Kraljic vs Portfolio Analysis — 5 Key Differences 

5 Key Differences of Kraljic Vs. Portfolio Analysis

Kraljic’s matrix and portfolio analysis serve as frameworks that optimize procurement processes. The table below will show you the characteristics, the differences, and the application of each method.

What is Kraljic’s Matrix?

Kraljic’s Matrix, developed by Peter Kraljic in 1983, is a strategic procurement tool that categorizes items based on supply risk and profit impact. Its purpose is to help organizations decide what to buy and how to manage each purchase category. The model emphasizes that not all items are equally important, guiding companies to handle non-critical, bottleneck, leverage, and strategic items differently. 

By applying the matrix, organizations can reduce costs, manage risks, and optimize value from their purchasing power. As a result, procurement becomes a strategic rather than purely transactional activity.

What is Portfolio Analysis?

Portfolio analysis is a term borrowed from finance and utilized across various business disciplines. It refers to an assessment of a set of items, projects, or investments that can be made to determine how best to allocate resources. More than just that of procurement, this tool provides a holistic view of a company’s portfolio – everything the company has to offer. 

Portfolio analysis in procurement provides an organization with a strategic tool that sorts, ranks, and manages the purchase of goods and services in line with business goals and objectives. This is one of the fundamental aspects of supply chain management and strategic sourcing. 

It is the most crucial aspect of supply chain management and strategic sourcing to help businesses make the best procurement decisions and manage relationships with suppliers. The process consists of analyzing the procurement portfolio along several dimensions to identify opportunities for cost reduction, risk management, and value creation.

How to Implement Effective Procurement Strategies?

From this view, an organization that might be willing to optimize its procurement efficiency would have to consider the strategic integration of both Kraljic’s Matrix and Portfolio Analysis. This, therefore, gives a subtle supplier management perspective to the larger picture of procurement opportunities.

Implementing these frameworks requires a systematic approach, starting with a thorough analysis of the procurement portfolio, followed by the categorization of items or suppliers according to the chosen framework. This would involve continuous monitoring and adaptation as the procurement landscapes develop over time.

However, take note that organizations may face challenges such as resistance to change, quality problems with the data, and alignment to broader strategic goals. In each case, stakeholder involvement, strong practice of data management, and clear communication are essential for effective execution.

Practical Applications of Kraljic Matrix and Portfolio Analysis

Now, let’s take a look at how these two frameworks take effect in practice:

Example of a Practical Application: Automotive Manufacturing

Situation:

Let’s take for example an automotive manufacturer that is facing challenges with its supply chain. The challenges include volatile raw material prices, geopolitical issues that present potential disruptions, and the need for innovation in a rapid and competitive market. The automotive manufacturer can use the Kraljic Matrix to optimize their procurement strategy and mitigate risks.

Application:

Classification of Procurement Items:

• Strategic Items: For the manufacturer, the strategic items include electric vehicle batteries and microchips. These items are crucial for the company’s future growth and market differentiation. But, due to limited suppliers and fast-paced innovations, the supply market for these items tends to be complex.
• Leverage Items: In here, steel and aluminum are considered. These items are used in large volumes for car bodies and frames. These items have a significant impact on cost but unlike the strategic items, it is available from multiple suppliers.
• Bottleneck Items: The company’s bottleneck items would be the rare earth metals, which are essential for electric vehicle motors and battery systems. The problem is that this items come with limited and geopolitically sensitive supply sources.
• Non-critical Items: This is where standard items like nuts and bolts can come in. These are readily and widely available and have a low impact on the cost and performance.

Here’s how strategies can be developed tailored for the categorization above:

• Strategic Items: For these items, the company should develop strong relationships with key suppliers, focus on investing in joint research and development projects that will ensure innovation, and explore long-term and sustainable contracts to secure supply.
• Leverage Items: Here, the company should use its buying power to negotiate better deals, seek cost reductions by facilitating competitive bidding, and consider alternative materials to optimize costs.
• Bottleneck Items: For these items, the manufacturer can identify alternative suppliers in politically stable regions, invest in having a safe stock of critical materials, and explore possibilities for substitutes.
• Non-critical Items: The company should set standards for these items across its models to achieve economies of scale, use automated procurement systems for efficiency, and focus on cost-effective suppliers.

Outcome:

Looking at this application of the Kraljic Matrix, the automotive manufacturer can successfully manage its supplier portfolio, reducing supply chain risks and ensuring the availability of critical items. This approach will also enable the manufacturer to control costs, promote innovation, and maintain a competitive advantage in the automotive industry.

For portfolio analysis, we can look at the application of one of its models, the BCG Matrix.

There are many companies that we can apply the growth matrix to in the real world. Apple (AAPL) is a great candidate. Let’s take a look at the products Apple has on the market according to the matrix categories:

• Star: iPhone
• Cash Cow: Macbook
• Question Mark: Apple TV
• Dog: iPad

The company was able to achieve net sales amounting to $394.33 billion. Generally, almost $316.2 billion was from the products segment of the firm, and the remaining $78.13 billion was from the services section.

Now, given the figures, there is no doubt that the product with the most units sold would take most of the sales for Apple. The iPhone, with $205.49 billion in units sold for the year, would then be considered the star for the company.

The Mac products, and more notably the Macbook laptop, are among some of the most popular products that bring in a lot of money for this company. Sales for the Mac products line came in at $40.18 billion for the fiscal year (FY).

The only big question mark for Apple is its Apple TV streaming service that falls under the Services category. As of the moment, there is a huge competition in the world of streaming, with traditional services like Netflix, Hulu, and Disney+ owning the market. But others like YouTube and Vimeo also eat into their market share. In the Sales of Apple Services2, it drew $78.13 billion in sales.

The darling of the company at one point, the iPad, is now considered a dog. The declines continued as sales of the tablet from Apple carried on showing weak growth. Yearly sales came in at $29.29 billion compared with $31.86 billion last year.

From the above matrix, two key dimensions then emerge as very critical in determining the real considerations that would be made in making investment location decisions: company competitiveness and market attractiveness, underpinned by relative market share and growth rate.

Each of the four quadrants represents a specific combination of relative market share and growth:

• Low Growth, High Share: Companies should milk these “cash cows” for cash to reinvest.
• High Growth, High Share: Companies should significantly invest in these “stars” as they have high future potential.
• High Growth, Low Share: Companies should invest in or discard these “question marks,” depending on their chances of becoming stars.
• Low Share, Low Growth: Companies should liquidate, divest, or reposition these “pets.”

Understanding the Evolution of Procurement Strategy

Procurement is considered a transactional activity that has always been a part of any business, but in today’s world, it has changed to a strategic base for business success. This transition is emphasized by the relevance of advanced analytical tools and frameworks, which support and drive decision-making towards the creation of value in the supply chain.

The path from traditional procurement practices to the strategic approach indeed does represent a broader understanding of procurement as a potentially impactful function on an organization’s overall strategic objectives. It signals a drift toward the use of procurement for competitive benefit, efficiency, and innovation.

Changes over time require analysis in procurement as well. Tools that exemplify this need are Kraljic’s Matrix and Portfolio Analysis, which aid in informed strategic decision-making. These frameworks help in facilitating supplier relationship development, risk management, and category strategy development.

Conclusion

In a world of procurement and supply chain management that is so complex and changes a lot, the Kraljic Model and Portfolio Analysis offer value to the point that it brings clear insights when informed strategic decisions have to be made.

Deciding to use one or combining the other two is always dependent upon the organization’s specific needs and strategic objectives, even when each has its strengths and limitations. Increased technological advancements, a growing focus on sustainability, and changing market dynamics will, therefore, lay the uses and applications of these models in the future. 

Thus, only informed and flexible companies can swim successfully across such changes through the use of the Kraljic Model and Portfolio Analysis in an attempt to remain competent and propel the competitive advantage critically needed in their respective industries for sustainable success.