18 Must-Have Negotiation Skills For Procurement Professionals
Kraljic Matrix — Everything You Should Know
The Kraljic matrix is used by organizations to help them work smartly with their suppliers. However, we are sure that not all procurement professionals have heard this matrix. If so, then this article is for you.
In this article, we will discuss what the Kraljic Matrix is all about. We will show you an illustration of the matrix and discuss its four quadrants. Additionally, we will tackle the steps to use this tool to help you understand it more clearly.
This article will allow you to effectively use the Kraljic method once you are finished reading. Additionally, this will allow you to improve your procurement strategy. So without further ado, let us start.
The History and Definition of the Kraljic Matrix
Purchasers usually hold the idea that their profession is mainly a practical job and therefore should be based on experience.
When you try to browse through the literature on the subject of purchasing, you will find the possible harvest meager compared to the vast amount of subjects like marketing and sales.
Currently, purchasing is more and more seen as a strategic tool and the actual placing of an order is just a result derived from the overall company strategy.
The last action is simple and could be done by almost anyone, the first activity demands a good insight into all the aspects involved in the markets around the organization.
This change is also pushed by the fact that more and more companies are reconsidering what will be part of their core business and what could be outsourced to third parties.
Purchasers have to be more aware than ever before that the survival of the organization depends on their ability to make the right decisions. Experience will still be in demand, but you must take note that a good theoretical basis is also needed to succeed.
The Kraljic matrix was created by Peter Kraljic and first appeared in the Harvard Business Review in 1983 to devise a means to segment the supplier base.
In the review, he argued that the supply items should be mapped against two key dimensions which are risk and profitability. Despite the age of the matrix, it is still popular and useful in companies in many parts of the world.
The purpose of why he created the Matrix was to help companies in maximizing supply security and reduce costs by using most of their purchasing power. Thus, it makes procurement a strategic activity rather than transactional activity.
Kraljic Matrix is a strategic tool used by procurement and supply chain professionals to find and minimize supply risks nowadays. Using the Matrix in classifying the significance of suppliers’ products and services can highlight the support strategy development, supply disruption, and weaknesses of the supply chain.
Knowing the type of relationship in positioning suppliers by risk and profit impact will support the supply chain and procurement professionals to create the right type of supplier relationships. Thus, using their time more effectively while minimizing supply risks in their organization.
The Four Quadrantsof the Matrix
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The Kraljic Matrix works by mapping the profit impact of a product on one axis and the reliance on the supplier of the product on the other. Thus, in doing this, it will result in a matrix of four quadrants which is shown in the illustration.
Before we discuss the quadrants, let us focus first on defining the two axes. In the original model, the vertical axis labeled as ‘complexity of supply’, is concerned with the degree of difﬁculty associated with sourcing a product or service, or the vulnerability of the supplier to provide the product or service on time.
The horizontal axis, ‘Proﬁt potential’, is used to indicate the extent of the potential of the supply to contribute to the proﬁtability (or efﬁciency) of the buying concern. This proﬁt potential might be realized by achieving lower costs, either by paying a lower price for a good or service or by introducing more efﬁcient buying methods. Another axis that is often used instead of profit potential, is business impact.
Now you know the axes, we will explain the four quadrants of how to plot your own product, services, or suppliers in the model.
1. Non-critical items
Non-critical items are low risk and have a low impact on organizational profitability. The common example for this segment is office supplies.
Although this is important for employees to do their job, pens and papers do not have a significant impact on the business, nor does their absence pose a serious threat.
However, these items are interesting as the cost of handling them can usually outweigh the cost of the product. Hence, the purchasing strategies you would want to use for these types of items focus on reducing administrative costs and logistical complexity.
One of the best ways to handle this is to delegate authority for ordering stationery to each department that requires it. By doing this, you will reduce the administrative burden on the purchasing department without adding overhead to the respective departments.
2. Leverage items
Leverage items have high profitability but a low-risk factor. Thus, buyers possess the balance of power in the relationship and leverage this strength to gain greater returns.
The purchasing strategy you can use for these items is to negotiate hard. You can also try switching suppliers if necessary to achieve the best price.
In the past, procurement professionals have abused this status to lower prices. Today, an increasing number of advanced companies are looking to unlock the innovative potential of their suppliers.
3. Bottleneck items / Minimize risk
Bottleneck items are the opposite of leverage items. These are products with a limited source of supply. Their supply risk is high, but they do not have a major profit impact. This quadrant belongs to a “Supplier’s Market.” Here, the strength is in the hands of the supplier.
The market can consist of few suppliers which can force the prices to rise. Many procurement leaders found that these suppliers absorb more of the buyer’s time compared to the other quadrants of the matrix.
Even though these items have a low impact on the profitability of a company, the market structure forces them to accept unfavorable deals.
The main strategy that you can use for these types of items is damage limitation. Procurement professionals must recognize that few opportunities will arise from this quadrant.
Innovative internal activities can revise the product requirements so these materials can be replaced with other materials. You can also alter the terms of trade to mitigate the impact of these items.
4. Strategic items
Strategic items have high supplier risk and high-profit impact which are crucial to any business.
These items are only represented or made by a handful of suppliers. Ensuring an effective and predictable supplier relationship is the key to the future of the purchases of a company.
Managing suppliers in this quadrant require a diverse array of skills and should include time in sponsoring and directing the relationship.
Strategic partners should look at innovative ways in terms of the product and process so they can expect long-term commitments and proactive development.
Steps in Using the matrix
1. Classify purchasing portfolio
In this step, you start classifying all the commodities, products, components, and services that you purchase according to the supply risk and profit impact of each.
- Supply risk is high when it can be affected by the scarcity of raw materials, government restrictions, natural disasters, disruption in the supply chain, and the low number of suppliers who make the particular product.
- Profit impact is high when it adds significant value to the organization’s output.
Based on this, these purchases can be classified into one of the four quadrants that we have discussed earlier which are the non-critical, bottlenecks, leverage, and strategic items.
2. Market Analysis
In this stage, the procurement department must consider the supply risk and profit impact of the current market situation.
In doing this, the procurement department of a company must evaluate its purchasing power compared to the supplier market.
3. Strategic Positioning
In this step, you will now position the strategic purchases within the matrix which is according to the market analysis that you have carried out.
Positions on the market are a relative phenomenon and an advantage can easily turn into a liability if one is not careful enough. To help you out in plotting your current situation of the products, supplier, or sourcing group, we
made an example about Gorilla for you to know how plotting works.
Gorilla’s current main sales drivers nowadays are the snacks & drinks category. In the example of Gorillas, who are only a-brands and therefore have fewer options in supplier diversification and development, three levels could possibly apply:
- Level 1 is Products: for example beer in a can, specialty beer in a bottle, etc
- Level 2 is product group: Pilsener, lager, Saison, Tripel, Mexican
- Level 3 could be Brands like Heineken, Bud, Corona, Warsteiner
On a side note, another level could of course be suppliers: Heineken, Ab Inbev, Carlsberg, Duvel
For this example, we have plotted the beer suppliers in the quadrant:
- Since Heineken is a huge player in the market of beer and by far the biggest supplier of Gorillas, they are plotted in the strategic quadrant in the current situation.
- AB Inbev is a huge supplier but has a small position within Gorillas, so is plotted in leverage.
- Carlsberg is plotted within Non-critical: sales, margin, and supply risk are low.
- Duvel, relatively small in comparison with the big three earlier mentioned, has only limited volumes year over year available and is not that critical to the business of Gorillas and is therefore plotted in the bottleneck.
An important note to this example is the fact that procurement managers of Gorillas will always have limited power towards the branded suppliers versus the power they will have when they list multiple own-brand beers.
It is in that case when there is the choice of 100 possible suppliers that will be the one brewing the gorilla brand, that real power over suppliers could be achieved: the consumer will buy the beers, and procurement can switch suppliers every year to make sure to guarantee best price and quality.
4. Action planning
Finally, you know what you want and what you may expect to be able to get it. After analyzing the information, the final step is to develop action plans for each of the products and materials that you need regularly.
Three purchasing strategies emerge from this stage which are:
- Exploit – This purchasing strategy makes the most out of your high buying power to secure good prices and long-term contracts from numerous suppliers to reduce the supply risk that your purchases have.
- Balance – This is the middle path between the exploit and diversity strategy.
- Diversity – Here, you can reduce supply risk by finding alternative suppliers or products.
The portfolio approach of Kraljic is very well known throughout the world of Procurement, but the model lacks an active dynamic character. Luckily, scientist Gelderman can help you out with this!
According to Gelderman, the core of all purchasers’ action should be in the case of leveraging products to make the shareholders happy, by increasing profit through low costs. Instruments could be found in reverse auctions.
For routine products profit is to be made through reducing handling connected with purchasing. Little or no honor is to be found with these goods, so try to do it with fewer people.
The instruments, in this case, are for instance E-procurement and E-ordering. In the case of strategic articles, Kraljic proposes a partnership with a supplier. Easier said than done. Most of the attempts to set up these schemes will fail.
Relationships in purchasing have a lot in common with human relationships. Trust is often the stumbling stone to building something lasting. Still, the partnership is the key to success in this segment of the model. But just as with some situations with bottleneck products, you could face an impossible task.
Some aspects go beyond your control and you could be too small to change them. In this case, the only thing you can do is accept your faith and hope for a brighter future.
+ What is the Kraljic Matrix?
It is a strategic tool used by procurement and supply chain professionals to find and minimize supply risks.
+ Who invented it?
The Matrix was created by Peter Kraljic and first appeared in the Harvard Business Review in 1983 to help professionals segment the supplier base.
+ How does it work?
It works by mapping the profit impact of a product on one axis and the supply risk of the product on the other.
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