organisational buying behaviour literature’s discussion of expected behaviour in different purchase situations. As we discussed in Chapter 3, the organisational buying behaviour literature suggests that known suppliers offering well-proven products and services will be favoured in high-risk situations, and there will be an emphasis on non-price selection criteria (i.e. quality, delivery performance, service levels). The organisational buying behaviour literature also suggests that, in situations of high risk, buying centre participants will favour suppliers with which their organisation has strong prior relationships and well-established networks of communication. These insights are strongly mirrored by Kraljic’s recommended strategies and practices in the highest-risk purchase categories, strategic and bottleneck items, where he suggests a need for closely controlled and long-term relationships. By contrast, the organisational buying behaviour literature suggests that, for lower-risk procurement decisions, buying centre participants will use price as the dominant selection criterion and seek to stimulate competition from as wide a range of suppliers as possible. Again, these insights are reflected in Kraljic’s recommendations for the lower-risk purchase categories, leverage and non-critical items, where he suggests that buying organisations should standardise and consolidate their requirements and seek to exploit supply market competition for a better price.
We can make the same observation of a mirroring of the organisational buying behaviour literature in Kraljic’s suggestions about the required information and the appropriate decision level in his different purchasing approaches. In terms of searching for information about supplier options, the organisational buying behaviour literature suggests that this will become more active and extensive as procurement risk increases. Kraljic similarly suggests that information search should be more detailed and extensive in the higher-risk purchase categories. As regards decision level, the organisational buying behaviour literature suggests that the participants involved in a high-risk buying decision will typically be more highly qualified and experienced. Kraljic suggests that decisions about the higher-risk purchase categories should be handled by the more senior members of the procurement function, who by extension should be the most highly qualified and experienced. Despite this narrow functional focus, Kraljic does also recognise the organisational buying behaviour literature’s suggestion that more people will be involved in high-risk buying decisions and that they will be drawn from a wider range of departments or organisational subunits. He notes that ‘greater integration, stronger cross-functional relations, and more top-management involvement are all necessary’ in higher-risk purchase categories (p. 116).167
Given this resonance with the organisational buying behaviour literature, we propose that Kraljic’s work might be useful in addressing the first knowledge gap identified in Chapter 5 about the decision-making roles, processes and criteria at work in the Clinical Commissioning Groups and the commissioning support units, and about how these commissioning organisations should operate to be effective. In particular, Kraljic’s work provides a simple, clear and systematic framework that might be of use when shaping commissioning strategies and allocating scarce management resources to acquire different types of health-care services. For the same reasons we also suggest that Kraljic’s model might be of value to NHS trusts undertaking procurement of different types of health-care-related goods and services.
There are, however, criticisms of Kraljic’s work, which suggest that there might be some challenges in drawing simple lessons from it for commissioning and procurement in the NHS. These criticisms are of three main types. First, Kraljic’s framework is thought to be too simplistic in its analysis of purchasing context and its recommended procurement strategies to deal with the complexity of organisational decision-making. As Dubois and Pedersen470 suggest, it seems problematic to deduce strategies from an analysis based on just two dimensions and where the potential for interaction between those dimensions is not acknowledged. Second, and in a related vein, Kraljic’s recommended strategies are seen as too generic and too static or reactive. Some authors argue that the framework fails to acknowledge the possibility of different, more nuanced strategies within each category and does not provide guidance for buying organisations to move their purchases proactively from one category to another more favourable position.248,252,467,471 Third, there are what have been called ‘measurement issues’ (p. 21).467 Authors point to difficulties in deciding the operational meaning of purchase importance and supply complexity,472 difficulties in knowing if all of the appropriate variables are being used to measure these dimensions466 and difficulties in deciding how to weight these variables to produce a combined value on each dimension.249
Despite this range of criticisms, the available evidence suggests that Kraljic’s thinking is popular with management practitioners,252,466 which indicates that they find it of value in their decision-making. Work by Gelderman and van Weele248,252 examines why this might the case by looking at how managers handle these proposed weaknesses in practice. In case study research with three Dutch industrial companies, two large international businesses and one smaller nationally focused company, they found that the Kraljic framework was used in a customised way that suited the particular context and needs of each company. They comment that ‘the generic nature of the Kraljic approach allows for customisation, implying that users have to make all kinds of decisions, implementing the portfolio analysis’ (p. 210).252 This customisation applied to the nature of the dimensions used, the variables used to measure each dimension and the methods used to measure the individual variables and to arrive at an overall value against each dimension. This suggests that these companies regarded Kraljic’s work as a broad orientating device which could be used as a basis for analysing their purchased goods and services rather than as something given and immutable.
Moreover, the companies did not move from positioning their goods and services to pursuing procurement strategies in an unthinking and deterministic way. Rather, in each of the cases ‘the positioning of items was followed by a process of reviewing the positions in the matrix and a process of reflection on the consequences’ (p. 210).252 The companies saw the Kraljic framework as indicative, as a means to stimulate and focus discussion about procurement activities and as a vehicle for exploring and resolving conflicting preferences between stakeholders. Finally, Gelderman and van Weele found that rather than simply following Kraljic’s generic strategic recommendations the companies pursued a range of nuanced strategies either to hold a position within a purchase category or to move to another category. The companies saw the framework as a useful means of identifying ways to reorganise and respecify their purchase requirements to better mitigate risk or achieve greater value for money.
Based on these findings, then, it seems that Kraljic’s portfolio approach is of value to practitioners so long as it is used in a customised, indicative and reflective way, as an aid to intelligent decision-making. It might therefore provide a basis on which NHS commissioning and procurement organisations could organise their demand management processes to be effective in acquiring different types of goods and services.
Another criticism made of Kraljic’s portfolio approach is that it does not take into account the supplier’s perspective.466,471 It addresses issues of complexity on the supply side, but this is done at a generic market level and from the perspective of the buying organisation only. Kraljic’s work is, therefore, seen to lack a proper engagement with buyer–supplier relationships. It could be argued that this criticism is somewhat unfounded in that Kraljic’s framework is clearly not intended to address buyer–supplier relationships. It is a means of thinking in a more structured and systematic way about how buying organisations should behave when purchasing different types of goods and services. Nonetheless, the different procurement approaches suggested by Kraljic inevitably have implications for suppliers, will provoke a response from suppliers and will be delivered through interactions with suppliers, so a complementary set of portfolio thinking is required.
Responding to the observation that Kraljic does not try to deal with these issues, another strand of the portfolio literature has developed with an explicit focus on the development and management of appropriate forms of buyer–supplier relationship in different contexts. This relationship focused portfolio analysis therefore clearly draws our attention to the relationship management phase of the P&SCM process. Consequently, the theoretical underpinnings of these frameworks lie principally in the interorganisational relationships literature, although use is also made of ideas from the economics of contracting literature. In particular there are frameworks drawing on resource dependency theory to address issues of power in buyer–supplier relationships,403,469 and frameworks using resource dependency theory, social exchange theory and TCE to focus on the social and economic factors shaping buyer–supplier relationships.249,468 We discuss each of these broad types in turn below.
Given the basis of these various frameworks in the interorganisational relationships literature, we suggest that they might be useful in addressing the second knowledge gap in the NHS research literature identified in Chapter 5. This gap is about how buyer–supplier relationships develop over time and about how, in particular, collaborative efforts can be facilitated and maintained to deliver supply improvement and innovation in the NHS.
The basic premise of portfolio frameworks emphasising the role of power in buyer–supplier relationships is that the nature of the power structure between a buyer and a supplier has a strong influence on the kind of relationship that each party is willing and able to develop. Work by Cox et al.473 is based on a model for understanding the nature of buyer–supplier power structures that uses ideas from resource dependency theory134 and from industrial economics.135 This model suggests that buyers and suppliers will interact on the basis of one of four power structures: buyer dominance, supplier dominance, interdependence and independence. The nature of the power structure is seen as a function of the relative dependence of each party on the other. So, buyer dominance implies supplier dependence, supplier dominance implies buyer dependence and the other two structures imply a balance of dependence, either high (interdependence) or low (independence). Dependence is, in turn, seen as a function of two main underlying factors: how important each party is to the objectives of the other and how much choice each party has beyond a particular exchange partner. There are echoes here of the two dimensions used in Kraljic’s framework, but this is more explicitly concerned with importance and choice for both parties rather than just for the buyer.
Cox et al.136,473 link this power model to the relationship portfolio framework shown in Figure 8. They suggest that buyers and suppliers can potentially form one of six main types of relationship, and that power is a key influence on which is possible. They illustrate their argument with a series of short case studies involving both public and private sector organisations.
As Figure 8 shows, Cox et al. argue that buyer–supplier relationships differ along two dimensions. ‘Way of working’ is about how closely buyer and supplier interact with another in terms of such things as information sharing, operational linkages and relationship-specific investments. A collaborative relationship is closer on all of these dimensions than an arm’s length one. The ‘share of surplus value’ dimension relates to the commercial balance of a relationship in terms of who bears the costs and who receives the benefits. In a buyer-skewed relationship, for example, the supplier bears the bulk of the costs and the buyer receives most of the benefits. This framework has two key implications. First, collaboration is possible only where either one party dominates the other or where both parties are highly dependent on one another. This is because such interactions represent a substantial investment, which organisations will undertake only if they have a strong incentive to do so. Dependency is deemed to create such an investment incentive whereas independence does not. Second, the framework suggests that collaboration is not necessarily about an equal sharing of costs and benefits. Collaboration can be successfully undertaken even where one party is dominant and therefore receives a greater share of the relationship benefits and bears a smaller share of the costs. This is what Cox et al. call adversarial collaboration.
Work by Caniëls and Gelderman403,469 explores similar issues around the link between power and buyer–supplier relationships, and uses the same underlying concepts drawn from resource dependency theory. In this case, though, the discussion of power is used to extend Kraljic’s framework and to draw out its implications for buyer–supplier relationships. Data from a survey of 248 Dutch purchasing managers are used to test if proposed associations between power structure and relationship style in each quadrant of the Kraljic matrix are borne out in practice. The associations proposed by Caniëls and Gelderman are shown in Figure 9. Their findings support the expected link between power structure and relationship style in all of the quadrants except that for strategic items. Here they find that long-term collaborative relationships are the norm, but that supplier dominance tends to be a more common power structure than interdependence.
Caniëls and Gelderman conclude that these findings suggest two things. First, the nature of the power structure between a buyer and a supplier does have an important influence on the type of relationship that they are able to develop with one another. Second, collaborative relationships underpinned by a power structure in which one party is dominant will not necessarily be ineffective, as a number of authors have argued.474–476 These findings appear to support the notion of adversarial collaboration suggested by Cox et al.136,473 This suggests that a dominant power position can be an effective basis for managing a close exchange relationship if the weaker party sees its dependency as legitimate and the stronger party does not abuse its position.
Other relationship-focused portfolio frameworks are less explicitly concerned with the role of power. They draw on resource dependency theory, social exchange theory and TCE to examine the broader social and economic factors which influence the development and management of different kinds of buyer–supplier relationships.
Olsen and Ellram249 propose a three-step portfolio model to assist in managing buyer–supplier relationships. The first step, analysis of the organisation’s purchases, builds consciously on Kraljic’s framework. The suggested dimensions along which purchases should be categorised are, like those in Kraljic’s model, the strategic importance of a purchase and the difficulty of managing the purchase situation. A number of factors are suggested that might be used in measuring these dimensions. These are again very similar to those in Kraljic’s model, but, as suggested by Gelderman and van Weele,252 it is recognised that the precise factors used may vary with each organisation.
It is in the second and third steps of their model that Olsen and Ellram show how Kraljic’s framework might be extended with a more conscious focus on buyer–supplier relationships. They argue that the procurement strategies and implicit relationship styles proposed by Kraljic’s matrix are ideal types and that they ignore the nature of the actual relationships that an organisation has with its suppliers in each purchase category. The second step of their model, then, is to analyse these actual relationships to see how effectively they are delivering what Kraljic recommends as ideal. Olsen and Ellram suggest that relationships are analysed against two dimensions, the relative attractiveness of the supplier and the strength of the relationship. They propose that supplier attractiveness, which is analogous to supplier competence or capability, should be measured by a range of economic and technological factors inspired by resource dependency theory, and by organisational and cultural factors inspired by social exchange theory. The factors proposed to assess the strength of the relationship are about how effectively the buyer and supplier interact with one another. These are consciously derived from social exchange theory, dealing with the level of commitment, co-operation and longevity in a relationship.
Having compared actual with ideal, step 3 of the Olsen and Ellram model is about the development of action plans to ensure that the relationships in each purchase category are as effective as possible in delivering Kraljic’s ideal type procurement strategies. Three broad types of action plan are suggested. First, for those relationships where supplier attractiveness is high or moderate and relationship strength is low or moderate, the suggested plan is to strengthen the relationship by allocating more resources. Second, where a supplier’s attractiveness is low the suggested plan is either to commit resources to developing that supplier if the relationship strength is high or moderate, or to switch to a more attractive supplier if the relationship strength is low. Third, Olsen and Ellram recognise that relationship management is about making trade-offs between different relationships in an organisation’s portfolio, given resource constraints. Accordingly, they suggest that organisations should examine all of their relationships to see where allocated resources can be reduced in order to reuse them in implementing type 1 and type 2 action plans.
Bensaou468 provides a very similar step-wise model to analyse and propose different styles of buyer–supplier relationship to match particular contextual circumstances. His model draws on TCE to describe the key contextual factors influencing the development of different types of relationship. Based on a survey of 447 managers from three US and 11 Japanese car manufacturers he finds that the level and balance of relationship-specific investments, akin to the TCE notion of asset specificity, are crucial factors influencing what is the most appropriate style of relationship for a buyer and a supplier to develop. Specific investments are those ‘that are difficult or expensive to transfer to another relationship or that may lose their value when redeployed to another supplier or customer’ (p. 36).468 This association between specific investment and relationships is summarised in Figure 10.
As well as identifying which type of relationship is most appropriate in the context of different levels and distributions of specific investments, Bensaou also provides guidance on the characteristics of an effective management approach for each type of relationship. As shown in Table 8, he describes each management approach in terms of three generic dimensions: information-sharing practices, boundary spanners’ task characteristics and the social climate.
To sum up, our discussion shows that there are various relationship portfolio frameworks that might help to address the knowledge gap in the NHS research literature about how buyer–supplier relationships develop over time. In particular, these frameworks show that collaboration is not always appropriate or possible and that contextual factors such as power, supplier attractiveness, relationship strength and relationship-specific investments are likely to have an important influence on the development of collaboration.
It is important to recognise, however, that these frameworks can provide only a partial understanding of the scope for improvement in buyer–supplier relationships, because they focus at the dyadic level. As Dubois and Pedersen470 suggest, we need also to see relationships in their wider network context, because this may have an important influence on how they are best managed. With this in mind, we turn in the final section of this chapter to portfolio analysis that focuses at the level of the supply chain.
Unlike the relationship portfolio models discussed above, this literature focuses solely on approaches to using collaborative relationships between buyers and suppliers across an extended chain to deliver improved performance. These models draw directly on arguments made in the integrated SCM literature and focus our attention on the operational delivery phase of the P&SCM process. As discussed in Chapter 6, the integrated SCM literature can broadly be divided into work addressing the concept of lean and the elimination of waste through practices such as just-in-time delivery and value stream mapping, and work dealing with supply chain agility and responsiveness through practices such as flexible production and build-to-order supply. We also noted work that suggests using a combination of these approaches to create so-called leagile supply chains. The key aim of supply chain-focused portfolio analysis is to identify the contextual factors that influence when it is appropriate to adopt these different SCM approaches. We suggest therefore that this kind of analysis might be useful in addressing the third knowledge gap in the NHS research literature that we identified in Chapter 5. This gap is about the scope to apply different integrated SCM thinking and techniques to supply chains delivering physical goods to the NHS.
Although we can identify a number of supply chain-focused portfolio models,457,477–480 each of these is fundamentally derived from the framework developed by Fisher.168 Fisher’s core argument is that the decision on which SCM approach, lean or agile, is most appropriate is determined by the nature of the product delivered by a supply chain to the end-customer. He provides a number of case examples to support his argument. Fisher identifies two types of product, functional and innovative, which he distinguishes on the basis of the predictability of end-customer demand and, by extension, the degree of uncertainty in the wider supply chain. He argues that functional products are ‘the staples’ that satisfy the buyer’s ‘basic needs’, and that, because such needs change very little over time, these products have ‘stable, predictable demand and long life cycles’ (p. 106).168 He also notes that, because there is little variety and customisation in functional product offerings, firms compete primarily on price, and typical profit margins are low. Conversely, in the case of innovative products Fisher168 argues that, while innovation might enable firms to limit direct competition and earn higher profit margins through first mover advantage, their ‘very newness . . . makes demand for them unpredictable’ (p. 106). He also argues that innovative products will typically exhibit a short life cycle and a greater number of variants as suppliers offer buyers a range of different options in order to test the market. These characteristics are assumed to further increase the unpredictability of demand.
Fisher then suggests that, in order to link these product types appropriately to one of the two broad approaches to SCM, we need to understand which objective, supply chain efficiency or responsiveness, is most important for a firm seeking to successfully and profitably deliver each type of product. His answer in the case of a functional product is to keep physical supply chain costs, the costs of producing, storing and distributing the product, as low as possible, because of the price sensitivity of buyers. The practices necessary to create such a lean supply chain are summarised in Table 9. In the case of an innovative product, Fisher suggests that firms should place greater emphasis on supply chain flexibility and responsiveness, because of the significant impact on profitability of having either too little or too much of a product when first mover advantage is crucial and the life cycle is short. The key objective in this case is to have the right product, available in the right quantities, at the right time.457 The practices necessary to create such an agile supply chain are also summarised in Table 9.
This discussion suggests that Fisher’s portfolio framework and others derived from it might be a relatively simple and potentially useful source of guidance for those in NHS procurement organisations seeking to improve the performance of supply chains delivering clinical and non-clinical goods and services. There are, however, a number of possible limitations to the utility of these frameworks that should be borne in mind. These limitations are a function of the particular contextual circumstances on which these models are typically focused.
First, and most obvious, they are designed to be applied to supply chains delivering physical products rather than services to end-customers. Consequently, some of the analytical categories (e.g. product life cycle, product variety, lead time and inventory management) may not be easily transferable to a service setting. That said, as we discussed in Chapter 5, lean concepts have been used to identify waste in health-care service delivery and to generate ideas for improvement, which suggests that these challenges of terminology can be overcome. Second, these models are typically focused on the context of relatively high-volume manufacturing supply chains where there is a repeated production process. There has been relatively little discussion of the models’ usefulness in generating management advice for supply chains in a low-volume or one-off project context, which may characterise some of the more specialist areas of health care. Third, these frameworks are typically focused upon supply chains serving private consumer demand rather than the organisational buyer demand that one would see in NHS procurement. Consequently, there is little discussion of the possibility that the end-customer might well play an extensive and active role in design and specification decisions, which might in turn have an impact on the predictability of demand.
Work by Sanderson and Cox132 deals directly with these last two limitations. They argue that, although the logic of Fisher’s model is challenged by applying it in the context of a shipbuilding supply chain, with one-off project characteristics and an active organisational buyer, it can still provide a useful frame of reference for thinking about how best to manage supply chains. Their case study evidence suggests that functional products such as electrical cable might not necessarily have a predictable demand profile when they are supplied into a complex project context in which ‘the design and build schedule . . . are incomplete and subject to on-going change’ (p. 21).132 If one follows Fisher’s advice unreflectively this generates a paradox, with a more costly agile supply approach being recommended for a functional product where cost efficiency should be paramount. Sanderson and Cox suggest that one way out of this paradox is to use a leagile approach, which is recommended for supply chains where ultimate customer demand is highly volatile and unpredictable, but end-users are also price sensitive.457,477
To sum up, then, this chapter has discussed three different types of portfolio analysis and has shown how they might help us to address three key knowledge gaps in the NHS research literature. In broad terms, we suggest that these various portfolio approaches might be a useful means of improving P&SCM practice in the NHS, because they identify key contextual factors in the demand management, relationship management and operational delivery phases of the process and suggest appropriate forms of management intervention to deliver intended outcomes. It is important to emphasise, however, that these portfolio models should not be used in a rigid, deterministic or unreflective manner. Our discussion has also shown that these models can and often should be used in a customised way to take account of the particularities of specific organisational contexts.