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Greater emphasis should be placed on the procurement function than it presently does in the majority of organizations.  A considerable number of procurement-related administrators are deficient in the requisite knowledge and perspectives to discern deficiencies and efficiently manage the function.

In this age of swift fluctuations in supply and demand, intense competition, constrained materials and resources, political instability, and failure to concentrate and enhance critical capabilities is a surefire way to face extinction.  Today, a comprehensive and lasting strategy for purchasing and supply management is necessary.

In order to be effective, purchasing and supply management strategy must evaluate the potential risks associated with international sourcing, address uncertainties, predict price and supply fluctuations, and shift focus from operational concerns to strategic supply management.

This involves performing an evaluation of the feasibility of forming collaborative alliances, procuring other firms to enhance existing capabilities and enter unexplored markets, reevaluating contractual agreements, and scrutinizing inventory management and materials planning systems.

Two elements are critical when formulating a comprehensive purchasing and supply management strategy:

• The strategic significance of purchasing: This metric evaluates the contribution of the entire product portfolio to profitability and value creation, in addition to the proportion of expenses attributable to raw materials in relation to total expenses.
• Supply chain complexity: This metric evaluates the extent of complexity of the supply chain in relation to factors such as technological disruptions, entry barriers, distribution costs, and market dominance.

Organizations may consider implementing the following best practices to enhance and supervise their procurement and supply operations:

• At the organizational level, streamline the supply needs of different departments.
• Reduce supply barriers, delays, and disruptions.
• Ascertain alternative supply routes.
• Curtail procurement-related risks.
• Sign long-term contracts and annual agreements to optimize cost-efficiency.
• Finalize make-versus-buy decisions.
• Foster cooperative partnerships with suppliers or competitors to manufacture critical components while minimizing expenses.

Procurement and supply chain management executives may employ the Kraljic Matrix to categorize and assess an organization's purchasing portfolio.  The Kraljic Matrix provides a methodical approach to objectively identify supply constraints, risks, and defects.

The Kraljic Matrix enables directing an organization's Procurement Strategy.  The matrix significantly aids purchasers during periods of abrupt technological disruptions, economic instability, and fluctuating regulatory and environmental conditions.

The Kraljic Matrix enables the classification, organization, and representation of procurement items in accordance with the following 4 fundamental categories:

• Non-critical Purchases
• Leveraged Purchases
• Bottleneck Purchases
• Strategic Purchases

Implementation of the Kraljic Matrix entails a 4-stage process:

1. Purchasing Portfolio Classification
2. Market Analysis
3. Positioning of Strategic Items
4. The Action Plan

Let’s delve deeper into the first two stages of the matrix, for now.

Stage 1. Purchasing Portfolio Classification

Prior to implementing the Kraljic Matrix, purchases ought to be classified based on their influence on supply risk and profitability.  The profit implications of a supply item are determined by its purchased quantity, proportion of the total purchase price, and impact on the quality of the product or the expansion of the business.  On the contrary, considerations such as storage risks, make-or-buy opportunities, availability, supplier count, and competitive demand are incorporated into assessment of supply risk impacts.

These two elements facilitate the categorization of procurement items into the following four groups: noncritical, strategic, bottleneck, and leverage.  It is crucial to consistently evaluate and adjust the classification of the purchase portfolio in response to the supply and demand dynamics that influence the classification of individual items.

Stage 2. Market Analysis

The procurement executives then assess the suppliers' strengths in relation to their own organizational strengths using evaluation criteria.  In addition to aiding in the achievement of cost efficiencies and volume expansion, this market analysis helps prepare for obstacles, barriers, and fluctuations in supply or demand.

The procedure involves evaluating the suppliers' strengths in comparison to the organization's bargaining power by conducting an analysis of the supply market, the availability of critical products in the necessary quantities and qualities, and the comparative strengths of the vendors.

Interested in learning more about the next steps of the Kraljic Matrix? You can download an editable PowerPoint presentation on Kraljic Matrix here on the Flevy documents marketplace.

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