Activity 19
Kraljic portfolio analysis
Overview
Dr Peter Kraljic was the first academic to bring portfolio models into the procurement arena. He developed his matrix in the early 1980s, with the aim of demonstrating how much time buyers should focus on managing different categories of expenditure within an organisation.
The matrix is based on two dimensions: a simplified classification of an organisation’s expenditure on goods and services in terms of the profit potential, and supply risk.
Elements
The two key dimensions can be defined as follows:
- Profit impact – This is the strategic importance of procurement in terms of the value added by product line, the percentage of raw materials in total costs and their impact on profitability.
- Supply risk – This is the complexity of the supply market gauged by supply scarcity, pace of technology and materials substitution, entry barriers, logistics cost or complexity and monopoly or oligopoly conditions.
These dimensions are used to determine how categories of expenditure might be managed:
- Bottleneck – Products that can only be acquired from a limited source of supply or where there is a high degree of supply risk. Suppliers need to be managed in order to secure delivery. This quadrant is typically characterised by bespoke/rolling contracts.
- Strategic – Products that are crucial to the firm and are characterised by high value and high supply risk. Suppliers need to be closely managed. This quadrant is typically characterised by strategic-partnering relationships.
- Routine – Products that are easy to acquire and have a relatively low impact in the event of nondelivery. The buyers’ efforts should concentrate on implementing standardised ordering procedures and improving efficiency. This quadrant is typically characterised by volume/blanket agreements.
- Leverage – Products that are easy to buy and could result in significant cost savings due to high volume/values, thus greatly impacting contribution to the bottom line. This quadrant is characterised by many suppliers and quality is standardised, therefore encouraging frequent tendering.
So what?
Kraljic’s matrix is used extensively within the procurement and supply-chain arena. It is often carried out at the planning stages when developing a sourcing strategy for either the function or individual categories of expenditure.
Some debate has been generated about whether the model assesses categories of expenditure or individual supplier relationships. Although Kraljic intended the former, there is some application to the latter in specific circumstances.
Many consulting firms have adapted or oversimplified Kraljic’s matrix in an attempt to pass off the model as their own. Although it has sometimes been referred to as ‘supply positioning’ and been attributed different titles for its quadrants, the principles laid down by Kraljic remain the same.
Category management application
- Assists in the development of category management strategies
- Aids both supplier and supply-market analysis
- Supports spend analysis
- Provides focus to category management activities
Limitations
Kraljic’s matrix has generated much discussion and debate, with some claiming it to be a panacea and others considering it to be extremely limited in application.
The model is only a ‘snapshot’ in time, and from a practical perspective it does not consider the resources needed to appropriately manage the suppliers of the products in each of the quadrants.
Some academics have argued that the axis definitions need to be precise in order to collate meaningful data and that too much subjectivity can occur when application occurs. Linked to this, one sustained criticism is that this model is only based on the buyer’s perspective of the purchases.
Some consulting firms believe the axes should be graded, consequently allowing items to be plotted on the matrix like a statistical graph – but this is probably an extension too far beyond Kraljic’s original intention and there are risks inherent in this approach.
Template
The following template can be used to segment categories of expenditure:
- Template 19: Kraljic matrix