General expression
Before entering Kraljic Portfolio Analysis, we need to consider supplier relationships. Due to the fact that supplier relationships are arranged with the perspective of “price reduction” instead of “ adding value “ [1] in general, the preferred approach is based on to be dominant, being in the driver’s seat in the face of the supplier. Here, which provides the opportunity to become dominant is the enthusiasm of the supplier.
The eagerness of the supplier is important. Because, thus, important advantages are gained over issues such as ;
A contract in better conditions,
Purchase at a more affordable price,
A shorter length of term
While it is difficult to find enthusiastic suppliers in low-budget purchases, this difficulty is relatively overcome in midsize-budget purchases. Low and midsize -budget purchases lead to the danger of “putting all the eggs in the same basket” because of the large purchase packages created for enthusiastic suppliers [1]. Besides, managing hundreds of suppliers, thousands of product kinds and tens of bill payments requires a very different approach.
Besides, by virtue of intensive possibilities that the globalizing world provides for the supply of raw materials, semi-finished and finished products, goods now can be easily procured from very different and remote locations of the world. Moreover, competition conditions, becoming more difficult, also oblige companies to do that. This situation leads to many geographical, political and economical uncertainties.
In addition to all of these, since the logic that suppliers are considered as business partners rather than competitors, will add not only a great value for company especially through knowledge sharing and experience share that it will provide in strategic and critical product/service groups but also will provide many problems to be solved before occurrence; it will also provide plenty of time for issues that need to be focused on.
Effective portfolio analysis is very useful in overcoming these and similar problems. With portfolio analysis, suppliers are divided into groups according to their importance levels. Thus, as well as due importance is given to strategic suppliers, the only required time is allocated to routine purchasing suppliers, thereby allowing to focus on the right point [2].
Pareto analysis is usually used in portfolio analysis. However, Pareto analysis prioritizes groups with sorting based on the size of the purchase amount. Therefore, it is not a strategic approach. Because, “Strategic product” suppliers can be included among the C group suppliers whom too little interest are shown, and most likely they go unnoticed. For example, “spare part” is a low-amount purchase, but has vital importance for critical equipment in the enterprise (production band, generator, crane, etc.). For this reason, with only Pareto analysis, grouping suppliers on the basis of their portfolios is not enough, furthermore, it is dangerous [3].
Kraljic Method
Peter Kraljic, for this purpose, delivered a new solution for this issue in the article entitled “Purchasing Must Become Supply Management” that he prepared for the Harvard Business Review in 1983 https://hbr.org/1983/09/purchasing-must-become-supply-management). The analysis in question consists of the dimensions of Profit impact (size of purchase volume) and of Supply Risk (supplier dependency rate).
Figure 1 – Kraljic Portfolio Analysis Chart
(Picture: https://www.pool4tool.com/procurementworld/practices-can-be-best-only-in-a-certain-context/ )
Kraljic has 5 main ideas;
The strategy should not solely consist of price reduction-aimed negotiations (Leverage group)
Different strategies should be developed for different supplier categories
Like opportunity/cost, risk also should be defined.
Besides “Suppliers”, “Product categories” and “Purchase amounts”; “Goods market” should also be taken into consideration,
Value chains and risk situations should be questioned.
Kraljic argues that in addition to the Pareto analysis, procurement importance should also be assessed in supplier classification.
The factors determining procurement importance;
Added value
Strategic importance
Total cost
Profit contribution
Kraljic grouped portfolio analysis under four categories in light of aforementioned his ideas;
1- Routine, non-critical material (Low risk, purchase in low amount)
Product group features;
Having standard qualifications, readily available, substitutable
Low added value
Low amount and low profit-induced.
For example; Cleaning materials, scraps, stationery, etc.
Strategy to be implemented;
Create a medium-term estimated demand plan
Create order packages for optimal price advantage (larger / smaller)
Reduce safety stock [5]
Focus on systems such as Vendor Managed Inventory (VMI) or consignee purchase.
Prefer suppliers that allow purchasing online, and if possible delegate purchases, you, only control them
Investigate productivity-enhancing opportunities to reduce the loss of operation time before and after the order process.
Decision-making authority level [4]
Purchaser (Low level)
2- Leverage (Low risk, purchase in high quantity)
Product group features;
Having standard qualifications, readily available, substitutable
Low added value
High amount and high profit-induced
For example; Concrete, metallurgy products, foodstuffs, etc.
Strategy to be implemented;
Create long-term estimated demand plan [4]
Create order packages for optimal price advantage (larger / smaller)
Reduce safety stock [5]
Focus on systems such as Vendor Managed Inventory (VMI) or consignee purchase.
Investigate productivity-enhancing opportunities to reduce the loss of operation time before and after the order process.
Prioritize the profit objection [6]
Make use of the scale economy (If there is no central procurement, seek the way of combining orders with all other units) [7]
Seek for a replacement product
Perform market research at regular intervals
Decision-making authority level [4]
Purchasing Department Manager (Top level)
3- Critical (High risk, Purchase in low quantity)
Product group features;
Certified
Unique, specific, hard to find, rarely available alternative
High added value
Low amount and low profit-induced
Supplier/service provider with strong references
For example; Equipment spare parts, special service purchases, custom made materials, etc.
Strategy to be implemented;
Create medium and long-term estimated demand plan
Make medium or long term contracts
Investigate all potential suppliers in the market in detail [4]
Establish a strong relationship with the supplier
Consider safety stock enhancement [5]
Decision-making authority level [4]
Purchase Team Leader / Chief (Second level)
4- Strategic (High Risk, High Purchase Amount)
Product group features;
Certified
Unique, specific, hard to find, rarely available alternative
High added value
High amount and high profit-induced
Supplier/service provider with strong references
Large-scale supplier/service provider
For example; Raw material, production band, generator, transformer, curtain wall, etc.
Strategy to be implemented;
Create long-term estimated demand plan [4]
Make long term contracts
Investigate all potential suppliers in the market in detail [4]
Increase cooperation with a supplier (such as a partnership) [6]
Listen to supplier’s creative ideas
Develop a performance-based relationship and if necessary, help to improve the supplier’s performance [6]
Consider safety stock enhancement [5]
Investigate self-production
Keep urgent action plan available against risks such as geographical, political, disaster, accident risks
Decision-making authority level [4]
Purchase Department Manager or General Manager level (Top level)
Table 1 – Kraljic Prototype Analysis Matrix
Kraljic Portfolio Analysis Quadrant Pareto Groups
Of course, it is necessary to investigate the subject from the viewpoint of a supplier. It is highly probable for a supplier to make a similar evaluation for its customers in the same way. For strategic partnership, both sides should look at each other with the same eyes. It should not be forgotten that the lifestyle of the supplier side is completely different from that of the buyer side [8]. As well as the preparation of supplier portfolio analysis, supplier performance evaluation also has to be performed according to a specific procedure (See: Supplier Performance Evaluations). It is also important to update both the portfolio analysis and the performance evaluation according to a procedure at certain periods.
The categories of products will differ by market conditions (Raw material bottlenecks, currency fluctuations, etc.) and the company’s activity area (Manufacturing, energy, housing, etc.). Therefore, it should not be forgotten that portfolio analysis will show a serious change in the current market situation, firm and project basis, and accordingly, an update should definitely be made. It will be very useful to create two different spaces called “Main Product Group” and “Sub Product Group” on the supplier list in order to check that the portfolio analysis is done correctly and also to make subsequent updates easily. (E.g. Main Group: “Metallurgy”, Sub Group: “Carbon Steel” or “Stainless”). Besides, firms operating in more than one sector at the same time will also need to perform such analysis separately on the basis of their field of activity (To give an example from the contracting sector; the construction of both Power Plant and Residence at the same time ).
The preparation of this type of portfolio analysis will naturally take a long time. However, with the net portfolio and strategy image to be acquired, the purchasing department will increase its efficiency by focusing on more important issues and suppliers and will gain significant advantages in medium and long term.
Kraljic Portfolio Analysis Sample Application
The Kraljic Portfolio Analysis application consists of several phases.
First of all, all suppliers are grouped as Main Group and Sub Group. This will be very helpful both in decomposition on the activity area basis, and on future updates. If the same supplier has several different product groups (eg: Strategic and Leverage) then the same supplier can be written more than once. (This paragraph is completely optional.)
Figure 2 – Main and Subgroups on a product group basis
Subsequently, as in Figure 3, the relevant sections are filled out first (“Pareto Group”, “Profit Impact” ve “Approval or Special”), and the result of “Kraljic Group” section is obtained with the following formulation
=SWITCH(
(“Pareto:“&[@[Kraljic Cr:Pareto Group]]&”, Profit Impact:“&[@[Kraljic Cr:Profit Impact]]&”, Appr or Special:“&[@[Kraljic Cr:Appr or Special]]),
“Pareto:A, Profit Impact:Yes, Appr or Special:Yes”,”Strategic“,
“Pareto:B, Profit Impact:Yes, Appr or Special:Yes”,”Strategic“,
“Pareto:C, Profit Impact:Yes, Appr or Special:Yes”,”Strategic“,
“Pareto:B, Profit Impact:No, Appr or Special:Yes”,”Critic“,
“Pareto:C, Profit Impact:No, Appr or Special:Yes”,”Critic“,
“Pareto:A, Profit Impact:Yes, Appr or Special:No”,”Leverage“,
“Pareto:C, Profit Impact:No, Appr or Special:No”,”Routine“,
“!!! Control !!!”)
Figure 3 – Kraljic Portfolio Analysis Data Entry and Result
With the help of the above list, the strategies to be pursued can be followed easily.
Besides, optionally, a graph like in Figure 4 can also be created to see the overall situation( The graph was created with Microsoft Power BI).
Figure 4 – Kraljic Prototype Analysis Sample
References
[1] T. Colwell, “How to Select Strategic Supplier – Part1,” 7 February 2012. [Online]. Available: https://acuityconsultants.com/wp/2012/02/how-to-select-suppliers-to-add-value-beware-the-suppliers-perspective/. [Accessed 9 May 2016].
[2] A. V. Weele, «Purchasing Portfolio Management,» 2014. [Çevrimiçi]. Available: https://www.youtube.com/watch?v=5VvS12UWV8w.
[3] «Peter Kraljic Portfolio Analysis,» 2012. [Çevrimiçi]. Available: https://www.youtube.com/watch?v=GKWHdc7LlnU.
[4] P. Kraljic, «Purchasing Must Become Supply Management,» Harward Business Review, September 1983.
[5] M. E. T. «The Kraljic Portfolio Purchasing Model – Assessing Risk and Maximizing Profits,» www.MindTools.com, cilt 1, no. 1, p. 1, 2016.
[6] «Kraljic Protfolio Analysis,» 2012. [Çevrimiçi]. Available: https://www.youtube.com/watch?v=cEtHVlMSInk.
[7] «2.3. Analysing the Procurement Portfolio and Developing a Procurement Profile,» 1 September 2012. [Çevrimiçi]. Available: https://www.ungm.org/Areas/Public/pph/ch02s03.html.
[8] Alıntı, Alıntı.
September 19, 2016 - Istanbul
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