Kraljic Model

Definition

The Kraljic Model is a method used in Supply Chain Management to segment the purchases or suppliers of an organization by dividing them into four classes, based on the complexity (or Risk) of the corresponding market.

Kraljic proposed the first purchasing portfolio model in the 80s formulated as a matrix that classifies the purchased goods or services into four categories that span two key factors: the monetary profit impact (or spending value) and the risk / complexity level. Creating two buckets of low / high impact and risk respectively, the approach distinguishes 2 x 2 = 4 categories: Non-critical, bottleneck, leverage, and strategic items. Each category requires a distinct management strategy.

Objective

The objective of the Kraljic model is minimizing Supply Chain Risk and optimizing purchasing power. The procurement portfolio approach has become a standard for strategic planning across the procurement profession.

Structure

• Low Risk and Low Spend and Profit-Impact. Concerns Non-critical and Routine items. Purchased iterms that have a low impact on the organization and are found in abundance (multiple suppliers). For such items, the management goal is to maximize efficiency of the procurement process to reduce the administrative burden.
• Low Risk but High Spend and Profit-Impact. Leverage Items. They are important for the organization but are sourced from low-risk markets with an abundant supply. Optimal management of these purchase categories is essential. The organization must make the most of bargaining power and the abundance, e.g., with frequent negotiations.
• High Risk and Low Spend. Bottleneck Items. Low business impact in economic terms but supply continuity is questionable. The management of should aim creating long term relationships or collaboratio with less emphasis on the cost.
• High Risk and High Spend. Strategic Items. Important for the organization both in terms of economic impact and for supply conditions from complex and / or risky markets. Management requires continuous monitoring of the economic situation of markets, technical developments, creation of alternatives and/or development of stable relationships and collaboration with suppliers.