Industrial Marketing Procurement and Supply Chain Management The Kraljic Portfolio

KRALJIC MATRIX
A model on procurement and supply chain management
Purchasing portfolio models have received great attention during the last two
decades. The simplicity of application and the focus on power-dependence balancing
has been appreciated by practitioners and academics alike. In this paper we argue
that the starting point in 'given' products in addition to a dyadic perspective on
purchasing management may be counteractive when purchasing efficiency is
concerned. First, the object of exchange is not 'given' when firms interact, but may
be subject to continuous development. Second, the dyadic perspective may obscure
potentials for enhancing productivity and innovativity since both parties have other
relationships that impact on the collaboration between them.

Introduction
In recent decades, purchasing costs have risen. Currently, purchasing costs
constitute the majority of the total cost of goods sold in both the private and
public sectors. In many firms, the value of purchased materials, components,
and systems accounts for 50-80 percent of the total cost of goods sold. Thus, the
purchasing function has a substantial impact on the total cost of a firm and
thereby on the potential profit. This change has been accompanied by increasing
attention to purchasing, as a field of strategic interest.
Suppliers have also become increasingly important as they account for a large
part of the value creation related to the buying firm's products and services (as
an effect of increasing specialisation). Thus, managing the firm's supplier base is
becoming an essential strategic purchasing issue, and consequently the need for
differentiated approaches to purchasing behaviour increases. The variety in
purchasing needs, and thus the need to purchase in different ways, is increasing
which confront firms with new challenges.
The Kraljic purchasing model
In 1983 Harvard Business Review published an article by Peter Kraljic entitled
Purchasing must become supply management. In essence, the article focused on
purchasing as an important managerial area with a huge impact on profit. The
article soon received a great deal of attention both among managers and
academics, and is currently both applied in practise and used as reference by
researchers in industrial purchasing. The reasons for this attention may be
several. The article recognised purchasing as an important management issue,
and thereby an area which was regarded as in need of useful models.
Furthermore, the usefulness of the purchasing portfolio model presented by
Kraljic (1983) was proven in that it clearly distinguished between different
purchasing situations and gave logical recommendations as to how to act. In the
later years, a number of academics, referring to Kraljic's article, have further

Industrial Marketing Procurement and Supply Chain Management The Kraljic Portfolio

developed his model of differentiated purchasing behaviour in relation to: (1)

single materials or components, or (2) supply or purchasing situations. Following
these elaborations of Kraljic's model, another line of development can be
observed. This second wave focuses on classifying the content of buyer-supplier
relationships as opposed to the initial focus set by Kraljic In parallel to these
developments, the interest in, and empirical studies of, relationships between
buyers and suppliers in industrial markets has grown enormously during the
years since Kraljic's article was published. These studies show that industrial
markets can be characterised by the existence of long-term business
relationships, and that these relationships are both complex and varying with
regard to content and dynamic aspects. With this as a starting point, several
concepts and frameworks have been developed which have contributed
significantly to our understanding of: (1) the interactive nature of customersupplier relationships, seen from a purchasing view.
Relationships between suppliers and buyers
Furthermore, we can observe a development from studies of buyer-supplier
relationships to studies focusing on single business relationships in the context of
the other relationships the firms are involved in. In addition to the
characterisation of individual relationships, empirical studies show that single
relationships also are affected by developments in other relationships. Thus, any
business relationship exists both in itself and is at the same time embedded in a
network context, and thus connected to other relationships. By contrasting
models with the industrial network approach some issues concerned with the
principles of analysing purchasing situations are highlighted. It focuses on how
relationships between buyers and suppliers are dealt with in these two different
settings and discusses the implications of the different assumptions about the
context in which purchasing takes place. The next section presents an overview
of the different purchasing portfolio models, on the basis of the model developed
by Kraljic. The classification dimensions used in the models are analysed and the
portfolio approach in terms of suggested steps is discussed together with its
implications.
Purchasing portfolio models
The portfolio model concept was originally developed by Markowitz in the 50s
who used it as an instrument for managing equity investments. His point of
departure was that rational investors will (or should) select portfolios which
maximise the individual investor's utilities by maximising the expected return for
a given level of risk or minimising the risk for a given level of expected return.
These ideas have travelled far, as they are now applied for classifying different
materials in purchasing or different buyer-supplier relationships. The Kraljic
portfolio approach is generally considered as an important breakthrough in the
development of theory in the field of purchasing and supply management."
Kraljic's model is based on two dimensions for classifying a firm's purchased
materials or components (see figure 1):

Industrial Marketing Procurement and Supply Chain Management The Kraljic Portfolio

(1) "The strategic importance of purchasing in terms of the value added by

product line, the percentage of raw materials in total costs and their impact on
profitability"
(2) "The complexity of the supply market gauged by supply scarcity, pace of
technology and/or materials substitution, entry barriers, logistics cost or
complexity, and monopoly or oligopoly conditions".
Thus, Kraljic's model uses one internal and one external dimension, and the
model aims at matching external resources provided by suppliers with the
internal needs of the buying firm. The issue at hand is thus to optimise the way
in which suppliers are managed or to optimize the use of capabilities of different
suppliers - must be kept in mind." The optimisation is based on the trade-off
between the costs of obtaining the products on the one hand and the value
achieved from obtaining them on the other. Turnbull (1990, p.7) also emphasises
optimisation based on the limited resources of the buying firm: "... the portfolio
concept is a useful management tool for enforcing a discipline in the allocation of
the company's limited resources to an optimal combination of business
operations which will maximise long-term returns at the given levels of risk."
The first step in reducing the number of suppliers was gaining insight in the
products that are part of the assortment. The products were analyzed on basis of
two aspects: it combined financial risks with supply risks to come to a
classification of 4 categories of products. The purchasing strategy to be followed
for each category differed accordingly.
The portfolio model is not useful if all purchases are categorised as being equally
important. Each quadrant in the figure requires its own supplier strategy.

Industrial Marketing Procurement and Supply Chain Management The Kraljic Portfolio

A similar matrix can thus be made on the supplier level.

Main suppliers: develop approach for vertical

coordination based on product portfolio
Financial risk:
impact on turnover
impact on profit

high
Financial
risk
low

Leverage
products

Routine
products
low

Supply
risk

Strategic
products

Bottleneck
products
high

safety risk
Supply risk:
Number of potential suppliers
Location of suppliers
Shelf life
Scarce situations (seasonality)

Leverage products
The category of leverage products included purchases that were easy to manage
but strategically important to the company. When managing these purchases, it
is important to identify particular value added of the purchases, and leverage
volume across product lines and suppliers to lower the material costs. The goal is
to create mutual respect in the supplier relationship and communicate
requirements further into the future. Because of the large number of potential
suppliers and the impact of price, long-term contracts should be avoided to make
switching between suppliers possible: the purchasing policy should be based on
the principle of competitive bidding. Buying at the least costs with maintenance
of quality and delivery-certainty should get priority.
Routine products
The routine category included purchases that were easy to manage with a low
strategic importance. The keywords when managing these purchases are
standardisation and consolidation. The company should reduce the number of
suppliers and the number of duplicate products. Suppliers with a broad
assortment should be selected: the purchasing policy should be directed at the
reduction of logistical and administrative complexity so high volume product
flows should be generated (i.e. via combined delivery). Long-term contract are
not necessary since switching between suppliers is preferred in case a better
solution is found.
Bottleneck product

Industrial Marketing Procurement and Supply Chain Management The Kraljic Portfolio

The bottleneck category included the purchases that had a low strategic
importance but were difficult to manage. To manage these purchases more
effectively, the company should try to standardise the purchases or find
substitutes if possible. Demand is low and delivery risk is high because suppliers
are scarce and sometimes located on a long distance. The purchasing policy
should be directed at the ensuring of deliveries. To reduce insecurity, a retailer
should spread the total volume over a number of suppliers, by which the
deliveries are ensured via contracts. Price should be a minor criterion in here. In
addition, alternative products are suppliers should be searched for to decrease
dependency.
Strategic products
The strategic category encompasses purchases that are difficult to manage and
strategically important to the company. For strategic products, three different
power positions are possible:
Buyer dominated: power position in benefit of retailer. Since there are in
common only a few potential suppliers for these products, this power position
will be rare for strategic products.
Supplier-dominated: power position in benefit of supplier. This situation
should be avoided for strategic products. Alternatives such as backward
integration should be considered.
Balanced relationship: both the supplier and the retailer have an interest in
the maintenance of this relationship. Seen from a supply chain management
perspective, this is the preferred power position.
From another angle
Kraljics matrix balances purchasings impact on the financial result with the
supply risk to the organisation and categorises the outcomes under four
headings.

Strategic products are ones that account for a high monetary value and also
suffer supply risk, perhaps because of the small numbers of potential
suppliers. These products are seen as being important over the long-term to
the organisation and will require long-term solutions such as the development
of supply chain thinking and a closer, more collaborative approach between
the organisations.

Bottleneck products are products identified as being crucial to maintain

operations, e.g. the manufacturing operation. This can occur if one supplier
dominates the market. Although these purchases may represent a relatively
small proportion of total purchasing spend the consequences for nonavailability can be very high. The role of purchasing is to secure continuity of
supply and develop the business relationship accordingly.

Routine products such as lubricants or stationery can increasingly be handled

by contracting out management of the day-to-day supply activities to

Industrial Marketing Procurement and Supply Chain Management The Kraljic Portfolio

specialist organisations. After the initial contract is drawn up the role of

purchasing becomes one of monitoring and managing the contract, often
using IT systems developed by the supplier to ensure the correct level of
supply and service is being provided.

Leverage products are also valuable in monetary terms, but their supply risk
is low, probably because there are many possible suppliers. This category is a
natural target for a competitive bidding approach. The main deciding factor is
likely to be purchase price. Leverage products (where the purchaser has
leverage over the supplier) will often lead to an adversarial approach where
the purchaser is looking for the best possible price while considering delivery,
quality and other issues as secondary. This approach does not lead to longterm thinking but is designed to secure the required product that meets the
specification at the most competitive price.

Application of the model

The Kraljic matrix needs to be viewed on an on-going basis. Time moves on and
products progress through the product life cycle, technology moves on and
products that were once in considerable demand can experience a fall in
demand. A product that was once considered strategic may be reclassified as
adversarial and a more price aware approach taken. Organisations will use a mix
of relationships applicable to those identified in the Kraljic matrix. These different
approaches allow the purchasing team to maximise their effectiveness by having
the right approach to suppliers in the circumstances. However the matrix
requires regular monitoring and updating to ensure that the correct approach
continues to be used.

Some useful websites on Kraljic matrix

http://harvardbusinessonline.hbsp.harvard.edu/b02/en/hbr/hbr_home.jhtmlK
raljics purchase portfolio

http://www.emarketservices.com/upload/Issues/Reverse%20auctions.pdf

http://www.ifm.eng.cam.ac.uk/mcn/pdf_files/part6_5.pdf

http://www.future-fab.com/documents.asp?grID=384&d_ID=1303

Compiled by HV 0806