The Kraljic Matrix and SCM.

This matrix is part of Game Theory, i.e. a branch of applied mathematics that provides the Kraljic matrix as a tool for analyzing situations in which parties, usually called players, make decisions that are interdependent. This causes each "player" to to consider options or strategies. Other examples besides the Kraljic Matrix are SWOT, Porter's 5 forces model, the Ansoff Matrix, PEST analysis, Growth-Share Matrix (BCG matrix), VRIO (value, rarity, inimitability, and organization - a useful tool designed to help organizations identify and leverage the unique resources and capabilities that make up long-term, sustainable competitive advantages), and so on.

The Kraljic matrix is a tool many procurement professionals use to gain deeper insights regarding their organisations products and suppliers. However, only a few professionals can utilize this tool really effectively.

The model involves four steps:

1. The Purchase classification.
2. Conducting a Market analysis (could be a Gap analysis, environmental scanning and so on. Remember that there may be a gap in the marketplace but is there a market in the gap.)
3. Strategic positioning in the marketplace.
4. Action planning.

1. Non-critical items (Routine quadrant): These are purchases with low profit impact and low supply risk, such as office supplies, stationery or standard components, including MRO (maintenance, repair and operations). They require minimal strategic attention and can be managed through streamlined, transactional processes and cost-efficient sourcing and usually have a long preferred suppliers list. The buyer can handle this purchasing with ease.
2. Leverage items: These are purchases with high profit impact but low supply risk, such as commodity raw materials or standard services. They offer opportunities for competitive bidding, volume consolidation, and aggressive price negotiation to maximize cost savings, and this can lead to comparative competition/advantage.(See my article on Comparative vs. competitive advantage). Supplier consolidation involves reducing the actual number of suppliers that you work with. Pros include better supplier relationships, cost savings, and time savings. Cons include a lack of contract flexibility, requiring a strict vendor selection process, and more.
3. Bottleneck items: These are purchases with low profit impact but high supply risk, such as rare or specialized components that may have to be imported. They require close monitoring, contingency planning is key, and risk mitigation strategies to ensure continuity of supply and avoid production disruptions, as this of course can cause large losses and losing customers who will seek their product elsewhere, if possible. They often have large entry barriers as well.
4. Strategic items: These are purchases with high profit impact and high supply risk, such as critical raw materials, innovative technologies, or customized services, and with Digital Business Transformation innovative technologies are here to stay - AI, blockchain, digitization, cloud computing, robotics, IoT, big data and so on. With DBT this has resulted in nondisruptive creation, but will soon become disruptive when the marketplace is saturated with suppliers, and prices drop. Disruptive creation is the phenomenon where groundbreaking new products, services or business models shake up existing industry standards, displacing current market leaders and transforming the competitive environment and is often referred to as "Blue Sea" - Kim and Mauborgne. They require close collaboration with suppliers at all times, joint innovation and development, and long-term partnerships to manage risks and create mutual value and companies can harness this symbiotic relationship in order to thrive. This is a strategic imperative. A strategic imperative is a business goal, objective or target that has the highest priority in an organisation. Businesses engage in strategic planning, that evaluates the entire business and sets out a plan of action (formulation). Strategy formulation is the process of using available knowledge to document the intended direction of a business and the actionable steps to reach its goals (in strategy the basic model is: formulation - implementation - evaluation and evaluation feedback loops.) This type of planning helps businesses better manage current and future operations. Strategic planning is an activity that determines the objectives and considers both the internal and external environment to design, implement, analyze and adjust the strategies, to gain competitive advantage. This is aligned to the micro, market and macro environments. Strategic Planning is not exactly the same as strategic management (see my article), which implies a stream of decisions and actions taken by the top "C" level/tier managers to achieve organisational goals. It is nothing but the identification and application of strategies, to improve their performance level and attain dominance in the industry and SCM within ERP systems, and logistics plays a large part in this with ERQ, EDI and so on. It is important that decision making is evidence-based and logical when individuals are working together. Successful organisations have cultures in which evidence-based decision making is the norm rather than the exception. This is aligned to higher-order thinking. Brainstorming is key with senior management involvement.

One of the most notable adaptations of the Kraljic matrix is the Kraljic Portfolio Purchasing Model, as discussed. The factor of risk relates to the likelihood for an unexpected event in SCM in the company to disrupt business operations. For example, in the significant areas of spending such as tyre suppliers for an automotive company are very important, and if there is any sort of disruption in the process, the automobile company will have to face substantial issues and problems, particularly if other tyre suppliers are in the same position.

The Purchasing element and aspects of the organization should be part of the overall corporate strategy. It is important that the purchasing department of the company should know how to evaluate the risk patterns and maximize profits by having the right approach to the procurement cycle, SCM and logistics.

In closing, The Kraljic matrix is built on two key dimensions that determine the strategic importance and complexity of a given purchase category: Profit impact: This dimension measures the financial significance of the purchase in terms of its contribution to the company's bottom line, and as stated is aligned to SCM and logistics. New DBT technology is affecting SCM significantly. Logistics and supply chain management (SCM) hold immense significance in the modern business landscape as is evident from the above. These intricate frameworks serve as the lifeblood of operations in an organisation, orchestrating the seamless flow of products from production to the hands of customers. Their pivotal role becomes evident in the form of cost efficiencies and savings, streamlined processes, and heightened customer satisfaction leading to robust CRM and repeat business.

Prof Rory Dunn.