The model distinguishes among four product categories: leverage items, strategic items, noncritical items, and bottleneck items.

My take on the model, as outlined in The Vested Outsourcing Manual, has been that procurement philosophies such as Kraljik’s encouraged businesses to use their buying power selfishly to condition the supply chain and force a change in the demand curve in order to lower dependency on service providers. The ultimate objective of the buying approach is to trigger lower-cost entrants into the market and force reductions in price and, by default, validate the make/buy decision.

Of course, the more companies applied these win-lose behaviors, the more service providers hunkered down to protect their margins. These heavy-handed transaction-based approaches lead to perverse incentives and missed opportunities to innovate that were outlined in Vested Outsourcing.

They also focus too heavily on transactions, rather than outcomes. This approach can be lucrative in the short term if the buyer gets away with it; however, it is inefficient over the long term, especially in cases where a service provider wants (or needs) to make investments in business infrastructure that require trust and cooperation to deliver results.

Recently I came across a CPO Agenda article from 2008, which featured a long interview with Kraljik, who is director emeritus at McKinsey, where he spent 32 years and held a number of senior positions until his retirement in 2002.

Kraljik’s interviewers, Philip Usherwood and Dick Russill, caught up with Kraljik to mark the 25-year anniversary of his Harvard Business Review article, “Purchasing must become supply management .”

There are many thought-provoking takeways in the CPO interview/article, one being that Kraljik’s description of the economic and political turbulence of the early 1980s and its impact on business procurement decisions is highly relevant today.

Kraljic’s statements about the need for simplicity and consideration of the total value chain when it comes to risk also caught my eye.

More importantly, at the end of the interview Kraljic was asked how he might rewrite or change his original article: “The first thing is that I would not address it to the purchasing community, but to the CEO. CEOs know what it takes, they can appoint the right people, and then they can uplift and anchor supply management so that is clearly visible.

“As regards the basic message of identifying critical items and building management talent, no, I would not change it other than to add trust into the equation – the importance of trust in long-term relationships with suppliers. You need to create win-win.”

Adding the concepts of top-down buy-in, visibility and trust to get to the win-win are hallmarks of the Vested Outsourcing approach, and it seems to me, takes the Kraljic Model out of a selfish, win-lose interpretation.

We know that supply chains need to be flexible, agile, collaborative, transparent, fairly priced, efficient and sustainable – both financially and environmentally. We hear those buzz words all the time, but they are easier said than implemented, especially all at once. Those qualities may not seem so vital when the world economy is booming, but if they are in place when things start to turn south, companies and their service providers are better placed to ride out the storm.

The key to this is flexibility, or resiliency – flexibility in dealing with the unexpected aspects that occur as you work together and as you deal together with the vagaries of the market.

This lesson was punched home during the Great Recession and continues during its uncertain aftermath. “As companies struggle to cope with the uncertain global economy in 2010, nurturing resilient supply chains is vital for survival,” says a recent report from the Economist Intelligence Unit. The report, “Resilient supply chains in a time of uncertainty,” published earlier this year, was sponsored by Oracle.

Companies have to stay efficient in order to generate good cash flows and “agile enough to jump-start production and keep customers satisfied as demand rebounds,” the report says.

Even in a slow recovery – which is what’s apparently occurring – “companies cannot afford to sacrifice resilience” for the sake of efficiency. Resiliency is defined in the report as the ability to recover quickly from disruptions.

“Sometimes it’s easier to manage on the way down in a recession than on the way up,” says Brian Hancock, vice president of supply chain at Whirlpool Corp., who was quoted in the report. “It takes quite a bit of effort to bring capacity back on line, and everybody is hesitant to increase capacity in case they don’t see the economy returning to 2006 and 2007 levels.”

As the report points out, efficiency and belt-tightening should not trump resilience when times are uncertain. Rather, strategic objectives should ensure that there is sufficient resilience for a given level of efficiency.

The Economist Intelligence Unit also found that strengthening relationships with suppliers and improving forecasts and planning are strategic changes that help balance the impetus to simply engage in cost-cutting. Vested Outsourcing’s Five Rules speak directly to this: Shift to the ‘What’s in it for We’ mindset; focus together on the what, not the how; agree together on clearly defined and measurable outcomes; optimize pricing model incentives.

In other words playing nice together as a matter of course will lay the foundation for success.

Charles Dickens’ famous opening line in A Tale of Two Cities, “It was the best of times, it was the worst of times,” contains a great message for the business world: It’s often impossible to discern exactly when good times turn bad, or when the bad times will improve. Often there’s no obvious demarcation, or the good and the bad occur simultaneously.

Why fight in the family? Work it out. Understand the data. Plan together for various scenarios. Put the boom or bust mentality aside and foster mutually beneficial relationships. Enlightened companies know the long-term value of cooperation with their partners and of vesting in the success of each other.

Resilient partners won’t break in high winds; resilient chains won’t snap.

For the second straight year I joined Dan Gilmore, the editor of Supply Chain Digest, as a “guest contributor” on one of his increasingly popular Video Reviews. These wrap-up and comment upon the three days of sessions and I was Dan’s sidekick for the Day 2 review.

In that review Dan and I discussed a fabulous presentation by Whirlpool and Lowes at the conference.  The session highlighted how Lowes and Whirlpool have taken collaboration to a new stage, doing what is in effect a joint Sales and Operations Planning  (S&OP) process. Gilmore said they are calling this alignment a “Merchandising and Operations Planning” exercise to get sales and marketing support. It starts with a collaborative planning, forecasting and replenishment (CPFR) process that is used as the baseline for the subsequent planning processes, he continued, and it involves a series of cross-company meetings each month and one integrated plan across both companies.

Of course this kind of joint integration doesn’t surprise me because more and more I see companies driving collaboration down to the supply base.  And it definitely does not surprise me coming from a company such as Whirlpool that has such a great reputation for pushing the envelop with adopting progressive business and supply chain concepts.

In essence Lowes and Whirlpool have created a collaboration where they realize they both have a vested interest in each other’s success. That’s called growing the pie and using the strategic relationship to bake a bigger pie by working together and working holistically from end-to-end, rather than micromanaging the chain. You can watch the Day 2 review with Dan Gilmore’s comments about their fabulous session.

This is the kind of collaborative thinking between manufacturers and retailers that makes ultimate sense, avoids unnecessary duplication of efforts and puts the people involved with the whole process in the same room and on the same page.

Of course, it’s right in the Vested Outsourcing wheelhouse and in particular, Rule 3 which instructs us to agree together on clearly defined and measurable outcomes. Without a high degree of collaboration, trust and flexibility that kind of agreement is just about impossible to achieve.

The Lowes and Whirlpool alignment also gets to a level of supply chain integration that’s frequently talked about but now is actually happening.

On a personal and highly pleasant note, I’m pleased to report that Palgrave Macmillan, the publisher of my book, Vested Outsourcing: Five Rules That Will Transform Outsourcing, has nominated it for a 2010 American Publishers Awards for Professional and Scholarly Excellence. This is known as The PROSE Awards, and I’m deeply honored and gratified. Thanks to everyone!

Stuck may not be the right word actually, it’s more like really impressed and fascinated with how his scholarship dovetails so nicely with the Vested Outsourcing concept of working aggressively, flexibly and cooperatively to achieve mutually beneficial or ‘win-win’ outsourcing agreements.

In a previous post. I talked about the implications of Dr. Williamson’s TCE research for outsourcing at what he describes as the “interfirm make-sell-buy” contract and conflict resolution level. He outlined this in a 2008 article in the Journal of Supply Chain Management (“Outsourcing: Transaction Cost Economics and Supply Chain Management”).

I was reviewing some of his work again, particularly in connection with his description of the three types of hybrid contracts – muscular, benign and credible – and I was fascinated by his discussion surrounding the common economics aphorism, “Never leave money on the table.”

Could it be, as Dr. Williamson suggests, that it’s “better to leave money on the table,” to not win every negotiating point?

Well yes; in the case of a credible, mutually beneficial contract that idea might be just the ticket for a winning and adaptable contract.

Never leaving money on the table has cache, especially in a muscular contracting arrangement, Williamson says, because “money left on the table signifies waste that can be converted to mutual gains by perfecting the bargain.” It’s an important lesson, he continues, but “as with many aphorisms there can be too much of a good thing.”

The economists’ dictum to never leave money on the table has been disputed by some investment bankers and businessmen who advise ‘always leave money on the table,’ Dr. Williamson says.

“But that sounds foolish. How could this be?” he continues.

As sometimes happens good theory (for one purpose) and good practice (for another) can part ways.

For one thing constructive and strategic contractual points are sometimes hard to differentiate. What exactly are the parties’ intentions going into a negotiation?

If there is a strategic, rather than constructive, purpose that skews the contract in one party’s favor “and if real or suspected strategic ploys invite replies in kind, then what could have been a successful give-and-take exchange could be compromised,” Williamson explains.

Asymmetry will rule the day as each party tries to gain and regain the upper hand.

This activity ”could plainly jeopardize the joint gains from a simpler and more assuredly constructive contractual relationship.

“Always leaving money on the table can thus be interpreted as a signal of constructive intent to work cooperatively, thereby to assuage concerns over relentlessly calculative strategic behavior.”

That’s a contract with credibility from start to finish. And that’s where the rubber meets the road for Vested Outsourcing.

In contrast to a one-sided muscular contract or an idealistic benign contract, “credible contracting is hardheaded and wise,” Dr. Williamson says.

The parties are hardheaded because they expressly work out contract commitments “to which mutual benefits can be confidently ascribed.” They are wise if they avoid contract provisions that “invite the escalation of strategic behavior with net negative effects.”

And they are brave and foresighted if they see the value of leaving money on the table.

After all, outsourcing may be high stakes but it’s not poker.