Kraljic Matrix Explained

The Kraljic Matrix, developed by Peter Kraljic in the 1980s, is a powerful tool used in procurement and supply chain management to categorise and prioritise purchases and suppliers based on their supply risk and profit impact.

By analysing these two factors, this tool helps companies achieve a balance between costs, availability, and profitability through identifying optimal purchasing strategies for different goods and services, ultimately mitigating potential risks and optimising purchasing power.

Kraljic Matrix – The Two Key Factors

The Kraljic Matrix utilises two key factors to assess suppliers and purchases:

• Supply Risk: This factor assesses the ease or difficulty of sourcing a particular item or service. Factors like the availability of substitutes for an item or service, availability of alternative suppliers, market volatility, supply market competition, and technological dependence, all influence supply complexity.

• Profit Impact: This refers to the potential impact a purchase or supplier has on the profitability of the buying company. High-impact purchases like key raw materials or components can significantly affect profits if they become expensive or unavailable, hence, requiring careful consideration and strategic management. On the contrary, low-impact purchases have a lesser effect on a company’s bottom line.

The Four Quadrants of the Kraljic Matrix

The Kraljic Matrix categorises purchases and suppliers into four quadrants based on two key factors; supply risk and profit impact. Here is a breakdown of these groups, ranked by importance:

1. Strategic Items: 

• Factors: These items have a high supply risk and high profit impact.

• Focus: Securing reliable supply and managing supplier relationships.

• Description: These critical items are essential for profitability but have a high supply risk due to limited suppliers, hence, necessitating careful management and strong supplier relationships.

• Strategies: Close collaboration with suppliers, long-term contracts, and risk mitigation strategies are crucial for ensuring uninterrupted supply.

• Examples: Specialised components for a manufactured product, unique software licences, critical raw materials, and advanced technology.

2. Leverage Items: 

• Factors: These items have a high profit impact but low supply risk.

• Focus: High-profit items with readily available suppliers.

• Description: These standard, high-volume goods and services present significant opportunities for favourable pricing due to abundant supply and increased purchasing power. 

• Strategies: Maximise cost savings through negotiation, volume discounts, and competitive bidding. It is useful to understand supplier tiers to enhance negotiation tactics and supplier relationships.

• Examples: Office supplies, common components, and readily available services.

3. Bottleneck Items:

• Factors: These items have a high supply risk but a low profit impact.

• Focus: Mitigating supply risk and ensuring supply continuity.

• Description: These items are essential for operations but have a low profit impact and high supply risk due to low availability and limited suppliers. Despite their lower financial importance, disruptions in case these items are not readily available can significantly impact the supply chain, so securing reliable suppliers is crucial. 

• Strategies: Careful supplier management, seeking alternative suppliers, and exploring alternative solutions are key to minimise supply chain disruptions.

• Examples: Custom tooling, specialised equipment, unique components, and geographically limited raw materials.

4. Non-Critical Items: 

• Factors: These items have a low supply risk and low profit impact. 

• Focus: Streamlining procurement and minimising administrative burden.

• Description: These low-cost, readily available items have minimal impact on profitability. Due to the abundant supply and low financial significance, the priority is on efficient procurement process.

• Strategies: Automation through e-procurement and standardisation of purchases are key to reducing administrative tasks associated with acquiring these non-critical goods and services.

• Examples: Office stationery, standard cleaning supplies, low-value maintenance items, and readily available services.

The Kraljic Matrix Steps

Applying the Kraljic Matrix involves a four-step process:

1. Purchase Classification: Identifying and categorising all purchased items into four quadrants strategic, leverage, bottleneck, and non-critical) based on their supply risk and profit impact.

2. Market Analysis: Conducting thorough research on the supply market for each category, considering factors like the number of suppliers, pricing trends, and potential risks.

3. Strategic Positioning: Developing tailored purchasing strategies for each quadrant, considering factors like cost optimisation, collaboration, and risk mitigation.

4. Action Planning: Developing and implementing specific action plans for each category. These plans should outline steps to execute chosen purchasing strategies, such as negotiating contracts with strategic suppliers, seeking alternative suppliers for leverage items, or streamlining the ordering process for non-critical items.

By following these steps and continuously monitoring market conditions, organisations can optimise their procurement processes, reduce costs, and ensure a reliable supply chain. This process is integral for a successful procurement transformation.

Benefits and Limitations

The Kraljic Matrix offers several benefits:

• Improved Procurement Efficiency: By categorising purchases and applying appropriate strategies, companies can optimise their entire procurement process, reducing redundancies and inefficiencies.

• Informed Decisions: The matrix facilitates data-driven decision-making in sourcing, negotiation, and supplier partnerships, allowing for effective resource allocation and focus on areas with the highest potential return.

• Reduced Costs: The matrix helps identify opportunities for cost savings through effective negotiation, leveraging buying power, and minimising administrative burdens.

• Improved Risk Management: By identifying high-risk purchases and suppliers, companies can proactively mitigate potential disruptions and ensure business continuity.

• Enhanced Supplier Relationships: The matrix encourages building stronger relationships with critical suppliers, leading to improved collaboration and communication.

However, it is important to acknowledge some limitations of the matrix:

• Subjectivity: The categorisation process can be subjective, requiring careful assessment and judgement.

• Dynamic Market Conditions: The matrix needs to be updated regularly as market conditions and supplier relationships evolve.

• Complexity of Implementation: Implementing the matrix effectively requires dedicated resources and expertise.

• Limited Scope: The matrix focuses primarily on supply risk and profit impact, neglecting other factors like sustainability or ethical considerations.

• Applicability: The matrix may not be suitable for highly dynamic or complex supply chains.

In essence, the Kraljic Matrix offers a structured approach to procurement, enabling businesses to make data-driven decisions, optimise processes, and achieve a balance between cost, availability, and profitability while mitigating supply risks.

Real-World Examples

The Kraljic Matrix is used across various industries to optimise procurement and manage supply chains. Here are some examples of how companies within the engineering and manufacturing industry categorise their items in accordance with the Kraljic Matrix:

Strategic:

• Personalised software for complex simulations

• Prototype testing equipment with unique capabilities

• Custom-designed control systems

Leverage:

• Standard fasteners (nuts, bolts)

• Standard engineering supplies

• Off-the-shelf sensors for industrial equipment

Bottleneck:

• Calibration equipment with limited service providers

• Replacement parts for obsolete machinery

• Custom tooling needed for production

Non-Critical:

• General office supplies

• Personal computers

• Personal protective equipment (PPE) for workers

Conclusion

In conclusion, the Kraljic Matrix empowers businesses of all sizes to optimise their procurement function. By categorising purchases based on their supply risk and profit impact, it guides companies towards strategic sourcing, cost savings, and risk mitigation. This data-driven approach fosters efficient supply chain management, ultimately contributing to a competitive advantage in today’s dynamic business environment.