Kraljic Model

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

What 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.

Kraljic Model Forum

Emma - Uganda

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"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."

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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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