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
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.
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The Four Quadrants of the Matrix
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.
Let us review each quadrant of the matrix below:
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
Bottleneck items are the opposite of leverage items. These items have high risk, yet the profitability is low. Here, the strength is in the hands of the suppliers.
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.
4. Action planning
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.
Frequently asked questions
1. What is the Kraljic Matrix?
It is a strategic tool used by procurement and supply chain professionals to find and minimize supply risks.
2. 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.
3. 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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