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 value) and the risk level.

The approach distinguishes categories as either non-critical, bottleneck, leverage, and strategic items, each requiring a distinctive strategy for supplier management with the objective of minimizing supply chain risk and optimize purchasing power . The procurement portfolio approach has since become the standard for strategic planning across the procurement profession and considered a sign of organizational maturity (Gelderman & Van Weele, 2005).

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.