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Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Kraljic Matrix — Everything You Should Know
- In 1983, purchasing expert Peter Kraljic developed the Kraljic Matrix.
- The four quadrants of the Kraljic Matrix are divided into 2 axes: the complexity of supply and the profit impact.
- The Kraljic Matrix is a complicated approach. However, it directs procurement efforts toward the most impactful areas.
Kraljic matrix is a tool many procurement professionals use to gain deeper insights regarding their products and suppliers. However, only a few professionals can utilize this tool effectively.
In this article, we will discuss the Kraljic Matrix and its four quadrants. We will explain how it works and provide examples to inspire you. Additionally, we will share insights from experienced procurement professionals and I will also share my perspective on the Kraljic Matrix.
After reading this article, you will learn to use the Kraljic Matrix in your procurement functions. Furthermore, you can share all your learnings with your colleagues to assist them in their procurement processes. So, without further ado, let’s start!
What is Kraljic Matrix?
Many procurement professionals are known to use the Kraljic Matrix. However, do you know that this Matrix was created in 1983 by Peter Kraljic?
The Matrix first appeared in the Harvard Business Review in 1983 to develop a tool to help companies segment their supplier base.
In procurement, its primary use was to evaluate supplier risk and profitability, thus providing a structured approach to procurement.
The Matrix offers a strong framework for supplier and product analysis, serving as a way to acquire deeper insights. By having a comprehensive understanding of supplier and product dynamics, the matrix empowers procurement professionals to make informed decisions.
Many procurement professionals embrace the Matrix across industries. Due to this, we cannot deny that it is an important tool for many professionals in shaping their procurement strategies.
Procurement professionals also use the Matrix to find and minimize supply risks. Using the Matrix in classifying the significance of suppliers’ products and services can highlight the support strategy development, supply disruption, and weaknesses of the procurement process.
Understanding the nature of relationships when positioning suppliers based on risk and profit impact enables procurement professionals to establish appropriate supplier relationships. This, in turn, allows them to optimize their time usage and mitigate supply risks within their organization more effectively.
The Four Quadrants of Kraljic Matrix
Now that you know the history and the usage of the Kraljic Matrix, it’s time to discuss the four quadrants that make up the Matrix.
1. Bottleneck Quadrant (Minimizing Risk)
The products that are in this quadrant are those that have a limited source of supply. Their supply risk is high, but they do not have a major profit impact.
Even though these items have a low impact on the profitability of a company, the market structure forces them to accept unfavorable deals.
This quadrant belongs to a “Supplier’s Market” where the strength is in the hands of the supplier.
The market in this quadrant can consist of a few suppliers that can force the prices to rise.
Many procurement professionals found that these suppliers absorb more of the buyer’s time compared to the other quadrants of the matrix.
2. Leverage Quadrant
In this quadrant, the products have high profitability but with low risk due to the abundance of supply.
Because of its low-risk profile, the power lies with the buyers. Thus, this quadrant is also referred to as a “Buyer’s Market”. With this, buyers can negotiate aggressively, potentially even switching suppliers to secure the best prices.
In the past, the products in this quadrant are often exploited to drive down costs. However, today, more companies are leaning toward harnessing supplier’s innovative potential rather than just focusing on the prices.
3. Non-Critical Quadrant
The products in this quadrant have minimal risk and a low impact on profits. Common examples of the items in this quadrant include office supplies like pens and paper, which are important for daily operations but not critical to overall business success.
The absence of these products typically does not pose a serious threat to the organization.
However, these items are still monitored due to the cost of handling them outweighs the product cost. This is due to the purchasing strategies for non-critical items focusing more on cutting administrative costs and simplifying logistics.
Nonetheless, the items in this quadrant are less prioritized in procurement as they can be obtained from different suppliers and come in various options.
4. Strategic Quadrant
Products in this quadrant are those that have a huge influence over the business, boasting both high-supply risk and substantial profit impacts.
These items are crucial to keep things running smoothly. However, only a handful of suppliers make these products. Thus, to ensure that the impact of these products is monitored, establishing strong and reliable supplier relationships is a must.
When it comes to strategic items, the power dynamic between the buyer and supplier is balanced. Therefore, the products in this quadrant emphasize the need for collaborative and forward-thinking strategies.
How to Use The Kraljic Matrix?
Now that you know the difference of each quadrant, let’s dive in on how you can use it.
Before we start, we want to remind you that you might need to adjust the matrix according to your procurement needs. So, we advise to adjust the axes if necessary.
Furthermore, we want to encourage you to know the strategies that you will apply per quadrant, which suppliers your company aims to build stronger relationships with, and which ones you may need to scale back or remove altogether.
This strategic approach can help enhance margin contributions and add value to your organization.
Let us now dive further into the steps you must take to use the kraljic matrix in your procurement process:
1. Identifying Procurement Items
First and foremost, you must identify which procurement items or categories need suppliers. This can range from raw materials, components, services, or other essential goods or services needed for business operations.
2. Know the Supplier Impact and Power
After identifying the items that need suppliers, you must then know each supplier item’s impact on business activities and the level of power that their suppliers hold.
There are various ways to assess supplier impact, some of these being: cost, availability, quality, and risks.
As for supplier power, these can be evaluated by metrics like market position, substitutability, and supplier concentration.
3. Plotting
This stage is where you will use your knowledge of the Kraljic Matrix to categorize each procurement item within the four quadrants discussed earlier: strategic, bottleneck, leverage, and non-critical quadrants.
By plotting the items on the appropriate quadrant, you can gain insights into the strategic positioning of each procurement product within your organization.
4. Developing Procurement Strategies
In this stage, you will develop appropriate procurement strategies for each quadrant. Here are the recommended points for the strategies you will create for each quadrant:
- Strategic Items: Here, you must focus on fostering collaboration and cultivating long-term relationships with suppliers to ensure reliability and innovation.
- Bottleneck Items: For the products in this quadrant, you must focus on risk management strategies and identify alternative suppliers to mitigate potential disruptions in your supply chain.
- Leverage Items: Here, you should focus on optimization efforts and engage in negotiations to secure favorable terms and pricing.
- Non-critical Items: Lastly, for the items in this quadrant, you must prioritize standardization and efficiency measures to streamline procurement processes and minimize administrative overhead.
5. Implementation and monitoring
Now that you’ve finalized and implemented your strategies across all quadrants, it’s crucial to monitor them regularly. This ongoing evaluation ensures that your procurement efforts remain aligned with your organizational goals.
Moreover, staying attentive to market changes and evolving procurement needs allows you to adapt and update your strategies as necessary, ensuring continued effectiveness in achieving your objectives.
The Kraljic matrix is widely recognized in procurement for its effectiveness in analyzing supplier portfolios, managing risks, and developing appropriate procurement strategies. However, the model is not perfect and it may lack an active dynamic character. The good thing about this is that scientists Cees J Gelderman and Arjan J. van Weele can help you out with this!
These scientists propose a complementary approach. They emphasize leveraging products to boost profits through cost reduction, particularly for routine items. Tools like E-procurement and E-ordering can streamline purchasing tasks for these goods, requiring fewer resources.
For strategic items, Kraljic suggests forming partnerships with suppliers. While establishing enduring relationships based on trust can be challenging, the long-term benefits often outweigh the initial effort.
An Example of Using Kraljic Matrix
When I was procuring a category that included many different A-brands, it helped me to see how the various suppliers performed relative to each other. I plotted all suppliers/brands in different bubbles across the quadrant.
The size of the bubbles represented the revenue of the suppliers, and furthermore, I plotted the suppliers based on margin contribution (vertical axis) and the dependence we have on the suppliers/brand (horizontal axis).
The outcome of this was that I found suppliers in all 4 quadrants, and based on the quadrants, I adjusted my negotiation strategy. Below you can find some of these examples:
Quadrant 1: high margin contribution, low dependency:
For these suppliers, you can aim to maintain strong relationships and negotiate favorable terms that can further increase profitability. This may involve requesting discounts for larger volumes or exclusive deals.
Quadrant 2: low margin contribution, low dependency:
Here, you can explore opportunities to improve margins by negotiating lower purchase prices, better terms, or exploring alternative suppliers that may offer a higher margin.
Quadrant 3: high margin contribution, high dependency:
These suppliers significantly contribute to profitability. It is important to maintain strong relationships with them and explore opportunities to reduce dependency by finding alternative suppliers or developing strategies to manage risks.
Quadrant 4: low margin contribution, high dependency:
These suppliers may represent a risk due to their low revenue and margin contribution, but high dependency. It is important to seek ways to reduce this dependency by diversifying suppliers or developing backup plans in case issues arise.
Procurement Expert’s Advice on Kraljic Matrix
For this article, we asked a seasoned procurement professional to share his insights regarding the Kraljic Matrix.
Sjoerd Goedhart
Owner, Goedhart Interim Management & Consultancy
LinkedIn Profile: https://www.linkedin.com/in/sjoerdgoedhart/
1. Can you share a personal example of Kraljic Matrix? What can readers learn from this?
“As a procurement professional for a retail company, I used this matrix as a basis for strategic choices in the annual plans and during discussions with the category managers in preparation for the annual meetings. You can think of questions such as;
Which suppliers should we grow with to gain more balance vs a large supplier? Or a question like which supplier should we reduce business with because they are small and the margin contribution is too low if this supplier is not prepared to reduce purchasing prices?
The matrix clarifies the positions of suppliers within a category and can be a starting point for internal discussions and strategic decisions.”
Follow-up Question: Did you encounter any limitations while using this matrix?
“I didn’t encounter any significant limitations while using this matrix. However, it’s important to note that it’s not the sole method for analysis. While it serves as a valuable starting point, further detailed analysis or additional methods may be necessary.
One limitation I found is that the model lacks actionable strategies for addressing issues identified in each quadrant. Another researcher, Gelderman, has developed actionable strategies per quadrant, which I found useful.
However, I believe there’s a need for more actionable strategies tailored specifically for professionals using this quadrant model. Ultimately, while the quadrant model is helpful, it should be supplemented with other tools and methods for comprehensive analysis and decision-making.”
2. What should readers know about Kraljic Matrix?
“It helps to determine the importance of suppliers/products for the organization. Based on this, strategic procurement decisions can be made and actions defined.”
3. What is the biggest misconception about Kraljic Matrix? What do most people get wrong about it?
“That analyzing data and presenting this in overviews and conclusions takes a lot of time and brings too little. For every procurement professional, analyzing data should be the starting point for all decisions about strategy and suppliers.”
4. How does the Kraljic Matrix help in strategic procurement decision-making?
“The matrix helps procurement professionals to determine the importance of suppliers/products for the organization. Based on this, strategic procurement decisions can be made and actions defined.”
Follow-up Question: How does it differ from portfolio analysis if both tools involve categorizing each product or supplier?
“No, I would say they are quite similar. Both tools involve categorizing products or suppliers, essentially constituting a form of portfolio analysis.”
5. Can you provide an example of how the Kraljic Matrix was used to transform a company’s procurement strategy?
“No clear example. But for companies that do not yet use this, it contributes to getting an overview of the position of suppliers compared to each other, but also compared to the chosen variables margin/profitability contribution and supply risk/complexity.”
6. How did you plot suppliers as a procurement manager? How did you compare them?
“I used the matrix in internal annual plans are a preparation for the annual meetings and negotiations.
You can determine which suppliers we should grow with to gain more balance versus a large supplier, or which supplier we should do business with because they are small and the margin contribution is too low if this supplier is not willing to reduce purchasing prices.
The matrix clearly clarifies the positions of suppliers within a category and can provide direction for the negotiation strategy and objectives per supplier in the annual appraisals.”
Follow-up Question: How do you assess and quantify the ‘margin contribution’ from suppliers, especially when dealing with smaller suppliers?
“When assessing and quantifying margin contribution, thorough planning and preparation are essential. In significant negotiations, it’s crucial to develop scenarios, create a plan, and calculate the potential impact of each scenario.
Understanding when to employ each scenario during negotiations is key. While this process may seem daunting, proper preparation is the key to success.”
7. Are there any pitfalls that procurement professionals may incur when using the Kraljic Matrix?
“It is a theoretical model. Other undefined aspects and common sense also play a role in choices made based on the matrix.”
My Insight on Kraljic Matrix
For this article I will also be sharing my insight about Kraljic Matrix.
Procurement professionals need to utilize the matrix (or an alternative tool) annually, using it as the core framework for crafting procurement strategies.
By plotting suppliers, items, or categories on the matrix, professionals can quickly determine the most suitable negotiation approach for each quadrant.
However, there are limitations to the matrix, particularly how the axes you used may not apply to your procurement process. Despite these limitations, the matrix provides a structured approach that encourages decision-making and strategy development.
In my time as a procurement manager in the FMCG sector, I adjusted the Kraljic Matrix to better suit our needs. I focused on measuring our dependence on suppliers along the horizontal axis, considering factors such as product criticality and availability of alternatives. This helped us tailor negotiation strategies based on supplier dependence and margin contribution, optimizing our procurement efforts for efficiency and value.
In practice, procurement professionals can efficiently utilize the Kraljic Matrix by updating it annually, adjusting axes as needed, and determining appropriate strategies for each quadrant.
This involves identifying suppliers to nurture for growth and those requiring reduction or improvement in margin contribution.
Despite changes in the procurement field since the matrix was introduced in 1983, it remains relevant, especially in today’s complex procurement environment.
As procurement grows more complicated due to increased options and global connections, tools like the Kraljic Matrix simplify decision-making. While many use it, departments often create their own versions to better suit their specific needs and goals.
Despite various alternatives, the fundamental concept of the Kraljic Matrix remains crucial: plotting suppliers or items into quadrants and devising strategies accordingly.
Its widespread success across diverse industries underscores its effectiveness in guiding procurement strategies and enhancing supplier relationships.”
Conclusion
In conclusion, the Kraljic Matrix is an important tool for procurement professionals to help them analyze suppliers and develop appropriate strategies for managing each product segmentation.
Additionally, it gives insights to procurement professionals into the risk and profitability of each product and supplier. With this, they can make informed decisions that can enable them to optimize their procurement processes and mitigate supply chain risks.
In this article, you have gained a different perspective on how the Kraljic matrix is just another theoretical model. It serves as a practical guide for strategic procurement decision-making. The matrix offers clarity on supplier importance and helps in prioritizing actions that add value to the organization.
Although the matrix has some limitations, its adaptability and foundational principles remain valuable and useful in the ever-changing landscape of procurement.
Furthermore, by leveraging the Kraljic Matrix effectively, organizations can navigate the complexities of procurement, optimize their supplier portfolios, and drive sustainable growth and success.
Frequentlyasked questions
What is the Kraljic Matrix?
It is a strategic tool used by procurement and supply chain professionals to find and minimize supply risks.
Who invented it?
The Matrix was created by Peter Kraljic and first appeared in the Harvard Business Review in 1983 to help professionals segment the supplier base.
How does it work?
It works by mapping the profit impact of a product on one axis and the supply risk of the product on the other.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
