The Kraljic Matrix is a method of classifying and analysing the purchasing portfolio to help guide a company's procurement strategy.
In this post, you will find the answers to all of your questions about the Kraljic Matrix:
- The goal of the Kraljic Matrix
- The starting point of the Kraljic Matrix
- Getting more out of the Kraljic Matrix
First theorised by Peter Kraljic in an article in the Harvard Business Review in 1983, Kraljic's purchasing segmentation matrix aims to guide buyers in a climate of economic, environmental and technological change.
The Kraljic Matrix can be defined as a purchasing portfolio classification method whose main objective is to identify the strategic weight of various purchasing families, both internally and externally, to help you adapt your purchasing strategies.
For Peter Kraljic, purchasing strategy depends on two key factors:
- The strategic importance of purchasing: volume of expenditure, Total Cost of Ownership (TCO), profitability, differentiation and value added for the company and the sales process.
- The complexity of the supply market: monopoly or oligopoly, entry barriers, technological evolution, logistics cost or complexity etc.
This principle gives rise to an initial chart that can be used to prioritise purchases and sort them into four main categories.
Each purchase category has its own unique characteristics and strategies:
- Non-critical items
These purchases have little impact on business activity. They are in abundant supply, such as office supplies, for example.
Appropriate strategies: streamlining products, automating processes and monitoring volumes.
- Leverage items
These purchases have a significant impact on the company's business, but they are also in abundant supply. With leverage items, there is plenty of room for manoeuvre and significant savings opportunities.
Appropriate strategies: fully exploiting your purchasing power by putting suppliers in competition with each other, negotiating or substituting products, for example.
- Bottleneck items
These purchases have a low business risk but are in limited supply (only a handful of suppliers).
Appropriate strategies: guaranteeing volumes, managing supplier relationships, securing stocks and supplies, putting backups in place etc.
- Strategic items
Business activity depends on these items. These are often rare or unique resources, or in other words, high-stake purchases for the company.
Appropriate strategies: developing supplier partnerships (particularly through the use of SRM software ), market analysis and consideration of vertical integration etc.
Very often, Peter Kraljic's approach is limited to this initial chart. However, if we look back at the original text, it is merely a starting point that is followed by a more complex analytical approach, divided into four steps:
1. Classification of the purchasing portfolio
Here, the author suggests drawing up a matrix based on two new criteria that are substantially similar to the previous ones:
- "Profit impact" means the volume purchased, the percentage of total purchase cost or the impact on product quality or business growth.
- "Supply risk" refers to product availability, number of suppliers and competitive demand.
Using this analysis, these purchases can be sorted into one of the four main purchase categories examined earlier: non-critical, bottleneck, leverage or strategic items.
2. Market analysis
As a result of this classification, the company must put these items into perspective with the current market situation. To do this, it will need to assess its purchasing power, in other words the balance of power between itself and the supplier market, based on around 20 criteria’s. For example, these criteria criteria’s include the size of the market in relation to the supplier's capacity and the market share held by the company in relation to competitors etc.
3. Strategic positioning
The next step is to position the items identified as strategic in the first stage within the final matrix, according to the market analysis carried out beforehand.
4. Action plans
Kraljic's final matrix yields three main strategies (exploit, balance and diversify) to secure purchases in the long-term while taking advantage of short-term opportunities.
In conclusion, the Kraljic Matrix is an effective analytical tool that identifies areas for improvement in your procurement strategy, but first and foremost helps you better manage your resources in line with priorities.
Furthermore, although the author chooses to limit his analysis to strategic purchases, this is a useful exercise to carry out for all purchases (including leverage, bottleneck and non-critical) to optimise management of the entire portfolio.
 Supplier Relationship Management