What is the Kraljic matrix model?

The Kraljic matrix model is a method used to categorize purchases of a company based on importance of purchasing and the complexity of market for the specific item by dividing them into four classes:

• Non-critical items
• Leverage items
• Bottleneck items
• Strategic items

The Kraljic model is used to identify the strategic weight of various procurement families (both internally and externally). It strives to help you select the most appropriate purchasing strategy and help you adapt it to reduce supply risks and improve profit. A Kraljic matrix allows you to determine which products purchases should be fostered, and which ones aren’t worth the risk.

Understanding the Kraljic matrix model

Before using the Kraljic matrix we first need to understand it and what the key factors are:

• Complexity of market in the Kraljic model refers to factors such as if a monopoly or oligopoly exists, entry barriers, technological evolutions, as well as logistics costs or complexity, etc.
• Importance of purchasing in the Kraljic model refers to factors such as the volume of expenditure, the total cost of ownership, pure profit, differentiation, as well as the added value for your company and procurement process.

Following this principle gives rise to an initial chart to sort suppliers or purchases according to their importance of purchasing, and the complexity of the specific market into one of the four mentioned classes/categories.

 

The quadrants of the Kraljic model

Each of the four quadrants/categories/classifications of the Kraljic model has their own unique characteristics as well as appropriate strategies:

Non-critical items (Low Risk – Low Impact)

The classification “Non-critical items” in the Kraljic matrix refers to purchases that have little to no impact on your business activity, while also being in abundant supply, for example: office supplies.

Strategy: Streamline and automate the process while monitoring the volumes.

Leverage items (Low Risk – High Impact)

The classification “Leverage items” in the Kraljic matrix refers to purchases that have a significant impact on your business activity, while also being abundant in supply. Leverage items allow for plenty room to manoeuvre and potential saving opportunities.

Strategy: Exploit your purchasing power. Put suppliers in competition with each other, negotiate or substitute products.

Bottleneck items (High Risk – Low Impact)

The classification “Bottleneck items” in the Kraljic matrix refers to items that have a little impact on your business activities, but are only available in limited supply or from only a handful of suppliers.

Strategy: Care and manage your supplier relationships, try to secure stock and supplies, and establish a backup of the specific item/product.

Strategic items (High Risk – High Impact)

The classification “Strategic items” in the Kraljic matrix refers to items that have a significant impact on your business activities, but are only available in limited supply or from only a handful of suppliers. They are often rare och unique resources.

Strategy: Develop long-lasting relationships with suppliers offering the specific product/item, try to stack up for backup if possible.

Applying the Kraljic matrix model in procurement further

Very often, the use of the Kraljic matrix is limited to the above mentioned first classification step to identify where your items are in the model, and how you should adapt your purchasing strategy towards the results. But this is only the first step.

It is followed up by a more complex analysis to dig deeper into your purchasing strategies, what challenges there are, and how you can improve them further.

Applying the next step of the Kraljic matrix in procurement consists of four steps:

Step 1: Classifying purchases/items

In the second matrix, two new criterias are established:

• Profit impact refers to the volume of items purchased, the total purchase cost, or the impact on product quality or business growth
• Supply risk refers to how accessible a specific product is, how many suppliers offer it, as well as competitive demand on the market.

Start by classifying all your commodities, components, products, parts, and services according to their supply risk and profit impact, in other words: in one of the four quadrants of the Kraljic matrix procurement model.

Step 2: Market analysis

To be able to extract any valuable information from this classification, you need to put the items into perspective within the current market situation.This includes researching and investigating how much power the suppliers have, and how much buying power you have as a customer on the market.

We suggest doing this through Porter’s five forces analysis which identifies five forces that make up a competitive environment and can influence your profitability. They include: Competitive rivalry, Supplier power, Buyer power, Threat of substitution, Threat of new entry.

Step 3: Strategic positioning

The next step is classifying all the items/purchases previously identified as “Strategic items” in Step 1 according to market analysis you did in Step 2 in the final Kraljic matrix.

Step 4: Action plans

The final Kraljic matrix consists of three different possible action plans/strategies:

• Exploit: Make the most out of your buying power. Secure good deals and develop long-term relationships from various suppliers to reduce the supply risk with the associated items.
• Diversify: Seek alternative suppliers or products to try and reduce the supply risk.
• Balance: Find the sweet spot between exploiting and diversifying.
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Supplier positioning matrix

While the Kraljic matrix model is most commonly used with items/purchases, it’s also applicable as a supplier positioning matrix. The process for the Kraljic matrix supplier positioning is identical to the one for items/purchases. Instead of identifying the strategic weight of a certain item, it aims to find out which of your suppliers are the most important.

Get more out of the Kraljic matrix with Prognos

The Kraljic matrix model relies heavily on data, a lot of it. The most important pieces of your current cost data and market cost data includes raw material costs, manufacturing procurement and labour costs, logistics costs, and taxation tariffs.

But gathering the data manually, visiting database after database, is a tedious process where you’d rather spend your time and effort on more fruitful things. Which is exactly what the platform Prognos allows for. We give you access to all the cost data you need in order to create a more detailed and deep-diving Kraljic matrix to help you identify the most appropriate purchasing strategy according to your needs. Prognos is available as two different solutions:

• Prognos Online gives you access to over 8 000 indices on raw materials, components, wages and currencies in a fully interactive online tool capable of transforming the data to fit your needs.
• Prognos Tailored is our more sophisticated platform giving you access to interactive, up-to-date reports where you can dive deeper into the cost data of your materials, compare the prices to your own cost development, export graphs, or export the underlying data for further analysis, for example in a Kraljic matrix. The reports are customized according to your needs by Prognos, leaving you to focus on applying the Kraljic matrix rather than having to scour and extract data.

For more information about how the Kraljic matrix can support your supply chain, or for additional Kraljic matrix examples, contact Prognos directly.

Further Reading:

• What is a spend analysis?
• What is a cost breakdown analysis?