One of the key milestones of procurement transformation was a paper by Peter Kraljic in 1983 in which he described a way of analyzing the portfolio of purchased items and services. The purpose was to adapt the method of procurement to the complexity of Supply Market, and the relative importance of that purchasing decision to the business.
Understanding the Matrix
A detailed representation of Kralijic Matrix is shown in the illustration below. As shown in the illustartion, the two criteria used in the matrix are:
- Supply Market Complexity
- Importance of purchasing decision
The overall complexity of the supply market depends on such factors as (not an exhaustive list):
- the number of potential suppliers available
- the rate of technological changes
- barriers to entry for potential new suppliers
- potential transportation complexity, perhaps due to distance or special packaging requirements.
The relative importance of purchasing decision to the business depends on such factors as the overall value of the decision, the strategic importance of the item to the business and impact of the price of this item on profitability.
As shown above, these two factors form the axes of a 2X2 matrix and an approach to the procurement task is defined for each quadrant.
When to use this Matrix
This is a strategic analysis tool, so can’t bu used for day to day analysis but is useful for periodic re-valuaion of procurement approches in the business. The relative importance of items or families can change over time as new products are introduced and the productmix changes. It can also be useful before the introduction of a new product in order to review the relative importance of its different components, assemblies or raw materials.
The Kralijic matrix is a good communication tool for explaining procurement methods and strategies to different user functions. Communication between the procurement function and user departments is vital to making the best supplier and product selections.
How to use this Matrix
Before you use this matrix, it is recommended that you carry out a Pareto or ABC analysis first in order to understand which purchased items or families have the greatest financial importance. Then the intems or families can be placed in the quadrants, either by the procurement function or by discussions between procurement and user functions. Finally, the appropriateness of current procurement methods for each family can be reviewed against the methods appropriate to that quadrant.
An illustrative Example
A manufacturing company has determined tha its outsourced logistics and supply chain services fall into six main categories:
- Full vehicle ambient transport
- Market distribution transport to customer
- Global sea freight services
- Global air freight services
- A single national distribution center providing co-packing and returns management service
- Pallet supplies
Leveraging the Matrix
The strategic sourcing team starts by placing each of the services indicated above into one of the four quadrants. The resulting matrix is shown below.
As you can see in the matrix above, one of the outcomes of this exercise was to try to find alternative suppliers for some of the specialist transportation and market distribution services where there was only a single supplier identified, and that fell in the “sourcing management” quadrant. It was recognized that the security and development of the single national distribution center was key and that the current supplier might not be the right partner for the joint development of after-care services.
Global air and sea freight services had high spend and criticality in service for the company and needed to be tendered regularly.