The Kraljic Matrix is a strategic tool used to manage procurement and supply chain relationships effectively. It helps organizations categorize their purchases based on two dimensions: supply risk and profit impact. This categorization aids in determining the most appropriate procurement strategy for each category.
Understanding the Kraljic matrix
The Kraljic Matrix divides procurement items into four categories:
- Strategic items: High profit impact and high supply risk
- Leverage items: High profit impact and low supply risk
- Bottleneck items: Low profit impact and high supply risk
- Non-critical items: Low profit impact and low supply risk
Each category requires a different approach to procurement to optimize value and minimize risks.
Real-world examples
- Strategic items:
- Example: Apple’s procurement of semiconductor chips. These components are crucial to their products and are sourced from a limited number of suppliers, making them both high in profit impact and supply risk. Apple invests in strong supplier relationships and sometimes even engages in joint ventures or exclusive deals to secure their supply.
- Leverage items:
- Example: Office supplies for a large corporation. While these supplies are essential, they generally have multiple suppliers, reducing supply risk. The corporation can use its purchasing power to negotiate better prices and terms with suppliers.
- Bottleneck items:
- Example: Specialized raw materials for a niche manufacturer. These materials might have few suppliers, making them high-risk despite their lower impact on the company’s profitability. The manufacturer may seek to find alternative sources or develop contingency plans to mitigate the risk.
- Non-critical items:
- Example: Standardized cleaning supplies for a large retail chain. These items are widely available and do not significantly affect profitability. The retail chain can use a straightforward, cost-effective procurement approach, focusing on price and convenience.
Applying the Kraljic matrix to your startup
- Identify categories:
- Assess your procurement items and classify them into the Kraljic categories based on their profit impact and supply risk.
- Develop procurement strategies:
- For strategic items: Build strong relationships with key suppliers and consider long-term agreements to ensure supply security.
- For leverage items: Use your startup’s purchasing power to negotiate favorable terms and prices.
- For bottleneck items: Diversify suppliers or develop contingency plans to reduce dependency and mitigate risks.
- For non-critical items: Optimize procurement processes for cost efficiency and operational convenience.
- Monitor and adjust:
- Regularly review the categories as your startup grows and the market changes. Adjust your procurement strategies based on new risks or opportunities.
By applying the Kraljic Matrix, you can make informed procurement decisions that align with your startup’s strategic goals, manage risks effectively, and leverage opportunities for cost savings and value creation.