The Kraljic matrix is a framework that analyzes and classifies a company’s supplier base.
Kraljic’s matrix is used by purchasers to maximize supply security/minimize supply risk, and reduce costs. In so doing, it encourages them to see procurement as a strategic activity and not one that is simply transactional.
The Kraljic matrix is divided into four quadrants based on varying degrees of supply risk and profit impact. Each quadrant defines a type of supply item and a strategy that reduces risk and cost. The quadrants encompass leverage items, bottleneck items, non-critical items, and strategic items.
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Understanding the Kraljic matrix
The Kraljic matrix is a framework that analyzes and classifies a company’s supplier base.
The Kraljic matrix was created in 1983 by Peter Kraljic, a former director at McKinsey & Company’s Dusseldorf office.
Purchasing departments use the matrix to segment their supplier base and determine which contracts are the most strategically important to the company. The matrix also identifies what kind of purchasing power companies have with suppliers and where it is most concentrated.
Kraljic posited that two main factors affected the supply market:
Complexity (risk) – this describes the likelihood of an event with the potential to disrupt supply chain operations. Examples include raw material shortages, some business models, monopoly situations, and innovation.
Profit impact – this is the potential impact of a supply item or supplier on the company’s bottom line. For example, lumber suppliers have a greater potential impact on a furniture manufacturer’s profitability.
Based on these factors, Kraljic’s matrix is used by purchasers to maximize supply security/minimize supply risk and reduce costs.
Ultimately, this encourages them to see procurement as a strategic activity and not a transactional activity.
The four supply items of the Kraljic matrix
On the horizontal axis of the Kraljic matrix, supply risk runs from low to high. On the vertical axis, profit impact does likewise.
The matrix is then divided into four quadrants based on varying degrees of supply risk and profit impact.
Each quadrant defines a type of supplier for which the company can devise a tailored strategy.
These are abundant products whose procurement remains relatively simple. The most commonly mentioned example is office supplies.
While employees need pens or copiers to do their work, these sorts of items do not have a measurable impact on performance and their absence does not pose a serious threat.
The main challenge with non-critical items is transportation fees which can often run higher than the cost of the items themselves.
Businesses in this quadrant should employ a strategy that maximizes the efficiency of the procurement process.
This can be done via increased automation or a reduction in administrative costs or logistical complexity.
2 – Leverage items (low risk/high profit impact)
Leverage items are important to the company but can easily be sourced from low-risk markets characterized by abundant supply.
Buyers hold the balance of power in these scenarios and use negotiation tactics to achieve a better price. Others may switch to a different supplier entirely.
In scenarios involving bottleneck items, a small number of suppliers hold the bargaining power.
While these items have a low profit impact, the presence of relatively few suppliers forces companies to enter into sub-optimal arrangements.
For procurement departments, options are limited in this quadrant. The company can seek to limit its exposure to unfavorable deals or determine if there are ways that bottleneck items can be substituted with other items.
Long term, it is also wise to establish a relationship with the supplier to secure supply with less emphasis given to cost.
These tend to be expensive products that are difficult to source or deliver and directly impact the company’s profit potential.
Strategic items are critical to organizational success. To ensure procurement of these items is consistent and predictable, mutually beneficial supplier relationships must be established.
Key Highlights:
Kraljic Matrix Concept: The Kraljic matrix is a strategic framework used by purchasing departments to analyze and classify a company’s supplier base. It assists in developing tailored strategies to manage supplier relationships and optimize procurement activities.
Created by Peter Kraljic: The Kraljic matrix was created in 1983 by Peter Kraljic, a former director at McKinsey & Company’s Dusseldorf office. It aims to enhance the strategic importance of procurement beyond transactional activities.
Factors Considered:
Complexity (Risk): This refers to the likelihood of events that could disrupt the supply chain, such as raw material shortages, monopolies, and innovations.
Profit Impact: It measures the potential impact of a supply item or supplier on the company’s profitability.
Matrix Structure:
The matrix has two axes: supply risk (horizontal) and profit impact (vertical).
It is divided into four quadrants, each representing a different type of supply item and requiring a specific strategy:
Non-Critical Items (Low Risk/Low Profit Impact): Abundant products with minimal impact on performance. Focus on procurement efficiency and cost reduction through automation and streamlined processes.
Leverage Items (Low Risk/High Profit Impact): Important items that can be sourced from low-risk markets. Buyers have negotiating power to secure better prices or consider alternative suppliers.
Bottleneck Items (High Risk/Low Profit Impact): Few suppliers hold bargaining power. While profit impact is low, supply risk is high. Seek ways to limit exposure to unfavorable deals, explore substitutes, and establish relationships with suppliers.
Strategic Items (High Risk/High Profit Impact): Expensive and critical products with significant profit impact. Develop strong, mutually beneficial relationships with suppliers to ensure consistent and predictable procurement.
Strategic Procurement: The Kraljic matrix encourages a strategic approach to procurement, where suppliers are managed based on their strategic importance, supply risk, and potential impact on the company’s profitability.
Tailored Strategies: Each quadrant in the matrix requires a different procurement strategy to mitigate risk, reduce costs, and ensure the availability of critical items.
Ongoing Evaluation: The matrix is dynamic and should be revisited periodically. Changes in supply risk, market conditions, and business priorities may lead to adjustments in the strategies for each quadrant.
Benefits:
Helps align procurement with strategic goals.
Provides a systematic approach to managing supplier relationships.
Optimizes resource allocation by prioritizing items based on their strategic importance.
Key Takeaways:
The Kraljic matrix categorizes suppliers into four quadrants based on supply risk and profit impact.
Different strategies are applied to each quadrant: efficiency for non-critical items, negotiation for leverage items, risk mitigation for bottleneck items, and strategic relationships for strategic items.
The matrix promotes a strategic perspective on procurement and guides decisions to optimize supplier management.
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The Kraljic matrix is a framework that analyzes and classifies a company’s supplier base.
Kraljic’s matrix is used by purchasers to maximize supply security/minimize supply risk and reduce costs. In so doing, it encourages them to see procurement as a strategic activity and not one that is simply transactional.
The Kraljic matrix is divided into four quadrants based on varying degrees of supply risk and profit impact. Each quadrant defines a type of supply item and a strategy that reduces risk and cost. The quadrants encompass leverage items, bottleneck items, non-critical items, and strategic items.
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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
