What

Is The Kraljic Matrix?

Jonathan Webb01:02pm EST

A key part of supply chain management is segmenting the vendor base. From
there, organizations can match design supplier relationship management
strategies against this map of suppliers. The Kraljic Matrix is one of the most
effective ways to deliver accurate supplier segmentation.

In 1983, Peter Kraljic devised a means to segment the supplier base in the article
in HBR. In this, he argued that supply items should be mapped against two key
dimensions: risk and profitability.

Risk relates to the likelihood for an unexpected event in the supply chains to
disrupt operations. For instance, in important areas of spend, such as
tire suppliers for an automotive are business critical, and should a disruption
occur, the auto company is likely itself to face substantial problems.

The supplier suffers from a range of risks depending on its geographic location,
business model and supply chain length. If the vendor is based in Switzerland, it
is unlikely that political uncertainty or logistical delay will impact upon
operations. On the other hand, facilities based in the developing world may be
subject to legislative risk, political upheaval and unreliable transportation routes.
All such risk factors have a bearing upon the buying company.

Profitability describes the impact of a supply item upon the bottom line. For
certain areas of spend, such as stationery, supplies have only a negligible effect
on profits. In other categories, a single source of supply can make or break a
business. For Apple, a large proportion of its profits are determined by
Foxconn’s ability to manufacture the scale of products required to a precise
specification.

Putting these two dimensions together yields a classic two-by-two matrix.

Source: Peter Kraljic, HBR

Each of these boxes represent a different buyer-supplier relationship type and

suggests a set of distinct sourcing strategies.

Non-critical items

These items are low risk and have a low impact upon organizational profitability.
The most commonly used example in this segment is office stationery. Although
important for employees to perform their duties, pens and paper do not have a
significant impact upon the business, nor does their absence represent a serious
threat.

For buyers, stationery is a nuisance. It clogs up time with peripheral concerns. As

such, the sourcing strategies deployed here focus on efficiency and reducing
administrative burden. Techniques such as e-auctioning and catalogs are an
excellent means to redirect responsibilities either directly to suppliers or to
internal customers that are requisitioning the goods.
Leverage items

Where items have a high profitability, but a low risk factor, buyers possess the
balance of power in the relationship and leverage this strength to obtain greater
returns. Traditionally, procurement professionals have exploited this status to
lower prices, but increasingly more advanced companies are looking to unlock
the innovative potential of their suppliers.

The market dynamics of this relationship rest upon an abundance of highly

commodified parts. Suppliers can be easily substituted as their offerings are
much the same. The only limitation for buyers is perhaps over-playing their hand
and forcing a low-profit margin vendor into insolvency.

Bottleneck items

The flip side of leverage: risk is high, but profitability is low. Here, the strength is
in the hands of the supplier. The market consists of few suppliers that can behave
oligopolistically to force prices upward. Procurement Leaders found that these
suppliers absorb more of buyers’ time compared to any other segment. The
supplier relationship is demanding, even though they have a limited impact upon
company profitability. The market structure forces buyers to accept an
unfavorable deal.

The main strategy rests upon damage limitation. Procurement must recognize
that few opportunities will arise from this category. More creative buyers will
seek to alter the terms of trade. Innovative internal activities can redevelop
product requirements such that the material can be replaced with another and
preferably sourced from a leverage supplier.

Strategic items

Lastly, high supplier risk and high profit impact items cover strategic suppliers.
These are critical to the business. These items only represent a handful of
suppliers, but ensuring an effective and predictable supplier relationship is key
to the future of the buying company.

Managing such suppliers requires a diverse array of skills and can subsume a
significant proportion of executive time in sponsoring and directing the
relationship. Unlike the non-critical items, each contract is unique and focuses
upon the shared gains that equal partners enjoy in a collaborative relationship.
Strategic partners should look to innovative both product and process
innovation and in return they can expect long-term commitment from the buyer
as well as proactive development.

Getting segmentation right

Although the Kraljic Matrix may appear simple to many procurement

professionals, it is often inaccurately applied and this leads to misfiring supplier
relationship management programs. Individual buyers invariably believe that
their suppliers are truly strategic (in contract to the business-wise reality). This
miscategorization creates expensive and resource-intensive relationship that
have little genuinely impact upon profitability.

Conversely, companies that treat their strategic suppliers as non-critical, have

the potential to lose substantial profit. Over time, these may affect the viability of
the business.

Peter Kraljic’s basic insight was to urge the buyer community to manage their
resources in a more intelligent fashion. Even though he first argued for this in
1983, his argument is just as relevant in corporate purchasing as ever.