Kraljic vs Portfolio Analysis — Two Sides of the Procurement Strategy Coin

Kraljic Matrix? Portfolio Analysis? If you’re new to procurement, maybe it’s your first time hearing these terms. But if you’re not new to procurement, then you’re probably tired of hearing these two. 

We all know procurement strategy plays a crucial role in determining an organization’s competitive edge and efficiency in operations. Two well-known frameworks, kraljic’s matrix, and portfolio analysis, stand out as noteworthy tools guiding procurement professionals. 

In this article, I will discuss these two methods, providing insights into their application, individual strengths, and strategic importance in modern procurement practices

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.

Introducing Kraljic’s Matrix

Peter Kraljic developed the Kraljic Matrix in 1983, and since then, it has been an innovation in procurement strategy. The Kraljic Matrix has two dimensions through which procurement items are categorized: supply risk and profit impact; thus, it plays a crucial role in helping organizations determine and select what they should be purchasing.

Kraljic Matrix, therefore, helps organizations in deciding what is to be bought and how much of it is to be purchased. The Kraljic Matrix assumes that not all purchases are created equal and hence proves rather indispensable in assisting companies to appreciate their non-critical items, leveraging bottlenecks, and strategic items.

Kraljic points out that he designed the Matrix to help companies reduce costs and make an optimal profit from their purchasing power. In this effect, then, procurement becomes an activity at the strategic level and should not be limited to transactions.

Quadrants of the Kraljic Matrix

The Kraljic model identifies the goods and services offered to organizations under four quadrants: bottleneck items, leverage items, strategic items, and non-critical items. Each quadrant of the Kraljic Matrix represents a given procurement strategy, from efficient processing for items that are not critical to the organization to strategic partnerships for items in the strategic quadrant. This, therefore, gives focused and targeted procurement management.

Before diving into the quadrants, it’s important to first clarify the two main axes of the matrix. The horizontal axis, known as “supply risk/complexity” deals with how challenging it is to obtain a product or service, or how likely it is that the supplier can deliver it punctually. On the other hand, the vertical axis, referred to as “profit impact,” gauges the ability of the supply to boost the profitability (or efficiency) of the purchaser.

This boost in profitability can come from lower costs achieved through reduced prices for goods or services, or the implementation of more efficient purchasing practices. An alternative to the profit potential axis that is sometimes used is the “business impact” axis.

Now you know the axes, let’s move on to the quadrants:

1. Leverage Items 

These are characterized by low supply risk and high financial impact. They offer opportunities for negotiating favorable terms.

2. Strategic Items 

These items have both high supply risk and financial impact, requiring strong supplier relationships and risk management strategies.

3. Non-critical Items

These are with low supply risk and financial impact and are ideal for standardized processes and cost minimization.

4. Bottleneck Items 

Presents high supply risk but low financial impact, suggesting the need for alternative sources and supply security measures.

To sum up, the Kraljic matrix is still a valuable tool in the fast-paced and rapidly changing business world. It aids organizations in managing the growing complexity and uncertainties of the modern supply chain.

A great aspect of the Kraljic matrix is that it provides organizations with methods to address procurement not only through simple transactional measures but also through strategic purchasing and the building of strong partnerships.

These methods include understanding market conditions and supplier capabilities as well as the strategic importance of one procurement activity over others.

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.

Key Components and How Portfolio Analysis Works?

This analysis focuses on assessing the attractiveness of each spending category against the difficulty of achieving savings or improvements. It helps organizations allocate their resources and efforts more strategically across their procurement activities. Here’s a breakdown of its key components and steps:

1. Categorization

The first step is to categorize all purchases and suppliers. This can be based on various criteria such as the volume of spend, the criticality of goods or services, the complexity of the supply market, and the risk associated with the supply chain. A common framework used for this purpose is the Kraljic Matrix. There is also the BCG Matrix.

2. Analysis

After categorization, a detailed analysis is conducted for each category. This analysis can include:

• Spend Analysis:  How much is spent in each category and identifying trends. 
• Market Analysis: A study of the supply market that involves the capabilities of suppliers, market trends, and any future risks. 
• Risk Analysis: Identifying potential risks of the suppliers in the supply chain and its impact.
• Performance Analysis: Analysis of the suppliers’ performance, which includes quality, delivery time, and cost and innovation.

3. Strategy Development

Based on the analysis, procurement strategies are developed for each category. These strategies are aligned with the overall business strategy and may include:

• Strategic Sourcing: Finding and engaging with suppliers that can provide a competitive advantage.
• Supplier Relationship Management (SRM): The process of developing good relationships and maintaining them with key suppliers to create value over the long term.
• Supply Chain Diversification: Identifying alternative suppliers or materials to reduce risk.
• Cost Reduction Initiatives: Implementing initiatives to reduce costs without compromising quality or service.

4. Implementation

Once formulated, the procurement strategies are then implemented through various procurement activities such as supplier selection, contract negotiation, and purchase order management. This would likely mean the cross-functional implementation working in other departments like finance, operations, engineering, etc.

5. Monitoring and Review

Finally, the performance of procurement strategies and results from purchasing decisions will be investigated and reviewed periodically. This means it will monitor savings, supplier performance, and contract compliance. The findings from the review are used in the continuous improvement of strategies and processes.

Portfolio Analysis allows a procurement professional to easily understand how the relative potential impact on the organization varies between the range of factors affecting the alternative solutions and that resources are applied effectively and efficiently to those areas where value added is the greatest. It also helps in managing risks and fostering innovation by encouraging strategic thinking about the supply chain.

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 difference, and application of each method.

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.

The Future of Procurement Analysis

The future of procurement is marked by an increased emphasis on sustainability, resilience, and technology-driven decision-making. These trends are influencing the evolution of procurement frameworks and tools.

Technology is changing how Kraljic’s Matrix and Portfolio Analysis are used within an organization, making these very flexible frameworks increasingly data-centric. This is an area where AI and machine learning integration are quite promising in availing new insights for improved procurement optimization.

As procurement continues to transform further down the line, the role played by analytical frameworks will increase further, with a more significant share concentrating on predictive analytics, risk management, and value creation. This will enhance the strategic importance that procurement itself will have in reaching those business goals, further boosting the need for those highly developed analysis tools.

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 by the end of the fiscal year 2022. 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 Services for 2022, 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.”

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.