Happy 40th Birthday to Kraljic... But now consider the Pagell Variant

Its 40 years since Kraljic published his seminal paper in Harvard Business Review. And the 2x2 model we all know and love has become the de-facto strategic decision tool for how to manage supplier interactions. It was a key contributor in turning Procurement into a strategic contributor.

It's also a little twee on re-reading today. It refers to high technology using the example of a 256K RAM chip for example! How times have changed. And ironically the only 2x2 visual model that is actually in the HBR paper is relating to purchasing sophistication versus supply market complexity, and this is probably the least cited part of the publication!

Applying Kraljic- A mixed report card

The models in the article are widely misapplied and misunderstood.

• Mostly, Procurement teams apply "Phase 1: Classification" well using the eponymous 2x2 matrix (Bottleneck, Leverage etc.). A- for effort here. I do note that many category managers over-state the profit impact and risk dimensions in their own analysis. After all, who wants to be managing non-strategic categories? It all gets too subjective.
• I've met a significant minority of teams that don't apply "Phase 2: Market Analysis" which is the very useful Portfolio Analysis matrix. B-, here. Its quite a well known model, but not always used.
• And I've never met a Procurement team that applies Phase 3: Strategic Positioning" which is the final model on how to treat strategic suppliers. Fail.

Perhaps we just aren't completer finishers? Or maybe we just didn't get to the end of the article? Please please correct me in the comments if you have seen Kraljic working as intended through all 3 stages, citing the company as true disciples.

Time for a change?

There have been many critiques of the Kraljic model, not least by Kraljic himself, who wished the concept of collaboration was more prominent in the paper. [I can't find the reference to this, you'll just have to believe me].

It doesn't capture the concept of networks, the interdependencies between products or the concern for sustainability [1]. Professor Andrew Cox, who's writings I also admire, shares that it "does not provide us with any proactive thinking about what can or should be done to change the existing reality of power." [2]

And furthermore, something started to show up in the research. Was Kraljic becoming broken?...

"During the analysis of data collected as part of a study on exemplars in Strategic Supply Chain Management (SSCM), a significant anomaly emerged related to the well-established purchasing portfolio framework . We observed that a number of leaders in SSCM were not making purchasing decisions in the manner suggested by Kraljic (1983) nor were these firms acting in ways that alternative approaches would completely predict."[3]

The main revelation is that buying firms are thriving and NOT leveraging their commodity purchases in particular circumstances. These include business continuity and sustainability risks. Instead benevolent suppliers are seeking common prosperity with some suppliers in the hope of improving long term market conditions, to help lift employees out of impoverishment and to improve the environmental impact its supply base on the local communities it works in.

In short Kraljic no longer works in the 'Leverage' quadrant where Commodity and High emission categories need to be treated as strategic where triple bottom line impact is threatened.

Pagell et al. therefore propose a variant of Kraljic that I've taken the liberty of tabulating below beside the original masterpiece.

The key variations are:

1. The Y-axis is sensibly expanded to become "Threat to Triple Bottom Line"

2. The removal of leverage items into 3 commodity types:

• (a) True commodities that are treated as per the Kraljic leverage definitions
• (b) Strategic Commodities are those critical commodities that transcend traditional economic considerations. Energy, primary raw materials for an energy firms, food ingredients for a food manufacturer etc. and
• (c) Transitional Commodities that may receive temporary status as 'strategic' in order to raise overall standards, wellbeing, sustainability goals, before returning to a more traditional True Commodity status when supply market standards confidently meet the buyer goals.

Whilst this model was released in 2009, and is widely cited by scholars, it remains relatively unknown in the practitioner world. Until now- I hope! I view myself as the first Pagell disciple, spreading the good word, when the world needs it. I consider that this paper, almost 15 years old, was ahead of its time, but with Sustainability commitments mandated or committed to by organisations, its time to think again and think harder about our flawed modelling of purchasing and supply dynamics.

An attitude of “purchasing as usual” will make the company vulnerable to competitive pressure; but enhanced strategic awareness, greater flexibility, and stronger entrepreneurial thinking in the supply area can improve the supply security and lower the input costs of any company.

Peter closed the HBR article with these words as a clarion call to action. It still rings true 40 years later.

About me.

I sell Procurement Services. I used to provide Procurement Services. Before that I used to have a real job actually doing Procurement. I continue to publish longform articles in the face of low readership. Why? I am glutton for punishment, and I don't have the stomach to write fan fiction with my kids. This feels much more legitimate. Even though I know I'm just giving ChatGPT more writing to scrape and steal.

Sources

[1] Geldeman & Weele, Purchasing Portfolio Models: A Critique and Update, Literature review, 2005

[2] Cox, A. Business Success — A Way of Thinking about Strategic, Critical Supply Chain Assets and Operational Best Practice, Earlsgate Press, Great Britain, 1997

[3] Pagell, M et al. "THINKING DIFFERENTLY ABOUT PURCHASING PORTFOLIOS: AN ASSESSMENT OF SUSTAINABLE SOURCING", Journal of Supply Management, 2009