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Kraljic Portfolio Purchasing Model Presentation
- 1. Procurement and Materials Management Presentation on Kraljic Portfolio Purchasing Model With Case Study Example SYMBIOSIS INTERNATIONAL (DEEMED UNIVERSITY) SYMBIOSIS INSTITUTE OF OPERATIONS MANAGEMENT Presented by: Aditya Deshpande 21st March 2019 © Aditya Deshpande 2019
- 2. CONTENT 1. Introduction to Procurement and Purchasing 2. History of Kraljic Purchasing Model 3. Kraljic Model A. Purchase Classification B. Market Analysis C. Strategic Positioning D. Action Planning 4. Kraljic Model – Example Case Study to Construction Company 5. Advantages and Limitations 6. Conclusions 7. Q&A © Aditya Deshpande 2019
- 3. Introduction to Procurement and Purchasing Procurement is essentially the overarching or umbrella term within which purchasing can be found Process of purchasing good and services is known as the Procure-To-Pay Cycle Procurement Purchasing Strategic Sourcing Need Recognition Describe Need Purchase Source Selection Price, Availability Check PO Preparation, Sending to Supplier Acceptance of PO by Supplier Checking Invoice and Approve for Payment Follow Up for Timely Delivery © Aditya Deshpande 2019
- 4. Difference- Purchasing and Procurement Viewpoint Purchasing Procurement 1 Goods, Services How Why 2 Viewpoint Transactional Strategic 3 Vendor Base Existing Finding New and Building them 4 Stakeholder Relationship Less More 5 Measuring Success Right goods at right time cheaply Cost savings, risk reduction 6 Key Skills Organizational, Attention to Detail Negotiation, Research, Relationship Building 7 Focus Price and Lowest cost per unit Value and Total Ownership Cost 8 Automation Lower Compensation Higher Compensation Purchasing is Narrower but Procurement is Wider Approach © Aditya Deshpande 2019
- 5. Procurement Affecting Factors Procurement External National Economy Taxations World markets Currency valuations EXIM policies Time Supply variation Lead time Demand variation Money Working capital Storage capacity Utilization Technology Forecasting method used Information available Communication © Aditya Deshpande 2019
- 6. History of Kraljic Model Peter Kraljic Borne in 1939 in Slovenia, did MSc. from Metallurgy then Ph. D from Germany; also MSc. in BA from France. Activities were many focused on customers in the pharmaceutical and automobile, steel and aluminium industries Former director in the Düsseldorf office of McKinsey at McKinsey & Company, Inc. Developed famous model for purchasing in 1983 for same company o analyse the purchasing portfolio Paper in HBR in 1983 Retired from professional field in 2002 Kraljic Matrix- Widely accepted important tool for purchase strategies © Aditya Deshpande 2019
- 7. Kraljic Model- What is Exactly? Most effective way to deliver accurate supplier segmentation To help purchasers maximize supply security and reduce costs Making the most of their purchasing power Procurement moves from being a transactional activity to strategic activity With Example International Logistics company spending lot of money on fuel due to diverse nature of methods- air, water, ground freight Each dept. purchases fuel separately- full of chaos How to reduce cost on fuel???? In such scattered environment??? ANSWER- Kraljic Matrix © Aditya Deshpande 2019
- 8. Action Planning Strategic Positioning Market Analysis Purchase Classification 1 2 3 4 Kraljic Model- Step by Step Each step plays important role from classification to action planning of procured goods and services © Aditya Deshpande 2019
- 9. Kraljic Model- Step 1 Purchase Classification Start by classifying all of the commodities, components, products, and services These are which organization buys according to the supply risk and potential profit impact of each Interpretation: Supply Risk raw material – Rare government instability natural disasters Complicated delivery logistics and could easily disrupt few suppliers Profit Impact Item- significant value to the organization's output high impact on quality high proportion of the output © Aditya Deshpande 2019
- 10. Kraljic Model- Step 1 Purchase Classification Supply Risk ProfitImpact Exploitation of full purchase order Long term relation development Low control of suppliers Product Standardization Target pricing or Negotiations Supply Abundant Collaboration Innovation Natural Scarcity Automation in process Supply Abundant Production base scarcity Innovation and substitution Product Purchasing Classification Matrix © Aditya Deshpande 2019
- 11. Kraljic Model- Step 1 Purchase Classification Leverage using full purchasing power, substituting products or suppliers, placing high-volume orders. Strategic developing long-term supply relationships, analysing and managing risks regularly, planning for contingencies, considering making item in-house rather buying, if appropriate. Non-critical using standardized products, monitoring, optimizing order volume, optimizing inventory levels. Bottleneck over-ordering when the item is available and looking for ways to control vendors Purchase Approaches for Each Quadrants © Aditya Deshpande 2019
- 12. Kraljic Model- Step 1 Purchase Classification Non critical Leverage Bottleneck Strategic Management Focus Purchasing Materials Sourcing Supply Time Horizon Limited: Normally 12 Months Or Less Varied, 12 To 24 Months Varied, Depending On Availability Up To 10 Years Long Term Strategic Impact KPI Functional Efficiency Cost/Price, Material Flow Costing, Reliable Short- term Sourcing Long Term Availability Items Purchased Commodities, Some Specific Materials Mix of Commodities Specific Materials Mainly Specified Materials Scarce And/Or High Value Materials Typical Sources Established Local Suppliers Many Suppliers Mainly Local Global, Most New Suppliers With New Technology Established Global Suppliers Supply Abundant Abundant Production Based Scarcity Natural Scarcity Decision Authority Decentralized Mainly Decentralized Decentralized, Centrally Coordinated Centralized Purchase Policies for Each Quadrants © Aditya Deshpande 2019
- 13. Kraljic Model- Step 2 Market Analysis Investigate how much power suppliers have, and how much buying the power the organization has as their customer- total 8 strength to each------NEXT SLIDE A right way of doing this - using Porter's Five Forces analysis Value Created and Captured – Cost of Creating that Value = Margin Set of activities that organization carries out to create value for its customers. The way in which value chain activities performed determines costs and affects profits. Value Created and Captured Cost of Creating that Value Margin Market Analysis Porter’s Value Chain © Aditya Deshpande 2019
- 14. Kraljic Model- Step 2 Market Analysis No Supplier Strength Company Strength 1 Break even stability Cost of non delivery 2 ROI Main product profitability 3 Uniqueness of products and technology advancement Own production capability and integration depth 4 Entry barrier –capital, know-how Entry cost of new sources, cost of own production 5 Market size Purchasing volume of finished product 6 Market growth Demand growth 7 Competition between peers Main product competition 8 Logistics of given good, service Logistics of finished product Purchasing Portfolio Evaluation Criteria © Aditya Deshpande 2019
- 15. Kraljic Model- Step 2 Market Analysis Primary Activities SupportActivities © Aditya Deshpande 2019
- 16. Primary Support Inbound logistics Operations Outbound logistics Marketing & Sales Service Firm Infrastructure HR Development Technology Development Procurement Receiving, Storing, Distributing Inputs Internally Inputs into outputs sold to customers collection, storage, and distribution systems to persuade clients to purchase from organization instead of competitors Maintaining value of product of customer after purchase support systems, and the functions recruit, hire, train, motivate, reward, retain workers managing processing info, protecting knowledge base finding vendors and negotiating best prices Kraljic Model- Step 2 Market Analysis © Aditya Deshpande 2019
- 17. Kraljic Model- Step 2 Market Analysis Companies use these primary and support activities as "building blocks" to create a valuable product or service © Aditya Deshpande 2019
- 18. Sub-activities for each primary activity Sub-activities for each support activity Identify Links Look for opportunities for value increase Kraljic Model- Step 2 Market Analysis Porter- Chain Use- STEP BY STEP 3 different types of sub- activities 1. Direct activities create value by themselves 2. Indirect activities allow direct activities to run smoothly. 3. Quality assurance activities ensure that direct and indirect activities meet the necessary standards cross-functional, rather than specific to each primary activity. Again, look for direct, indirect, and quality assurance activities connections between all of the value activities Review each sub-activities and links that organization has identified, and study how they can change or enhance for maximizing value organization offer to customers © Aditya Deshpande 2019
- 19. Kraljic Model- Step 3 Strategic Positioning 1. Classify the products or material identified as "strategic" in Step 1 2. Again classification according to the supplier and buyer power analysis the organization as in Step 2 3. Then plot them in Purchasing Portfolio Matrix- Used to develop counterstrategies for key suppliers- Reverse Marketing Supply Market Strength CompanyStrength Balance Exploit Diversity Risk Categories © Aditya Deshpande 2019
- 20. Kraljic Model- Step 3 Strategic Positioning Where company plays dominant role Suppliers market strength is low Company achieve positive profit through favorable pricing Not to threat long term supplier relationship Exploit No major risks and benefits items Defensive role would be expensive Aggressive role be harming supplier relations Balance Where company plays secondary role Suppliers market strength is dominant Start looking for material substitute or new supplier Backward integration through R&D, production capacity Diversity © Aditya Deshpande 2019
- 21. Kraljic Model- Step 3 Strategic Positioning Strategy varies for different items and different suppliers time to time So company uses “Hybrid Strategy” © Aditya Deshpande 2019
- 22. Kraljic Model- Step 4 Action Planning BalanceExploit Diversity Volume spread Keep or shift Centralize Price Push for reduction Negotiate opportunistically Keep low profile Contractual coverage Buy spot Balance contracts, spot Ensure supply through contracts New suppliers Stay in touch Selected vendors Search vigorously Inventories Keep low Use stock as buffer Bolster stocks Own production Reduce or don’t enter Decide collectively Build up or enter Substitution Stay in touch Purse good chances Search actively Value Engg. Enforce supplier Selective preforming Start own program Logistics Minimize cost Optimized selectively Secure enough stocks © Aditya Deshpande 2019
- 23. Kraljic Model - Example Case Study 1. Portuguese Construction company headquartered in Portugal and working in Angola, Mozambique and other countries (MNC) 2. Market cap- €620M – Public Company, expertise more than 90 years 3. Area – Rehabilitation services for any type of Infra, contract management services 4. Why Kraljic Model Case? Wide supplier base – more than 1000 © Aditya Deshpande 2019
- 24. Kraljic Model - Case Study Methodology 1. Period of 6 months for study by team of – Supply General Manager, Internal Control General Manager, Divisional Manager, International Procurement Manager 2. Total 6 steps: I. Literature Review---- by reviewing documents, books II. Criteria Selection And Prioritization----by AHP III. Product Portfolio Analysis-----by categorization and yearly purchase base IV. Matrix Construction----by answers to questions coded into matrix (0/1) V. Filling Matrix----by filling weighted sum of all questionnaire VI. Results and Discussion Research Methodology © Aditya Deshpande 2019
- 25. Kraljic Model - Example Case Study Company Items for Kraljic Matrix Total 4000, chosen in 29 classes 1. Concrete 2. Cement 3. Electricity 4. Climate/ HVAC 5. Steel 6. Infra 7. Workforce 8. Aggregate 9. Land 10.Travel 11.Construction machines 12.Rent on excavation work 13.Equipment general transport 14.Cement articles 15. Paintings 16. Insulation 17. Wooden furniture 18. Stone 19. Floor covering 20. Aluminum 21. CI pipe and fittings 22. Ceilings 23. Special formwork 24. Formworks and slag 25. Geotechnical 26. Mosaic tiles 27. Equip scaffolding platform 28. Locksmith 29. sanitary © Aditya Deshpande 2019
- 26. Kraljic Model - Case Study Methodology Research Methodology 𝑆𝑐𝑜𝑟𝑒 = 𝑖=1 𝑛 𝐶𝑟𝑖𝑡𝑒𝑟𝑖𝑎 𝑊𝑒𝑖𝑔ℎ𝑡𝑖 𝑋 𝐴𝑛𝑠𝑤𝑒𝑟𝑗 𝑆𝑐𝑜𝑟𝑒 ∈ 0,1 , 𝐴𝑛𝑠𝑤𝑒𝑟 ∈ [0,1] i= criteria question, j= class Strategic Impact Criteria C1 Total Amount Purchased C2 Expected Demand Growth C3 Level of Product standardization C4 Bargain power of buyer C5 Imp of product in project Supply Risk Criteria C1 Available supply on site local market C2 Product availability C3 Substitution C4 Product storage cost C5 Legality C6 Ease of supplier substitution C7 Logistic proximity of supplier market C8 No of available suppliers Total 4000 items out of which 75% chosen and in 29 classes These criteria chosen on basis of correlation with case study © Aditya Deshpande 2019
- 27. Kraljic Model - Case Study- AHP Tables © Aditya Deshpande 2019
- 28. Strategic 27% Leverage 37% Bottleneck 22% Non Critical 14% Kraljic Model - Example Case Study Results- Purchase Amount Distribution After matrix completion, Strategic 14% Leverage 24% Bottleneck 38% Non Critical 24% No of Classes out of 29Total Purchase 49% of total purchase in High Risk items © Aditya Deshpande 2019
- 29. Built Kraljic Matrix Supply Risk StrategicImpact Inferences • Concrete – Highest Impact, Med Risk • Workforce- medium Impact, Low Risk • Some items falling in two criteria making them difficult to interpret. • Most items fall in bottlenecks but having small consumption • Higher consumption items are leverage and strategic. 2 1 4 3 © Aditya Deshpande 2019
- 30. Kraljic Model - Case Study Findings 1. Construction- conservative sector for procurement advancement projects 2. Comparing with manufacturing sector, dimension criteria and weights assignment is difficult and subjective 3. Top management agreed on importance of tool for effective purchasing portfolio for strategic impact and supplier risk 4. AHP is effective for dealing problems of Kraljic Matrix keeping it simple and usable. 5. Study done on yearly cost basis; further implemented on quarterly or monthly basis thus giving more insights and control. © Aditya Deshpande 2019
- 31. Kraljic Model - Advantages and Limitations 1. The Kraljic matrix is an extremely valuable tool which allows to look at the procurement holistically 2. Simple to interpret and easy to understand 3. Marks conceptual change in management strategy towards procurement Advantages 1. Incorrect segmentation within the matrix- cross segmentation of items due to complexities in today’s world 2. Not paying attention to the supplier perspective (company power vs supplier power)- focuses on only company approach 3. So Kraljic matrix will work, if we take into account both a buyer and supplier perspective Limitations © Aditya Deshpande 2019
- 32. Conclusions 1. Importance of Kraljic Matrix in purchasing portfolio studied 2. Case study in construction sector gave insights of matrix and its implications 3. Kraljic Matrix- tool to make Purchasing part of Supply Chain Management © Aditya Deshpande 2019
- 33. References 1. Purchasing Must Become Supply Management, Peter Kraljic, September 1983, Harvard Business Review 2. Application of Kraljic Purchase Portfolio Matrix in Construction Industry- A Case Study, Feriera, Kharlamov, July 2012, ICIEOM 3. Purchasing Portfolio Models: A Critique and Update, August 2005, JSCM 4. Importance of the kraljic matrix as a strategic tool for modern purchasing, Pieters, et al, 2005, LogForum 5. Handling measurement and strategic issues in Kraljic Purchase Portfolio model, Gelderman © Aditya Deshpande 2019
- 34. © Aditya Deshpande 2019