Last year we wrote about both Pareto’s Law (the 80-20 rule) and the Kraljic Model. At Proficient Sourcing we are interested in the philosophy employed by our customer base. In particular we hope to better understand OEM procurement professionals in need of excellent manufacturing sources for their outsourced work.
In the two year history of this newsletter, the Kraljic article has been the most frequently visited of our website blog items. That article was a basic introduction to Kraljic’s Matrix. Here we present additional thoughts. Shortly we will prepare a more comprehensive white paper on portfolio purchasing, and we hope you will find this of value. If you are using a model such as Kraljic, we would greatly appreciate and value your experiences comments on our blog.
Prior to Kraljic (1983), purchasing was largely a clerical buying function, usually employing some sort of Pareto’s Law to determine priorities. This meant organizing supplier issues according to spend, with the larger cost areas getting the most attention. Regardless of factors such as supply risk (limited number of suppliers or supplier financial condition), dollars spent were the primary determinant of purchasing effort.
Kraljic, and others advocating a more sophisticated approach, maintained that the competitive position—and profit–of companies would be enhanced by a more strategic approach. The Kraljic Matrix categorized purchased items into the quadrants of model–strategic, leverage, non-critical, or bottleneck–and recommended a different strategy for each category.
As opposed to a tactical price-based approach to each purchasing event, the Kraljic Matrix advocated treating suppliers according to the profit impact and supply risk each represented. In the years following the Kraljic Matrix’s introduction using a purchasing portfolio model became widespread. The August, 2005 Journal of Supply Chain Management reported a study, the results of which “revealed that the position and the professionalism of purchasing are both positively related to the greater use of purchasing portfolio models. Findings indicate that portfolio usage is definitely a sign of purchasing sophistication”.
It would appear the more sophisticated procurement organizations have found value in tools such as the Kraljic Matrix, and the various supplier strategies thereby recommended. However, this same Journal noted criticism of these same purchasing portfolio models. Specifically, “there are doubts and questions with respect to the following measurement issues:
- The selection of variables: how could one know whether the most appropriate variables are being used?
- The supplier’s side: why is the supplier’s side disregarded in most portfolio models?’
- The measurement of variables: how should the weighting of factors take place?