This document summarizes a presentation on using the Kraljic matrix model to develop strategic procurement plans. The model involves 4 steps: 1) classifying purchases into categories based on profit/risk, 2) analyzing the market, 3) determining strategic positioning, and 4) creating action plans. Step 1 involves categorizing items as non-critical, leverage, bottleneck, or strategic. Steps 2-3 assess purchasing power and determine strategic thrusts of exploit, balance or diversify. Step 4 involves creating specific plans under each thrust to reduce costs and risks for important purchased items. Using the full model helps procurement and supply chain teams improve operations and supplier relationships.

1. Gain Competitive Advantage Using
Strategic Procurement.
An Interactive Presentation.
40 minutes talk time. Goal is 15 comments-questions.
Steve Greene CSCP, CLTD, CPIM
http://thesupplychainmaestro.com
October 10, 2023
ISE Magazine – Sept 2022
Industrial and systems engineers

2. Strategic Procurement
Have a strategy behind every purchase to reduce both item costs and supply risks.
Requires insight into market demands and fluctuations.
https://www.sketchbubble.com/en/presentation-procurement-strategy.html

3. Good Strategic Procurement
- ensures short-term supply at low cost
- eliminates long-term need of scarce and costly items.
Supply chain professionals of the buyer company need to provide data and insight to help
determine and implement the best procurement strategy.
http://blog.safesourcing.com/2015/01/22/why-we-love-procurement-supply-chain-management-and-you-should-too-part-6/
Procurement – Supply Chain Management Relationship

4. Peter Kraljic – Supply Chain Super Hero !
Introduced the Portfolio Purchasing Model in his article “Purchasing Must Become Supply Management”.
Published in September 1983 in the Harvard Business Review.
This four-step model is a strategic tool to both
reduce purchase costs and supply risks
by analyzing the purchasing portfolio of a buyer company.

6. Why Use Kraljic’s Model
Provides an effective framework to:
Model helps buyers:
• Buy strategically. Not making a series of short-term deals.
• Show where they have the most purchasing power.
• Improve collaboration both within company functions and with valuable suppliers.
• Forecast supply scenarios
• Identify favorable purchasing options
• Develop a supply strategy for all purchased items.

7. Model Step 1: Purchase Classification
Step uses Kraljic’s Product Purchasing Classification Matrix
which is composed of four categories based on the item’s importance.
To classify purchased items, procurement performs spend analysis.
Spend analysis evaluates purchasing data to better understand procurement patterns.
An item’s importance is based on the two factors of profit impact and supply risk.
Profit impact is a set of internal factors whose levels determine profit margins.
Supply risk is a set of external factors that reflect supply chain complexity.

8. Model Step 1: Purchase Classification
Four item purchase categories are based on the low and high levels of profit impact and supply risk.
These four item categories are called non-critical, leverage, bottleneck, and strategic.
Kraljic recommended a procurement strategy for each item category.
He noted the need to regularly update
the matrix as shifts in
supply and demand patterns
change an item’s category.
Questions or comments ?

9. Model Step 1: Purchase Classification
Non-critical Items – Reduce Purchasing Costs. (Low profit impact – Low supply risk)
Items are not usually used in goods production. Office supplies and M.R.O. items.
Purchasing costs are often higher than an item’s value.
Buy from the lowest price supplier.
Buyers should standardize items, substitute products or suppliers, optimize order volumes, and automate purchasing.

10. Model Step 1: Purchase Classification
Leverage Items – Exploit Buyer Purchasing Power. (High profit impact – Low supply risk)
Standardized items used in production and easily sourced. Raw materials.
Often is the largest spend category of purchasing.
Buyers should increase competition of suppliers, use target pricing, substitute products and suppliers,
and engage in frequent negotiations.

11. About the next two item categories . . .
Each item category has its own approach, whose complexity is in direct proportion to an item’s importance.

12. Model Step 1: Purchase Classification
Bottleneck Items – Ensure Volume Continuity. (Low profit impact – High supply risk)
Supply risk: reflects a low number of dependable suppliers, unreliable delivery, and/or no good substitutes.
Buyers should reduce supplier dependence, guarantee stock volumes by over-ordering, manage supplier relationships,
and set-up supplier back-ups.
Great item category for vendor managed inventory (the supplier does the work and is accountable for supply).

13. Model Step 1: Purchase Classification
Strategic Items – Collaborate in Supplier Partnerships. (High profit impact – High supply risk)
Items are most important as a buyer’s finished product will not function and/or can not be differentiated
without them.
Items are scarce, suppliers are few, and substitutes are limited.
Buyers should strengthen supplier partnerships, complete joint process improvements, and plan for contingencies.
A buyer company could consider making these items using
make-or-buy analysis.

14. Questions - Comments
• In your company, how often does each
of the most important items that is
purchased move around in the four
categories?

15. Now for the Model’s Three Much Lesser- known Steps.
Going beyond what the ASCM certification books teach.

17. Model Step 2: Market Analysis
Procurement leaders must consider each important purchased item in terms of current market conditions.
Must determine their item purchasing power - balance of power between their company and the supplier market.
Purchasing power is determined with up to some twenty criteria.
A good website on these power criteria is www.paulrogers.pro

18. Model Step 2: Market Analysis
Can use Porter’s Five Forces Analysis to determine purchasing power.
These five forces evaluate the competitive environment which influences profitability for each key item.
These forces include competitive rivalry, buyer power, supplier power, threat of substitution, and threat of new entrants.
Harvard Business Review. www.hbr.org January 2008

19. Model Step 2: Market Analysis
Five Forces determines the competitive environment which is the blue cloud.
Impacts most supply chain planning elements.

20. Questions - Comments
• What is the competitive environment for
each of the important items that your
company buys or sells?

22. Model Step 3: Strategic Positioning
After a company gauges its purchasing power for all important items,
the items are again classified by two factors: the company’s purchasing strength and supply market strength.
These two factors construct Kraljic’s Purchasing Portfolio Matrix in 9-box grid.

23. Model Step 3: Strategic Positioning
By plotting each important purchase item in this matrix, procurement leaders can then:
identify areas of opportunity or vulnerability, assess supply risks, and derive a strategic thrust.
A strategic thrust provides a general direction to both gain short-term pricing opportunities and secure long-term supply.
Kraljic noted three strategic thrusts for key purchased items: exploit, balance, and diversify.

24. Model Step 3: Strategic Positioning
Exploit Thrust – Be Reasonably Aggressive
Dominant buyers use their higher purchasing power to reduce an item’s supply risk.
And secure favorable prices, desired volume, and preferential treatment.
Diversify Thrust – Go on the Defensive
Buyers need to diversify their supply base.
Increase their supply options after analyzing key
item substitutes or new suppliers.
Balance Thrust – Be Well Balanced
Taking too much of a passive role could make a key item
too expensive.
Taking too much of an aggressive role could harm supplier relations.

25. Model Step 3: Strategic Positioning
A strategic thrust is dynamic. And must be determined often.
A self-perceived strong buyer’s demand of rock-bottom prices in times of large market changes could soon
provoke supplier counteractions.
Or you may continue to pay too much for key items if you don’t realize you have increased company strength.
When purchasing power changes frequently, procurement leaders who buy very many key items will often find
themselves in very many fluctuating strategic thrusts simultaneously.
The main problem of
practitioner use of the
Kraljic Model is that
supplier perspective is
NOT fully analyzed.
https://www.brcommunity.com/articles.php?id=b550

26. Questions - Comments
• What is the strategic thrust that your
company is now in for each of the
key items that it buys?

27. Now Comes the Talk’s More Tangible Value !

29. Model Step 4: Action Planning.
After the strategic thrust (the general direction) is determined for a key purchased item,
both procurement and supply chain leaders
should continually develop and implement more specific action plans.
They then have a systematic and updated set of documented strategies that specify actions.
These action plans should include supply chain factors of
volume, materials, logistics, and inventory.

30. https://hbr.org/1983/09/purchasing-must-become-supply-management
Supply Chain Super Hero - Action Planning Table

31. Model Step 4: Action Planning
For action planning under the exploit thrust, procurement and supply chain leaders could:
• Obtain lower prices on a key item
• Increase spot purchases
• Spread order volume over several suppliers
• Keep low inventory
• Minimize logistics costs

32. Model Step 4: Action Planning
Action planning under the diversify thrust depends on time length.
For a short-term period:
to ensure adequate supply, buyers likely have to:
• Offer to pay higher prices on a key item
• Pay supplier invoices faster
• Increase upfront purchase volume
(may have even more safety stock).

33. Model Step 4: Action Planning
For action planning under the diversify thrust:
Ensure an adequate item supply for a long-term period:
• Analyze alternative suppliers or materials to reduce dependence on a single source
• Increase efforts on supplier relations
• Ensure supply through longer-term contracts
• Improve the agility in buyer’s production capacities
• Buy-out the supplier company.

34. Model Step 4: Action Planning
For good action planning, the procurement and supply chain leaders should complete the following four steps:
1) Explore a RANGE of supply scenarios. Buyers list the scenarios to reduce costs and risks.
2) Outline each scenario’s IMPLICATIONS. Respective risks, costs, and returns.
3) Select and develop a PREFERRED option
With objectives, steps, responsibilities, and contingencies.
4) Present this preferred option for EXECUTIVE approval.

35. https://hbr.org/1983/09/purchasing-must-become-supply-management

36. Audience Call to Action
• How would using the Model’s action planning step benefit the supply chain efforts of your company?
• How would the supply chain leaders of your company help to work through the Model’s four steps?
• With whom in your company would you discuss the Model and its benefits tomorrow?

37. A community of procurement and supply chain professionals.

38. An online platform that connects U.S. manufacturers and suppliers into a single and searchable
supply-chain solution.
A new way to find, be found, and connect with each other.

39. Conclusion
By using the Kraljic Model, a buying company can use strategic action planning to improve
both the operations of internal functions and its relationships with key suppliers.
This optimal procurement strategy accounts for both internal organizational needs and external market dynamics
to reduce both supply risk and key item costs.
Supply chain professionals should provide data and insight
to help determine and implement the best procurement strategy.

40. Let’s connect !
https://www.linkedin.com/in/stevegreene-supplychains-operations
https://thesupplychainmaestro.com
Thank you !
Please email me your
insight on how I can improve the
presentation.
steve.greene@gvltec.edu

41. A.T. Kearney’s Chessboard. 4 Strategies - 16 Levers
https://www.kearney.com/web/the-purchasing-chessboard/

42. Supply Chain Transformation – Virgin Galactic

43. Procurement Risk Mitigation – Virgin Galactic

44. Contracts – Virgin Galactic

45. Cisco and Chinese suppliers. Risk Mgmt and 2008 Earthquake