Question

Purchasing and Supply Chain Management

a) Illustrate the kraljic matrix with its dimensions and categories using examples.

[15 Marks]

b) Elaborate on the specific actions that the kraljic matrix proposes for the four item categories.

[10 Marks]

[Total: 25 Marks]

Answer 1

Kraljic Matrix

Kraljic Matrix, also known as Purchasing Portfolio Matrix or Supply Chain Portfolio Matrix, is a method developed by Peter Kraljic in 1983. It is used to create a purchasing portfolio by segmenting items (products or services) into 4 dimensions. The result is that purchasing professionals can prioritize buying activities based on profit impact and level of risks involved.

High Leverage Items Strategic Items Key products/services goal is to ensure long term availability and global suppliers should be developed Standard commodities with abundant source of supplies: utilize purchasing power Non-Critical Items Bottleneck Items Low value items: purchasing process should be decentralized Items with limited source of supplies: maintain good relationship with existing suppliers and actively develop new/niche suppliers Low Supply Risk Low High Profit impact

Kraljic recommends the following purchasing approaches for each of the four quadrants:

• Strategic items (high profit impact, high supply risk).

These items deserve the most attention from purchasing managers. Options include developing long-term supply relationships, analyzing and managing risks regularly, planning for contingencies, and considering making the item in-house rather than buying it, if appropriate.

• Leverage items (high profit impact, low supply risk).

Purchasing approaches to consider here include using your full purchasing power, substituting products or suppliers, and placing high-volume orders.

• Bottleneck items (low profit impact, high supply risk).

Useful approaches here include over ordering when the item is available (lack of reliable availability is one of the most common reasons that supply is unreliable), and looking for ways to control vendors

• Non-critical items (low profit impact, low supply risk).

Purchasing approaches for these items include using standardized products, monitoring and/or optimizing order volume, and optimizing inventory levels.

the Kraljic Matrix helps us develop a purchasing strategy for the products and services our organization consumes. It aims to remove supply vulnerability as much as possible and maximize our potential buying power. The Kraljic Matrix allows us to work in a smarter way with those suppliers we already have. It does this by helping us determine, on a per product or per supplier basis, the type of relationship we should be fostering with each of our suppliers. The model works by mapping the profit impact of a product on one axis, and our vulnerability to the supplier’s disappearance on the other.

1. Strategic Items

These items have a large financial impact on our organization. This could either mean the organization spends a great deal of money on these items or that these items are directly linked to our organization’s differentiation and profit. These items are also scarce. This quadrant normally contains high-value items such as precious metals with limited, or even a single supplier. The purchasing strategies we would typically use for these types of items include collaboration and strategic partnerships. If you truly want to develop a comprehensive supplier management strategy, then this is the area you should focus on first.

2. Leverage Items

Just like strategic items, these items have a large financial impact on our organization, however, the item is in abundant supply. Because of their large financial impact, these items are important to the organization. The purchasing strategies we would typically use for these types of items include tendering and competitive bidding. EXAMPLE

3. Bottleneck Items

These are items that have a low financial impact on our organization, however, there is a high supply risk. An example might be where we have a new supplier supplying a new technology. The purchasing strategy we would typically use for these types of items is twofold. Firstly, we need to ensure continuity of supply. Secondly, we need to develop plans to reduce our dependence on this supplier, by adapting our products and investigating alternative products and suppliers.

4. Non-critical Items

These are items that have a low financial impact on our organization and are also in abundant supply, such as office supplies. Although these products are low impact and have an abundant supply, they are nevertheless interesting, because the cost of handling them can often outweigh the cost of the product itself. Thus, the purchasing strategies we would normally use for these types of items focus around reducing administrative costs and logistical complexity.

One further thing to think about, which isn’t included in the Kraljic Matrix is what suppliers think of our organization. This will be a function of our past dealings with the supplier and their size. For example, spending $20k per year in the coffee house next door to the office will probably make us more influential with them than spending double that amount with Google. With strategic suppliers, thinking about how we are perceived to them is important, and based on our answer to this question, we may want to approach how we build a relationship with that supplier in a different manner.

         SUMMARY               

The Kraljic Matrix works by mapping the profit impact of a product on one axis, and our vulnerability to the supplier’s disappearance on the other. It essentially provides a portfolio management approach to managing an organization’s many suppliers. This enables us to see which relationships are important so we can focus on strengthening these, as well as identifying less important relationships where we might employ traditional supplier management techniques such as offshoring.

SPECIFIC ACTIONS THAT THE MATRIX PROPOSES FOR THE FOUR CATEGORIES

A. Strategic items

1.Maintain strategic partnership:

In order to counter-balance the supply risk, firms will aim at building a partnership relationship with its supplier

2. Accept a locked-in partnership

This strategy often occurs when the buyer is subject to unfavourable conditions of the supplier and is unable to pull out of the situation.The locked in position might be caused by the fact that the supplier holds the patent to a certain product and therefore has monopoly power to some extent. This situation can be characterized as one dominated by the supplier

3. Terminate a partnership

This strategy is employed when a supplier’s performance has become unacceptable and incorrigible. The buyer will try to reduce his dependence on the supplier. One way of achieving this is to search for alternative suppliers.

B. Bottleneck items

1. Accept dependence, reduce negative consequences:

The main focus of this strategy is to assure supply, if necessary even at additional cost. Examples of this strategy are keeping extra stocks of the materials concerned or developing consigned stock agreements with suppliers. By performing a risk analysis firms can identify the most important bottleneck products and consider the implications. A possible action for dealing with unexpected bad dependence positions for certain products is to employ contingency planning.

2. Reduce dependence and risk, find other solutions:

This strategy is geared towards reducing the dependence on the supplier. The most common way to achieve this is to broaden the specifications of the product or to search for new suppliers

C. Leverage items

1. Exploit buying power:

In this strategy the firm pursues competitive bidding. Since suppliers and products are interchangeable, there is no need for long-term supply contracts. In general, a coordinated purchasing approach is adopted that has the form of a centrally negotiated umbrella agreement with preferred suppliers. Call-off orders are then placed as an administrative formality. The buying power is actively used to get better deals with interchangeable suppliers

2. Develop a strategic partnership

In a few cases practitioners choose to abandon the leverage position and opt for a strategic partnership with a supplier. This cooperative strategy is only pursued when the supplier is willing and able to contribute to the competitive advantage of the buyer’s firm. Hence, this role is only attainable for technologically advanced suppliers. In this scenario we expect to find a balanced power position between the buyer and supplier

D. Non-critical items

1. Pool purchasing requirements:

The handling of non-critical products requires a purchasing strategy aimed at reducing the logistic and administrative complexity. Systems contracting is generally advised as the way of doing business with suppliers of routine products

2. Individual ordering, efficient processing:

Whenever it is not possible to pool the purchasing requirements, professional purchasers adopt some kind of individual ordering, for instance by means of a purchase card. This strategy is aimed at reducing the indirect purchasing costs that are associated with administrative activities, such as ordering and invoicing.