The Kraljic Matrix is an important tool for understanding the importance of procurement by segmenting it into procurement categories and developing a procurement 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/is 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 those 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 used here is “competitive setting”: negotiating well to take maximum advantage of competitiveness in the market. Procurement activities focus on tendering contracts, for the company good agreements 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 life of the product or service).
FREE WHITE PAPER
Reduce Total Cost of Ownership (TCO) with the Kraljic Matrix
Strategic products
Strategic products/services are of great importance to the organization in that they are critical to the final product, have a high value (a large share of the cost price), and thus have a large impact on the operating result (large financial impact). The suppliers of these products/services are the main suppliers of 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 balance of power 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 focus on 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 therefore 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 great, and procurement is hardly laborious. “For every supplier 10 others”.
The strategy focuses 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.
Free whitepaper
Project Procurement in the Machine Building Sector
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. For example, consider also a monopolist if there are high barriers to entry 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 procurement 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 management given the great importance of this category. The contracts with these suppliers are extensive, they are negotiated for a long time because the cooperation with these suppliers is intensive, at all levels of the organization.
Routine products
Purchasing is performed 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.
Find a buyer through xentys
At xentys, your experienced procurement recruitment agency, we are happy to help you find the right professional for your procurement team. Send a message today and strengthen your purchasing department.
How does the vendor view me as a customer and what strategy can I expect from them?
Just as a customer can segment products/services and thus suppliers as well, suppliers will also segment their customers into categories, adopting strategies by customer type. This leads to the inverse Kraljic matrix, or “Account matrix.”
It is important to factor into the supplier strategy how the supplier assesses the relationship with the customer. The combination of the 2 segmentations determines the power relationship and the degree of mutual dependence between the supplier and its customer.
FAQ Kraljic matrix
In the competitive world of procurement management, it is critical for companies to make the right decisions when selecting and managing suppliers.
Managing procurement processes efficiently can yield significant benefits, including cost savings, improved delivery reliability and increased customer satisfaction. One of the tools companies can use to improve their procurement management is the Kraljic Matrix, named after its creator Peter Kraljic.
In this article, we will take a closer look at what the Kraljic Matrix is and the benefits it offers for procurement management in the engineering sector.
The Kraljic Matrix is a well-known model used to categorize suppliers and products based on their relative importance and vulnerability to a company.
The model is based on two main dimensions: the degree of importance of a product or service to a company and the degree of vulnerability of a company to suppliers.
By combining these dimensions, the Kraljic Matrix can help identify the purchasing categories that require more attention and strategic approach.
The importance of procurement should not be underestimated. Purchasing has a direct impact on the company’s bottom line and ultimate profit. By applying the Kraljic Matrix, you as a company can optimize your purchasing strategies and maximize the impact on profits.
Identifying strategic products and suppliers allows you to add value to your procurement processes.
Getting the right focus in contracts, analyzing suppliers and parts, and having enough alternatives and suppliers are just some of the aspects that can help companies realize the full potential of procurement.
The Kraljic Matrix is an essential tool in procurement management that enables organizations to refine and optimize their purchasing strategies.
It categorizes procurement items based on their impact on profits and the risks they pose, allowing buyers to make more informed decisions.
This is especially useful when managing high-value items that affect most of the organization’s products.
The matrix also helps identify the quantity of suppliers needed for different categories of products, which can lead to more efficient procurement processes and cost savings.
Improved delivery reliability: By using the Kraljic Matrix, companies can manage their supplier portfolio more effectively.
Identifying suppliers critical to business operations allows them to take proactive measures to ensure supply reliability.
For example, companies can establish long-term relationships with strategic suppliers and identify alternative suppliers to reduce the risks of supply interruptions.
The Kraljic Matrix is an interesting tool for a wide range of professionals and organizations. For buyers dealing with low-value products, the Kraljic Matrix can help control logistics costs and optimize purchasing strategy.
The matrix can also be useful for organizations seeking to understand their position on different types of products, especially in the tech sector.
It helps determine the right strategy for different categories of products, such as routine products, strategic products, leveraged products and bottleneck products.
It provides insight into which products should be purchased based on quality, price, delivery reliability and other relevant factors.
The Kraljic Matrix is a valuable tool for companies in procurement management. It helps identify strategic suppliers and products, which can lead to significant cost savings, improved delivery reliability and more efficient inventory management.
For companies in the tech sector, it provides a framework for developing effective procurement strategies that can lead to a competitive advantage.
By applying the Kraljic Matrix, companies can reduce the risks of supply interruptions, control costs and ultimately increase profitability.
