Question

Peter Kraljic distinguishes four types of product categories in these two dimensions:

1. Strategic items (High profit impact and high supply risk). These types of products are purchased from one supplier. There may be a balance of power between the company and the supplier, but when this supplier ceases to deliver, purchasing stagnates. In general, raw materials belong to this category. Raw materials determine to a large extent the value of the cost price of the finished product.
2. Bottleneck items (Low profit impact and high supply risk). These items do not represent a high value but they are a vulnerable factor in the entire supply chain. These are products that are essential for the production process but they are difficult to obtain. There is an imbalance of power between the company and the supplier, in which the supplier is the dominant factor. By creating buffer stock of these scarce items and by finding alternative suppliers, a company can undermine this position.
3. Leverage items (High profit impact and low supply risk). These types of products can easily be purchased from different suppliers and they determine to a large extent the value of the cost price of the finished product. A minor change in price or a change in quality will strongly affect the cost price. In the balance of power between the company and the supplier, the company is the dominant factor. By concluding good framework agreements and drawing up targeted pricing, the relationship between the company and the supplier continues to be in harmony.
4. Non-critical items (Low profit impact and low supply risk). These types of products cause the least problems with respect to purchasing performance. Such products represent a low value and they can be purchased in different varieties and from different suppliers. Most raw materials and substances fall into this category. There is a balance of power between the company and the supplier. By increasing product standardisation, much time and money can be saved.

After critiquing on the two dimensions (supply risk and profit impact) of Kraljic’s model, concentrating on how appropriate each dimension is for use in the development of sourcing strategies. Explain the limitations of the model and any information gaps that may result from using only the two dimensions.

Answer 1

Introduction:

In recent years, purchasing has become a strategic utility that deals with numerous transaction supply chains and conveys an economical and valuable arrangement for organisations that function within that chain, due to the current pace of business environments which has “expanded that role to control of the entire sourcing and acquisition process” (Sollish, F. et al, 2012). Sourcing now plays a massive role in guaranteeing that the approaches used through appropriate supplier management processes are optimally designed. This can only be done when sourcing is seen as a strategic perspective within the supply chain process mainly because excellent sourcing practices can lead to a consistent and economical supply base for the organization. The Kraljic Portfolio Purchasing Model is used by organizations to ensure supply security and reduce costs, because "purchasing must become supply management” (Kraljic, P. 1983).

Evaluation:

There are two dimensions on which the Kraljic portfolio purchasing model is based upon, which are profit impact and supply risk (Sollish, F. et al 2012).

• Profit Impact: defined as low or high, based on the importance of purchasing material, the materials added value towards the organisation, and its cost effects on the organisations overall profitability.
• Supply risk: defined as low or high, based on the complexity of the supply, its obtainability or the readiness of more up-to-date materials/technology, cost of logistics, and the availability of different manufacturers, vendors and suppliers.

When put together, these two dimensions create four quadrants known as Leverage items, Strategic items, Non-critical items and Bottleneck items. Different sourcing strategies must be developed and implemented for each quadrant, in order to reduce organisational expenditure (Kähkönen, A.K. et al 2012).

Using the Kraljics model, an organisation can improve its sourcing strategies which may lead to significant cost savings by spreading the materials/products across the four quadrants. This will reduce the amount of risk taken by the organisation and allow the organisation to have the upper hand when dealing with suppliers(Ellram, L. M. 1995). Once all products/materials have been places in the quadrants, the organisation will then understand how to evaluate risk and maximise profits, and accordingly, prepare its sourcing strategies (Chen, I.J. et al 2004).

For leverage items, the organisation is at an advantage against the supplier, and could mean higher profit margins and lower risks for the organisation. Strategic items are crucial for the organisation and suppliers should be on the priority list of the organisation sourcing team due to the high risk and low supply. Non-critical items are readily available and appose almost no risk and no impact on the organisations financial status. Finally, Bottleneck items are short in supply and high in risk, however these items also have a low profit impact on the organisation. the organisations needs to implement an appropriate sourcing and purchasing strategy for each item based on its risk and profit impact (Caniels, M.C.J.et al 2005).

Conclusion:

Though The Kraljic Portfolio Purchasing Model helps organisations better understand where to place their products/items in terms of supply risk and profit impact, the model has its limitations (Gelderman, C.J. et al 2005).Measurements of supply risk and profit impacts cannot be constantly and accurately measured, conflict may arise between buyer and seller resulting in shifting of power dominance, no financial risk assessment or analysis is included in the base risk factor and finally, if the buyer can use this model, then so can the supplier, thus putting them at an advantage position as well(Caniels, M.C.J. et al 2007).