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.