- 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.
- Understanding the Kraljic matrix
- The four supply items of the Kraljic matrix
- Related Business Matrices
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.
The four quadrants are listed below.
1 – Non-critical items (low risk/low profit impact)
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.
3 – Bottleneck items (high risk/low profit impact)
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.
4 – Strategic items (high risk/high profit impact)
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.