Kraljic Model

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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 and to support corresponding decisions and actions regarding purchasing of commodities, products or a company.

The Kraljic framework is based on two dimensions (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.
• Decision tool for a purchasing department or purchaser to define priorities.
• Decision tool on strategy to follow for a product or product category.
• Outsourcing of Non-critical Items and Leverage Items.

Steps in the Kraljic Model. Process

1. Decide on the products, product categories to analyze.
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 (to make it objective make several people score Profit Impact and Supply Risk).
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.

Strength of Kraljic. Benefits

The strength of a Kraljic diagram is that it gives in a relative simple way a result from which a clear purchasing strategy can be set up.

You can combine Kraljic with the 5 forces of Porter to get more insight and detail. Combined the 2 mentioned analyses are referred to as the Dutch Windmill (Van Weele, 2005). This gives the matching between your strategy and the strategy of the supplier towards you. It is always interesting to look into the mirror and analyze your attractiveness for the vendors.

Limitations of Kraljic. Drawbacks

Suppliers will also make an analysis on their customers.

Literature:
Peter Kraljic - Purchasing Must Become Supply Management - HBR Sept/Oct 1983
Van Weele (2005) - Purchasing and Supply Chain Management

Forum Forum discussions about the Kraljic Model. Below you can ask a question about this topic, share your experiences, report a new development, or explain something. What is Purchase Marketing? I'm trying to find out what purchase marketing is? Thanks for your ideas and hints.... 10   1 comments 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?... 9   Types of E-Procurement Tools I am looking for categories / types of E-procurement tools. Can you give me some ideas?... 9   Sustainability Criteria in Purchasing Strategy How to integrate environmental criteria into purchasing decision models, especially Kraljic's one ?... 9   1 comments E-Procurement Strategy per Category What are typical E-Procurement strategies a Chief Procurement Officer can design for each given purchasing category? Any help will be appreciated. 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Best Practices The best, top-rated topics about the Kraljic Model. Here you will find the most valuable ideas and practical suggestions. 🥇 Examples of the 4 Product Categories of Kraljic I don't manage to draw up a clear difference between the 4 categories of product. I am operating in the milling industry. We buy raw materials, packing materials, spares and stationery. Which is which... 16   6 comments 🥈 Public Procurement Process Can somebody give more information about public procurement processes? Thanks.... 13   5 comments 🥉 Factors to Analyse a Purchasing Portfolio Beyond those in the Kraljic Model Dear all, as written in the summary of the Kraljic Model, if we need to analyze our purchasing portfolio, we can use this model to help us consider 2 interrelated factors which are crucial in drafting... 5   3 comments

Expert Tips Advanced insights about the Kraljic Model. Here you will find professional advices by experts. Supplier Selection Models Supplier Selection, Supplier Evaluation, Best Practices Supplier selection has traditionally been described as being based on the five Rs: 1. Right price 2. Right quality 3.... Three Reasons for Dysfunctional Buyer - Supplier Relationships Supply Chain Management, Purchasing, Alliances, Partnerships, Supply Chain Relations Roloff, Aßländer and Nayier (2015) did research on the conditions for (un)successful buyer-supplier relationships and fo... Price Relates to Quality not the Other Way Around Best Practice Everybody is looking for the best Price/Quality ratio. But although most companies submitting an RFP know exactly what t... Obtaining a High Supplier Quality Best Practice to Consider W. Edward Deming, a well-known management consultant, strongly recommended Sole (Single) Sourcing as the only management...

Information Sources Various sources of information regarding the Kraljic Model. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops. Power and Interdependence in Kraljic's Purchasing Portfolio Matrix Purchasing Portfolio Management, Buyer-supplier Relationships, Power and Interdependence A remarkable finding of this paper by Marjolein C.J. Caniëls and C.J. Gelderman is the observed supplier dominance in th... Why partners do not fit into purchasing Portfolio models Purchasing Management In this paper Anna Dubois and Ann-Charlott Pedersen argue that the starting point in 'given' products in addition to a d... Procurement Category Management Procurement, Purchasing, CIPS Category Management, Purchasing Category Management, Strategic Sourcing The attached presentation is adapted from the CIPS "Advanced Category Management" materials. The purposes of categorizi... Industrial Purchasing Buying Behavior, Decision Making, Purchasing Process, B2B Purchasing, Procurement Process This presentation provides insight into industrial buying and includes the following sections: - Characteristics of Org... Kraljic Model Diagram Purchasing Portfolio Mgt. Download and edit this 12manage PowerPoint graphic for limited personal, educational and business use. Republishing in ...

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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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