The Kraljic Matrix Portfolio Purchasing Model was developed by Peter Kraljic in the year 1983 and the model could be used to analyze the purchasing portfolio of a company. The matrix duly facilitates the company gains a crucial insight into the working methods of the purchasing department and how they spend their time on the purchasing and evaluation of the various products.
Understanding The Kraljic Matrix – Portfolio Purchasing Model :
The model makes clear which products can be subcontracted and do not have to be ordered again and which ones involve a particular risk or threat for the overall growth or development of the company.
It is one of the most effective and efficient approaches to delivering accurate supplier segmentation information and details.
The model is devised as a means to segment the supplier base in the article published in the Harvard Business Review in which he argued that supply items should be mapped against two main dimensions of the company that are risk and profitability.
The factor of risk relates to the likelihood for an unexpected event in the supply chain management of the company to disrupt the business operations. For example, in the significant areas of spending such as tire suppliers for an automotive are very important and if there is any sort of disruption in the process, the automobile company will have to face substantial issues and problems.
Purchasing element and aspect of the organization should be part of the overall corporate strategy. It is quite important that the purchasing department of the company should know how to evaluate the risk patterns and maximize profits by having the right approach to the procurement cycle.
The model helps the purchasing department to understand where their products are classified in terms of supply risk and profit contribution, and also know whether the balance of power lies with them or the suppliers as once they are aware of the same, they can select and devise the apt purchasing strategy for the organization.
Dimensions of The Kraljic Matrix
1) Profit impact
This dimension of the model is defined from low to high. What is the strategic importance of the purchase of certain materials required for the organization? What is the added value and advantage that they deliver in the production line and what effect do the costs of these materials have on the company’s overall sales, profitability, and market share?
2) Supply risk
This dimension of the model is also defined from high to low. To what extent is supplying complex; is there abundance or scarcity of the material required for the production in the organization? To what extent are the materials as per the latest trends and have the latest technology and materials substitutions been used? What are the logistics costs involved in the purchase cycle and are there any sorts of monopoly or oligopoly conditions?
Product categories in The Kraljic Matrix – Portfolio Purchasing Model:
1) Strategic Product Items
These types of products are purchased from one supplier only and there may be a balance of power between the company and the supplier of the products required. But when this supplier fails to deliver, purchasing stagnates. In general, raw materials belong to this category. Raw materials determine the value of the cost price of the finished product.
2) Bottleneck Product Items
These items do not represent a high value but they are vulnerable in nature and in the entire process of the supply chain. These are products that are essential for the production process but they are difficult to obtain from the suppliers in the market. There is an imbalance of power between the company and the supplier as the supplier is the dominant authority. By creating the buffer stock of these scarce items and by finding alternative suppliers, a company can iron out the flaws of this bottleneck situation.
3) Leverage Product Items
These types of products can be easily be purchased from different suppliers in the market and they determine the value of the cost price of the finished product. A minor change in price or a change in quality will strongly affect the cost price of the final product that is to be sold in the target market. In the balance of power between the company and the supplier, the company is the dominant one. By concluding good framework agreements and finalizing the lucrative targeted pricing, the relationship between the company and the supplier continues to be quite fruitful in nature.
4) Non-critical Product Items
These types of products cause the least problems in the purchasing performance of the company as such types of products to represent a low value and they can be purchased in different varieties and from different suppliers in the market. Most types of raw materials and substances fall into this category. There is a balance of power between the company and the supplier in this scenario and by increasing product standardization, much time and money can be saved of the company.
Steps in the purchasing process as defined in The Kraljic Matrix – Portfolio Purchasing Model:
- Prepare the well defined and aligned portfolio analysis
- Determine criteria for-profit impact and supply risk involved
- Determine the detail level of the portfolio analysis
- Fill in the matrix in a dedicated and analytical manner
- Analyze and discuss the derived results
- Determine purchasing portfolio strategy and improvement actions
- Implement and monitor strategy accordingly
The scope of The Kraljic Matrix – Portfolio Purchasing Model:
- Using the model in a dedicated manner the organization can professionalize and improve its purchasing performance which will result in a considerable amount of cost savings.
- To avoid unnecessary risks and issues, it is imperative to spread the goods across the four quadrants of the framework explained above. A supplier should not have the upper hand and the factor power over the organization or the purchasing team.
- The precondition of the model is that each product or product group can be placed into the matrix in a seamless manner.
- It is quite preferable to place the products only in one of the quadrants. When agreement has been reached about the position of the products within the model, it can be determined what level of actions needs to be taken to achieve a better positioning.
- The purchasing strategy can be formulated for each part of the model. Aftermath, it can be concluded if the product is in the right quadrant or whether it would be better to move it to another quadrant as per the derived results considering various factors.
The three purchasing strategies of The Kraljic Matrix – Portfolio Purchasing Model:
- Exploit – Make the most of your high buying power to secure lucrative prices and long-term contracts from the suppliers, so that you can reduce the supply risk involved in these important items of purchase. You may also be able to make on the spot purchase of individual batches of the item if a particular supplier offers you a good deal that will add to the overall profitability of the company.
- Balance – Take a middle way between the exploitation approach and the diversification approach depending on the merit of the situation.
- Diversify – Reduce the risks involved by looking out for the alternative suppliers or alternative products in the market.