The Kraljic Portfolio Purchasing Model dates back to 1983 at the time it was developed by Peter Kraljic. The model is aimed at purchasers who want to make informed purchasing decisions that will bring their costs down while maximizing performance. Kraljic’s model has been gaining increasing popularity and has been widely used in a broad range of industries.
The Kraljic Portfolio Purchasing model aims to classify the products and services bought according to their potential profit impact and supply risk in order to identify the most suitable approach for handling the respective products.
Dimension 1: Profit Impact
Profit impact refers to the amount of value the purchase will
add to the finished product. The profit impact can range between low and high.
In order to assess the level of profit impact assesses the impact that these
materials will have on the company’s profitability.
Dimension 2: Supply Risk
Supply risk refers to situations in which the purchase or distribution of the material is difficult, due to scarcity, legislation, and regulation, or when there are only a few suppliers offering the product.
According to these dimensions, Kraljic propounds four possible approaches to the purchasing process
Strategic items are the purchases with a high profit impact and high supplier risk. There is usually a sole provider for these products and therefore close monitoring and management is advisable. Raw materials fall in this category as they are the main component of the finished good (e.g. Oats in oat flakes, fruit in juice, and so on)
Leverage items are the purchases with high profit impact and low supply risk. In this category, there are usually multiple providers so the company can come in an agreement with the suppliers for a mutual benefit. The items that fall into this category are also one of the main components of the finished good.
Bottleneck items have a low profit impact and high supply risk. These items are not considered high value but they are nevertheless important in the production process. Therefore, potential scarcity might significantly impact the supply chain. Here, it is advised to maximize control by placing a high amount of orders when the item is available
Non-critical items have low profit impact and a low supply risk. These items are not of significant importance since they represent low value and they are widely available from different suppliers. Optimization of order volumes and inventory levels is advised in order to save time and money.
As a supplementary tool analysis in order to gain a deeper and more thorough understanding of the market, a market analysis could be used. A useful tool at this stage is Porter’s 5 forces which looks into the bargaining power of suppliers, bargaining power of buyers, threat of substitutes, threat of new entrants and competitive rivalry.