The Kraljic matrix is a tool that companies use when managing purchases.
Above all, it is a tool that allows a classification of materials and services that a company requires. These materials and services are classified according to the level of risk they imply in terms of supply. But above all because of the way in which they can financially affect the final result of the business process.
Classification of materials or products
Materials or products can be classified as follows:
To begin with, leveraged products are the products in which the company has many suppliers. This means that the risk of achieving an adequate supply is very low.
Regarding the financial impact, they have a high impact on the cost-benefit ratio. Because they are easy to get and are generally standardized products.
While strategic products are critical for the company. Since its supply process is very difficult and its purchasing process is complicated. This implies that both the supply risk and the financial impact are considered high.
On the other hand, bottleneck products are products that have a very complex supply process, but fortunately their weight on costs is low. In other words, they have a high supply risk and a low financial impact.
Of course, routine products are easy to purchase, so their supply process is very easy. For this reason they have a low impact on costs and their supply risk is also low.
How strategies are defined
After the materials or products have been classified, the companies define the strategies that they will apply in each case. Each strategy chosen should seek to optimize the supply process.
1. Leveraged Product Strategy
Indeed, due to the characteristics of these products, which, as we indicated above, have many suppliers. The best strategy will be to negotiate with suppliers to obtain the best advantages in terms of price and quality of the products. As the company has greater bargaining power against many suppliers, it can ensure the best supply conditions.
In other words, the best strategy that can be applied is to find the best proposals and offers from the suppliers.
2. Strategic product strategy
Indeed, with strategic products the company and the suppliers have the same bargaining power. Therefore, the negotiation process will try to achieve a win-win agreement. All this so that both parties get the best benefits.
In any case, strategies must be implemented that achieve collaboration and support from suppliers. The most advisable thing is to make strategic alliances with suppliers, in order to achieve the best advantages.
3. Bottleneck product strategy
Likewise, bottleneck products are the ones that give the most problems in their supply process. Therefore, it is necessary to take a strategy that guarantees adequate supply. In this case, agreements must be made with the suppliers. These agreements must make clear the sanctions or penalties that will be given in the event of non-compliance with the required supply.
In addition, it will be necessary to have other options for alternative providers in the event of certain breaches. In such a way as to be sure that the necessary supply will be obtained. If we realize it, here the strategy must revolve around ensuring the adequate supply.
4. Routine product strategy
Without a doubt, these are the products that offer the least difficulty for your delivery system. So they are the ones that concern companies the least. That is why the only thing that the strategy to implement will look for is to carry out negotiations to obtain better prices for the required purchase volume. That is, use a supplier contract system.
Kraljic matrix example
The most important steps, by way of example, to make a Kraljic matrix are:
1. Identify the analysis variables
First of all, prior to making and graphing this matrix, it is important to identify the factors that are analyzed. These variables are:
to. Financial impact
In the first place, the financial impact is the one that will directly affect the cost of the company and, as a consequence, the profits. The financial impact is evaluated on the Y axis or vertical axis of the matrix. Here aspects such as the variation in prices and the level of expenditure of the company in purchases must be considered; which may affect profitability.
Of course, at the top of the matrix are the products that have the greatest impact on profits. In the lower part, those that affect to a lesser degree or do not affect profits. Already in the matrix at the top the leveraged and strategic products are noted. While at the bottom the routine and bottleneck products.
b. Supply risk
Now, the supply risk refers to the risk that is run with the availability of the materials that the company needs. The supplier market is taken into account first. Restricting factors such as shortages, monopoly situations and production cycles that can affect supply are then considered.
Naturally, this factor is placed on the X-axis or horizontal axis of the matrix. On the left side are placed the products that present less supply risk. In this case they would be the routine and leveraged products. On the right side are the products that are more difficult to find, so they offer greater supply risk. The products placed on the right side are the strategic and bottleneck products.
2. Draw the matrix
The matrix is then drawn by placing the financial impact on the vertical axis and the supply risk on the horizontal axis.
This is done in the following way.
3. List the materials
Subsequently, the list of materials that are required for the production process must be made.
For example, a shoe store requires the following materials:
- For the upper part of the shoe: Leather, fabric or synthetic material.
- For the soles: PVC, rubber, rubber, polyurethane or wood.
- For the heel: Rubber, metal or wood.
4. Segment the matrix into quadrants
Obviously, the segmentation of the matrix into quadrants must be carried out according to the materials and their classification.
5. Locate each material or product in the matrix
However, this location is made considering whether the product is leveraged, strategic, routine or bottleneck.
6. Define the strategies for each quadrant
Finally, the most appropriate strategies for the materials or products located in each quadrant must be defined.
To conclude, we can indicate that the Kraljic matrix is a very useful and important tool for any company to make its purchasing management more efficient. It helps to evaluate the supply risk and the financial impact of the materials and services that a company needs in its purchasing management. In other words, with its proper use, companies can obtain multiple benefits from the way purchases and suppliers are managed. Choosing the best strategy in your purchase management.