Editor's Note: Take a look at our featured best practice, Chief Procurement Officer (CPO) Toolkit (245-slide PowerPoint presentation). Unlocking Success with the Complete Chief Procurement Officer (CPO) Toolkit In today's rapidly changing business landscape, the role of the Chief Procurement Officer (CPO) has evolved into a pivotal position within organizations. CPOs are no longer merely responsible for [read more]
The Kraljic Matrix
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The procurement function in most organizations deserves more attention than it gets. Most executives associated with procurement lack the competencies and perspectives required to identify gaps and effectively manage the function.
This paucity of attention and capabilities is a certain path to extinction in this age of abrupt supply and demand shifts, intense competition, material and resource scarcity, and political turmoil. What’s needed in this era is an inclusive, long-term purchasing and supply management strategy.
A robust purchasing and supply management strategy should evaluate the risks associated with global sourcing, deal with uncertainties, anticipate supply and price instabilities, and shift focus from operations to strategic supply management.
This involves looking into the prospects of forming joint ventures, acquiring other firms to supplement existing capabilities and enter new markets, renegotiating contracts, and revisiting inventory management and materials planning systems.
Two key factors critical for devising a robust purchasing and supply management strategy are:
- Strategic importance of purchasing: This factor measures the ratio of raw material costs to total costs, their impact on profitability, and the value addition done by the entire product portfolio.
- Complexity of the supply chain: This factor measures the sophistication level of the supply chain in terms of supply insufficiency, technological disruption, barriers to entry, distribution costs, and dominance of market players.
Organizations can adopt the following best practices to streamline and manage their purchasing and supply functions:
- Consolidate the supply requirements of various units at the headquarters level.
- Remove supply obstacles, delays, and disturbances.
- Find alternates.
- Move towards reducing unacceptable sourcing risks.
- Ensure a mix of long-term contracts and annual agreements to save money.
- Decide on make-versus-buy choices.
- Collaborate with suppliers, or rivals, to manufacture critical components cost-effectively.
Procurement and Supply Chain leaders may use the Kraljic Matrix as a tool for categorizing and analyzing an organization’s purchasing portfolio. The Kraljic Matrix presents an objective methodology to identify supply bottlenecks, threats, and flaws.
The aim of the Kraljic Matrix is to inform an organization’s Procurement Strategy. It is a framework for administering a company’s product categories in the context of the market. The matrix facilitates buyers during times of abrupt technology disruption, economic instability, and shifting regulatory and environmental circumstances.
The Kraljic Matrix enables categorization, visualization, and prioritization of procurement items into 4 primary categories:
- Non-critical Purchases
- Leveraged Purchases
- Bottleneck Purchases
- Strategic Purchases
Implementation of the Kraljic Matrix involves a 4-stage process:
- Purchasing Portfolio Classification
- Market Analysis
- Positioning of Strategic Items
- The Action Plan
Let’s dive deeper into the first two stages of the Kraljic Matrix, for now.
Stage 1. Purchasing Portfolio Classification
The initial stage of the Kraljic Matrix warrants segregating purchases based on their profitability impact and supply risk. The impact of a supply item on profit is determined by its purchased quantity, proportion of total purchase price, and effect on product quality or business expansion. On the other hand, the impact of supply risks is evaluated by considerations such as availability, number of suppliers, competitive demand, make-or-buy opportunities, and storage hazards.
These two elements help the organizations organize their purchase items into 4 categories: Strategic, Bottleneck, Leverage, and Noncritical. The purchase portfolio classification needs to be frequently evaluated and adjusted based on the supply and demand patterns that affect each item’s category.
Stage 2. Market Analysis
Next, the organization determines and compares the strengths of suppliers against its own strengths based on evaluation criteria. This market analysis helps in preparing for demand or supply fluctuations, barriers, and achieving cost efficiencies and volume scale-up.
This involves evaluating the bargaining power of an organization against its suppliers’ strengths by analytically appraising the supply market, the availability of the required quantity and quality of strategic items, and the comparative strengths of the vendors.
Interested in learning more about the next stages of the Kraljic Matrix? You can download an editable PowerPoint presentation on Kraljic Matrix here on the Flevy documents marketplace.
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About Mark BridgesMark Bridges is a Senior Director of Strategy at Flevy. Flevy is your go-to resource for best practices in business management, covering management topics from Strategic Planning to Operational Excellence to Digital Transformation (view full list here). Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. Prior to Flevy, Mark worked as an Associate at McKinsey & Co. and holds an MBA from the Booth School of Business at the University of Chicago. You can connect with Mark on LinkedIn here.
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