How to optimise purchasing costs with the Kraljic Matrix
Use the Kraljic Matrix to help you determine the risk of materials from your suppliers
How can the Kraljic Matrix help optimise procurement costs?
Using the right tools within your organisation, can support your operational activity, to make it more aligned to your procurement strategy. The Kraljic Matrix helps to optimise procurement costs by distinguishing the products with profit potential and the products which hold a degree of risk. Determining the type of supplier relationship, by positioning suppliers by risk and profit impact, will help to support you to build the right type of supplier relationships, utilise time more efficiently and mitigate supply chain risk.
How the Kraljic Matrix determines risk and profit potential?
The Kraljic Matrix is based on two concepts, risk, and profit potential.
Risk
Risk consists of supply risk and technical risk. It measures the likelihood of the goods or service not being available and the costs resulting in its non-availability. There are some common factors which determine the risk:
- Experience with the product
- Supply/demand balance
- Supply chain complexity
- Financial risks
- Safety and environmental risk
- Design maturity
- Manufacturing complexity
Profit potential
Profit potential indicates the opportunity the supply may have to contribute to profit. The profit potential may be achieved by lower costs or by introducing more efficient buying methods. The common factors determining the profit potential are:
- Structure of the market
- Value of spend
- Supply/demand balance
- Efficiency of the procurement process
- Development of the procurement process
Applying the Kraljic Matrix – the seven step method
You can adopt a more structured approach when categorising your products or services, with the seven-step method.
- Define the risk and profit potential factors that are relevant to the product/service.
- If you have some factors that are more important than others, assign a weighting to each factor.
- Define a scale to assess each factor. (The higher end of the scale should correspond to high risk or profit potential and the lower end to low risk or procurement potential).
- Calculate the maximum score for weighted risk factors and weighted profit potential factors to determine the dimensions of the Kraljic Matrix.
- Assess each risk and profitability factor according to the defined scale.
- For each factor, multiply the weighting by the corresponding assessment and then calculate. the total score for risk factors and the total score for profit potential factors.
- Use the two total scores to position the commodity or service on Kraljic Matrix.
Advantages and disadvantages of the Kraljic Matrix
Using the Kraljic Matric helps you to categorise products or services by risk and profitability, helping you with your procurement decisions. There are many advantages of using the matrix:
- Kraljic’s Matrix is one of the most well-known and utilised tools.
- By shifting products or services to different quadrants Kraljic’s Matrix can help to reduce dependence on specific suppliers.
- Kraljic’s Matrix quadrants offer a useful means of classifying purchases by total spend.
It’s important to keep in mind that using the Kraljic Matrix brings about some challenges too. Some of the disadvantages are listed below:
- Kraljic’s Matrix doesn’t consider the supplier’s perspective.
- The matrix doesn’t offer any guidance on the movement of products and services ‘within’ the matrix.
- It can be complex and difficult to allocate products and services to a quadrant in a 2x2 matrix.
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