Kraljic Model

Analyzing the purchasing portfolio. Explanation of the Kraljic Model. (1983)




  

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Kraljic Model | Kraljic MatrixWhat is the Kraljic Model? Description

The Kraljic Matrix from Peter Kraljic was first described in an article "Purchasing must become Supply Management" in the Harvard Business Review (Sep-Oct 1983). The Kraljic Model can be used to analyze the purchasing portfolio of a firm.

 

The Kraljic framework is based on two dimensions for classifying a firm's purchased materials or components (see figure):

  • Profit Impact: "The strategic importance of purchasing in terms of the value added by product line, the percentage of raw materials in total costs and their impact on profitability".
  • Supply Risk: "The complexity of the supply market gauged by supply scarcity, pace of technology and/or materials substitution, entry barriers, logistics cost or complexity, and monopoly or oligopoly conditions".

The model then distinguishes between the following 4 product categories:

  1. Leverage Items.
    • Definition: Leverage Items are products that represent a high percentage of the profit of the buyer and there are many suppliers available. It is easy to switch supplier. The quality is standardized.
    • Buyer-seller power situation: buyer dominated, moderate level of interdependency.
    • Recommended purchasing strategy: Tender, vendor selections, targeted pricing, umbrella agreement with preferred suppliers. Call-off orders are then placed as an administrative formality.
  2. Strategic Items.
    • Definition: Strategic Items are products that are crucial for the process or product of the buyer. They are characterized by a high supply risk caused by scarcity or difficult delivery.
    • Buyer-seller power situation: balanced power, high level of interdependency
    • Recommended purchasing strategy: Strategic Alliance, close relationships, early supplier involvement, Co-Creation, consider Vertical Integration, long-term value focus.
  3. Non-critical Items.
    • Definition: Non-critical Items are products that are easy to buy and also have a relative low impact on the financial results. The quality is standardized.
    • Buyer-seller power situation: balanced power, low level of interdependency
    • Recommended purchasing strategy: reduce time and money spent on these products by enhancing product standardization and efficient processing.
  4. Bottleneck Items.
    • Definition: Bottleneck Items are products that that can only be acquired from one supplier or their delivery is otherwise unreliable and have a relative low impact on the financial results.
    • Buyer-seller power situation: supplier dominated, moderate level of interdependency.
    • Recommended purchasing strategy: Volume insurance contract, Vendor Managed Inventory, keep extra stocks, look for potential suppliers.

Origin of the Kraljic Model. History

The portfolio model concept was originally developed by Markowitz (1952), who used it as an instrument for managing equity investments. Kraljic (1983) was the first to bring portfolio models into the purchasing area.

 

Usage of the Kraljic Matrix. Applications

  • Analyze purchasing portfolio.
  • Focusing purchasing departments to spend their time on those products that matters most.
  • Outsourcing of Non-critical Items and Leverage Items.

Steps in the Kraljic Model. Process

  1. Prepare portfolio analysis.
  2. Determine criteria for Profit Impact and Supply Risk
  3. Decide the detail level of the portfolio analysis (Article or article group level? For department, business unit or entire corporation?)
  4. Fill in the Kraljic Matrix.

  5. Analyze and discuss the results.

  6. Define purchasing portfolio strategy and improvement actions per quadrant of the Kraljic framework.

  7. Implement and monitor strategy.

 

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Recent User Comments
Laurent - France Sustanability strategies "How to integrate environmental criteria into purchasing decision models, especially Kraljic's one ? "    0
 - Taiwan E-Procurement Strategy per Category "What are typical E-Procurement strategies for each given purchasing category? Any help will be appreciated. Thanks."    3
 - uk Beyond the Steady State "What impact will the emergence of a service free public sector, that is failure immune or failure compensated, have on emergence in bottleneck markets, and what are the sustainability issues?"    1
 - Netherlands Generic Purchasing-Decision Model "I am looking for more information about the Generic Purchasing-Decision Model. It's main phases are: 1) Need Identification, 2) Information Search 3) Evaluation of Alternatives 4) Purchase and Delivery and 5) After-purchase Evaluation.
Who can provide some more details on this model? Thank you!"		    -6
Emma - Uganda Question "Illustrate the kraljic portfolio matrix used for classifying products and show how a purchasing team can maximise their effectiveness in determining the right approaches to the supplier while buying."    0
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Compare with the Kraljic Model: Co-Creation  |  Outsourcing  |  3rd Party Logistics (3PL)  |  Vendor Managed Inventory  |  Value Chain  |  Vertical Integration  |   Value Stream Mapping  |  Five Forces model

 

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Copyright 2009 12manage - The Executive Fast Track. V10.4 - Last updated: 11/21/2009. All names tm by their owners.


  ● Y Beviss (UK) Typical E-Procurement Strategies "Non-Critical Items: online catalogue / e-catalogue from approved suppliers
Leverage Items: e-auction
Bottleneck Items: information sharing platform "


  ● Dan (USA) Procurement Phases "The procurement process usually consists of the following steps:
1. NEED IDENTIFICATION: what should be bought?
2. INFORMATION GATHERING: search for suppliers who can satisfy the requirements.
3. SUPPLIER CONTACT: When one or more suitable suppliers have been identified, Requests for Quotation (RFQ), Requests for Proposals (RFP), Requests for Information (RFI) or Requests for Tender (RFT) may be advertised, or direct contact may be made with the suppliers.
4. BACKGROUND REVIEW: References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are investigated. Samples of the P/S being considered may be examined, or trials undertaken.
5. NEGOTIATION: Negotiations are undertaken, and price, availability, and customization possibilities are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.
6. PURCHASE: signing of contract
7. FULFILLMENT: Supplier preparation, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included.
8. CONSUMPTION, MAINTENANCE AND DISPOSAL: During this phase the company evaluates the performance of the P/S and any accompanying service support, as they are consumed.
9. RENEWAL: When the P/S has been consumed and/or disposed of, the contract expires, or the product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier. "
  ● Mnyeti (Tanzania) Framework contract on Publc procurement! "How would the framework contract to be used to classify the items accrding to supply management model?, and what most items would be more appropriate especially for public procurement in a country to reduce the procurement overheads?, and in which ways as a purchaser can handle the emergency procurement in critical issue need?"
  ●  (Uk) Framework Agreements/Concordats "Dear Mnyeti, There are illustrations of procuring health and social care services on my website that advance the Klajic Model and are applying whole systems thinking. Go to alecfraher.org/resources.html"

  ● stuart emmett (uk) kraljic "Hi A long answer is needed but all explained in our books, for example "Excellence in Supplier Management" or "Excellence in Procurement" available from amazon.com or co.uk"