What is the Kraljic Matrix

What is the Kraljic Matrix?

The Kraljic Matrix is an important tool for understanding the importance of purchasing by segmenting it into purchasing categories and developing a purchasing strategy for each category. The matrix is named after Peter Kraljic, a Slovenian professor who introduced the Kraljic matrix in 1983. Since then, it has been the basis for virtually every procurement strategy.

The Kraljic matrix segments procurement categories (both services and products) into 4 segments, using 2 factors: financial importance on the one hand and the ease with which it is possible/not possible to switch suppliers (supply risk/supply risk) on the other.

The Kraljic Matrix in practice

The role of the Kraljic Matrix in determining procurement strategy

Procurement strategy in the 4 segments

Leverage products

Leverage products are products that have significant value and thus large financial impact and where there are sufficient potential suppliers (the supply risk is small). Multiple alternatives exist for each supplier’s product or service, and so it is relatively easy to switch between products/suppliers.

The strategy employed here is “competitive pricing”: negotiating well to take maximum advantage of competitiveness in the market. Purchasing activities focus on tendering for contracts, negotiating good deals with suppliers and adjusting them regularly to market conditions and a strong focus on lowest TCO (Total Cost of Ownership = lowest integral cost over the lifetime of the product or service).

Strategic products

Strategic products/services are of great importance to the organization in that they are critical to the end product, have a high value (a large share of the cost price) and therefore have a large influence on the operating result (large financial impact). The suppliers of these products/services are the main suppliers to the organization and so the number of suppliers is small. It is not easy or very costly to change suppliers. So here, without question, there is dependence on these suppliers, which impacts the power relationship between the companies.

As a result, there is almost always a long-term relationship with these suppliers, so good cooperation is vital.

The strategy focuses on intensive and planned cooperation (some organizations go further and talk about partnership) and mutual commitment. Procurement activities are aimed at exchanging knowledge and expertise (e.g. technological development) at different levels and integrating processes to reduce costs.

Routine products

Routine products are products/services where enough potential suppliers are available and thus easily obtainable, often have a low value and thus a small impact on the company’s bottom line. The supply is large, the diversity of products is high and procurement is hardly laborious. “For every supplier 10 others”.

The strategy is focused on a simple procurement process, reduction of logistics costs, supplier reduction, standardization, limited contracts with basic agreements with the suppliers, fixed ordering and billing routines.

Bottleneck products

Bottleneck products have a relatively low financial value and limited impact on the operating result, but cause a major impact on the operating result if problems arise here (i.e. a high risk of failure), because there are hardly any alternative products/services or suppliers available, there is scarcity, or it is very difficult or financially very expensive to change suppliers. An example of a bottleneck product is an ERP application. Also consider a monopolist if there are high entry barriers for suppliers.

The strategy then focuses on risk mitigation measures such as securing supply, developing alternatives, creating a preferred supplier position or seeking or even creating other suppliers.

What type of buyer to associate with a segment?

It is evident that each of the above 4 segments requires not only a different purchasing strategy but also, therefore, a different type of buyer.

Leverage products

Because of the large financial impact, this will be picked up by an experienced negotiator without losing too much sight of the relationship with the supplier.

Strategic products

This segment requires a lot of attention from strategic buyers, regularly supported by the management given the great importance of this category. The contracts with these suppliers are sizeable, with lengthy negotiations because the cooperation with these suppliers is intensive, at all levels of the organization.

Routine products

Purchasing is carried out by operational buyers based on general purchasing conditions.

Bottleneck products

Because of the complex relationship with the supplier and the limited financial impact, this will be handled by a strategic buyer-to-be, coached by a strategic buyer.