Background

The Kraljic Matrix from Peter Kraljic was first described in an article "Purchasing must become Supply Management" in the Harvard Business Review (Sep-Oct 1983). 

Peter Kraljic was for more than 30 years a senior executive at McKinsey & Company in Germany, where he worked with industrial clients in sectors such as chemicals, pharmaceuticals and automotive

He joined the firm in 1970 in Germany and worked with industrial clients in sectors such as chemicals, pharmaceuticals and automotive until he retired in 2002. Peter was born in Slovenia, is a Dutch citizen and is best known to CPOs for his 1983 HBR article, “Purchasing must become supply management”. 

About the model

Kraljic Matrix can be used to analyze the purchasing portfolio of a firm and to support corresponding decisions and actions regarding purchasing of commodities and products.

The matrix consists of two dimensions, these are:

• Profit Impact: "The strategic importance of purchasing in terms of the value added by product line, the percentage of raw materials in total costs and their impact on profitability".
• Supply Risk: "The complexity of the supply market gauged by supply scarcity, pace of technology and/or materials substitution, entry barriers, logistics cost or complexity, and monopoly or oligopoly conditions".

Four categories

Non-critical Items. 

Definition: Non-critical Items are products that are easy to buy and have a relative low impact on the financial results. The quality is standardized.

Buyer-seller power situation: balanced power, low level of interdependency

Recommended purchasing strategy: reduce time and money spent on these products by enhancing product standardization and efficient processing.

Leverage Items. 

Definition: Leverage Items are products that represent a high percentage of the profit of the buyer and there are many suppliers available. It is easy to switch supplier. The quality is standardized.

Buyer-seller power situation: buyer dominated, moderate level of interdependency.

Recommended purchasing strategy: Tender, vendor selections, targeted pricing, umbrella agreement with preferred suppliers. Call-off orders are then placed as an administrative formality.

Bottleneck Items. 

Definition: Bottleneck Items are products that can only be acquired from one supplier or their delivery is otherwise unreliable and have a relative low impact on the financial results.

Buyer-seller power situation: supplier dominated, moderate level of interdependency.

Recommended purchasing strategy: Volume insurance contract, Vendor Managed Inventory, keep extra stocks, look for potential suppliers.

Strategic Items. 

Definition: Strategic Items are products that are crucial for the process or product of the buyer. They are characterized by a high supply risk caused by scarcity or difficult delivery.

Buyer-seller power situation: balanced power, high level of interdependency

Recommended purchasing strategy: Strategic Alliance, close relationships, early supplier involvement, Co-Creation, consider Vertical Integration, long-term value focus.

There are often talk about specialized products, where it is difficult to change supplier and the products are important regarding the earnings of the company.

Criticism

It is not clear whether the model should be used on department or company level. Each company must decide this for themselves

The grading of products in each category can change over time - the model appears static - the world is dynamic.

Power relations between us - as a company - and our suppliers is not a subject in the model 

The model has clear strength - in a relatively simple manner, the model achieves a result that gives us a useful procurement strategy.