The model categorizes items into four quadrants:
* Leverage Items: These items have high profit impact but low supply risk. The organization has significant purchasing power and can negotiate favorable terms with multiple suppliers. Strategies for this quadrant often focus on maximizing commercial advantage through competitive bidding, volume discounts, and standardization.
* Strategic Items: These items have both high profit impact and high supply risk. They are crucial for the organization's success, but the supply is limited or volatile. Strategies here emphasize building strong, collaborative relationships with key suppliers, developing long-term contracts, and potentially even vertical integration (acquiring the supplier).
* Non-critical Items: These items have low profit impact and low supply risk. They are typically easy to source and readily available. Strategies focus on efficiency and streamlining the procurement process, often through automation or simplified ordering systems.
* Bottleneck Items: These items have low profit impact but high supply risk. They might be specialized items with only a few suppliers, or items prone to disruptions. Strategies focus on securing supply, exploring alternative sources, and potentially investing in inventory to mitigate risk.
How the Kraljic Matrix is used:
1. Identify key purchased items: The process begins with listing all significant goods and services purchased by the organization.
2. Assess profit impact: Determine the financial impact of each item on the organization's profitability.
3. Assess supply risk: Evaluate the potential risks associated with the supply of each item, considering factors like supplier concentration, geographical location, substitution possibilities, and technological advancements.
4. Plot items on the matrix: Based on the assessments, each item is plotted on the matrix according to its profit impact and supply risk.
5. Develop sourcing strategies: Appropriate procurement strategies are then developed for each quadrant.
Limitations of the Kraljic Matrix:
* Subjectivity: Assessing profit impact and supply risk can be subjective and depend on the individual's interpretation.
* Static nature: The matrix provides a snapshot in time and doesn't account for dynamic changes in the market.
* Oversimplification: The four quadrants might not encompass the complexity of all purchasing situations.
Despite its limitations, the Kraljic Matrix remains a valuable tool for organizations to gain a clearer understanding of their procurement landscape and develop more effective sourcing strategies. It encourages a strategic approach to purchasing, moving beyond simply focusing on price and towards a more holistic view of risk and reward.