The Kraljic matrix is a method for classifying and analysing the purchasing portfolio in order to guide the procurement strategy of companies. It is a tool for managing item categories for a company in relation to the market. But what is the purpose of the Kraljic Matrix? This article introduces you to the basics of this tool and gives you some ideas on how to take this model further.
The objective of the Kraljic matrix: classification method
Initially theorised by Peter Kraljic, in an article in the Harvard Business Review in 1983, Kraljic's purchasing segmentation matrix aims to support buyers in a context of economic, environmental and technological change.
The Kraljic matrix is a method for classifying the purchasing portfolio, the main objective of which is to identify the strategic significance of the different item categories, both internally and externally, in order to adapt purchasing strategies.
The starting point of the Kraljic matrix: purchasing categories
For Peter Kraljic, the procurement strategy depends on two main factors:
- The strategic importance of purchasing;
- The complexity of the supply chain.
The first element relates to the volume of expenditure, total cost of ownership (TCO), profitability, differentiation, added value to the business or the sale process.
The second factor looks at monopoly or oligopoly, barriers to entry, technological change and the costs and complexity of logistics.
This principle gives rise to an initial mapping that makes it possible to prioritise and classify purchases into four main categories:
- Non-critical purchases;
- Leveraged purchases;
- Bottleneck purchases;
- Strategic purchases.
Each of these purchasing categories has its own characteristics and strategies.
These purchases have little impact on the company's activity and their procurement remains simple. These are, for example, office supplies.
Appropriate strategies proposed are product rationalisation, process automation and volume control.
These purchases have a decisive impact on the company's business, but their procurement is also simple. With leveraged purchases, the company has a comfortable margin of manoeuvre and attractive profit opportunities.
Appropriate strategies here are the exploitation of the full purchasing power with the competition of suppliers, negotiation, or the search for substitute products.
These purchases have a low business risk but suffer from a limited market (small number of suppliers).
The strategies often recommended are guaranteeing volumes, managing relations with suppliers, securing stocks and supplies, and setting up backups.
The company's operations depend on these purchases. These are often rare or unique resources, in other words, high-stake purchases for the company.
Here, for example, it becomes essential to develop supplier partnerships (e.g. through the adoption of SRM software), to analyse the market and to consider vertical integration.
Going further with this method of analysis and classification of the purchasing portfolio
Peter Kraljic's approach is often summarised in this first mapping. However, going back to the original text, this is only a starting point that gives way to a more complex analytical approach, divided into four stages:
- The classification of the purchasing portfolio;
- Market analysis;
- Positioning of strategic items;
- The action plan.
1. The classification of the purchasing portfolio
Here, the author suggests producing a matrix according to two new criteria that are broadly similar to the previous ones:
- The "profit impact", which is the volume of purchase, the percentage of total purchase cost, the impact on product quality or the growth of the company.
- The "supply risk", which concerns the availability of products, the number of suppliers or the competitiveness of the demand.
Based on this analysis, these purchases can be classified into one of the four main purchasing categories mentioned above: noncritical, bottlenecks, leveraged or strategic purchases.
2. Market analysis
Following this classification, the company, and more particularly the purchasing department, must consider these elements in the light of the current market situation. To do this, the company must assess its purchasing power, in other words, the balance of power between it and the supplier market, based on some twenty criteria. These criteria are, for example, the size of the market in relation to the supplier's capacity, the market shares held by the company compared to its competitors, etc.
3. Positioning of strategic products
It is then time to position the strategic purchases (as identified in the first step) within the final matrix, according to the market analysis carried out beforehand.
4. Action plan
From this final Kraljic matrix, three main strategic directions emerge:
These pillars will serve to secure long-term purchases while taking advantage of short-term opportunities.
In conclusion, the matrix Kraljic is an effective analytical tool, which makes it possible to identify areas for improvement in one's procurement strategy, but also, and above all, to better manage resources according to priorities.
Also, although the author has chosen to limit his analysis to strategic purchases, it may be useful to carry out this exercise on all purchases (including leveraged, bottlenecks and noncritical purchases). Kraljic's classification and analysis method allows for improved resource management by optimising the management of the whole portfolio.
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