7.2 THE STRATEGIST IN YOU: The Kraljic Portfolio Purchasing Model

(SHORT NOTES FROM STRATEGY TOOLS:

Sourcing and Purchasing Strategy at http://www.mindtools.com)

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The Kraljic Portfolio Purchasing Model, created by Peter Kraljic, help purchasers maximize supply security and reduce costs.  The model involves 4 steps:

1.     Purchase Classification

·         classify all the commodities, components, products, and services according to the supply risk and potential profit impact of each

·         Supply risk is high when

·   item is a scarce raw material

·   its availability could be affected by government instability or natural disasters

·   delivery logistics are difficult and could easily be disrupted, or

·   there are few suppliers.

·         Profit impact is high when:

·   item adds significant value to the organization's output

·   it makes up a high proportion of the output

·   it has a high impact on quality

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·         Kraljic recommends the following purchasing approaches for each of the four quadrants:

o   Strategic items (high profit impact, high supply risk).

§  items deserve the most attention from purchasing managers.

§  Options include developing long-term supply relationships, analyzing and managing risks regularly, planning for contingencies, and considering making the item in-house rather than buying it, if appropriate.

o   Leverage items (high profit impact, low supply risk).

§  Purchasing approaches include using your full purchasing power, substituting products or suppliers, and placing high-volume orders.

o   Bottleneck items (low profit impact, high supply risk).

§  Useful approaches here include overordering when the item is available, and looking for ways to control vendors

o   Non-critical items (low profit impact, low supply risk).

§  Purchasing approaches include using standardized products, monitoring and/or optimizing order volume, and optimizing inventory levels.

2.    Market Analysis

·         investigate the power of suppliers

3.    Strategic Positioning

4.    Action Plans

·         The three purchasing strategies indicated are as follows:

·   Exploit

·         Make the most of your high buying power to secure good prices and long-term contracts from a number of suppliers

·         make "spot purchases" of individual batches of the item

·   Balance

·         Take a middle path between the exploitation approach and the diversification approach

·   Diversify

·         seek alternative suppliers or alternative products

Purchasing should be part of corporate strategy. It's important for purchasers to know risk evaluation and profits maximization by having the right approach to procurement.  The Kraljic Portfolio Purchasing Model helps purchasers to understand the supply risk and profit contribution, and the balance of power with their suppliers.