The Kraljic Matrix helps us develop a purchasing strategy for the products and services our organization consumes. It aims to remove supply vulnerability as much as possible and maximize our potential buying power. The model was published in Harvard Business Review in 1983, although it was already in use at BASF at this time. The Kraljic Matrix allows us to work in a smarter way with those suppliers we already have. It does this by helping us determine, on a per product or per supplier basis, the type of relationship we should be fostering with each of our suppliers. The model works by mapping the profit impact of a product on one axis, and our vulnerability to the supplier’s disappearance on the other.
Doing this will result in a matrix made up of four quadrants as shown below.
Let’s examine each quadrant in turn, starting with the most important quadrant and continuing in descending order of importance.
These items have a large financial impact on our organization. This could either mean the organization spends a great deal of money on these items or that these items are directly linked to our organization’s differentiation and profit. These items are also scarce. This quadrant normally contains high-value items such as precious metals with limited, or even a single supplier. The purchasing strategies we would typically use for these types of items include collaboration and strategic partnerships. If you truly want to develop a comprehensive supplier management strategy, then this is the area you should focus on first.
Just like strategic items, these items have a large financial impact on our organization, however, the item is in abundant supply. Because of their large financial impact, these items are important to the organization. The purchasing strategies we would typically use for these types of items include tendering and competitive bidding.
These are items that have a low financial impact on our organization, however, there is a high supply risk. An example might be where we have a new supplier supplying a new technology. The purchasing strategy we would typically use for these types of items is twofold. Firstly, we need to ensure continuity of supply. Secondly, we need to develop plans to reduce our dependence on this supplier, by adapting our products and investigating alternative products and suppliers.
These are items that have a low financial impact on our organization and are also in abundant supply, such as office supplies. Although these products are low impact and have an abundant supply, they are nevertheless interesting, because the cost of handling them can often outweigh the cost of the product itself. Thus, the purchasing strategies we would normally use for these types of items focus around reducing administrative costs and logistical complexity.
One further thing to think about, which isn’t included in the Kraljic Matrix is what suppliers think of our organization. This will be a function of our past dealings with the supplier and their size. For example, spending $20k per year in the coffee house next door to the office will probably make us more influential with them than spending double that amount with Google. With strategic suppliers, thinking about how we are perceived to them is important, and based on our answer to this question, we may want to approach how we build a relationship with that supplier in a different manner.
The Kraljic Matrix works by mapping the profit impact of a product on one axis, and our vulnerability to the supplier’s disappearance on the other. It essentially provides a portfolio management approach to managing an organization’s many suppliers. This enables us to see which relationships are important so we can focus on strengthing these, as well as identifying less important relationships where we might employ traditional supplier management techniques such as offshoring.
The Kraljic matrix helps us in the first step of supplier management – identifying important suppliers. How you then actually manage those suppliers is up to you.
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