Kraljic's purchasing portfolio model, which was introduced in 1983, still is the dominant approach in the profession. Contrary to the growing use of the Kraljic matrix, there are problems and unanswered questions with respect to measurement and strategic issues. Based on explorative case studies, the critique of Kraljic's model has been disputed and refuted to a large extent. This study describes the solutions of experienced practitioners to the problems which have been put forward in literature. The case studies point out which measurement methods are possible and which supplier strategies are feasible, including additional strategic movements of commodities within the matrix. The research findings indicate that there is no simple, standardized blue print for the application of the portfolio analysis. It requires reflecting on results, critical thinking and sophistication of purchasing management.
Recently, purchasing portfolio models have received considerable attention from academic and business world (e.g. Gelderman and Van Weele (2002) and Gelderman and Van Weele (2003); Leonard and Spring, 2002; Åhman, 2002; Dubois and Pedersen, 2002; Zolkiewski and Turnbull, 2001; Nellore and Söderquist, 2000; Wynstra and ten Pierick, 2000; Gelderman (2000) and Gelderman (2003); Croom, 2000; Bensaou, 1999; Lilliecreutz and Ydreskog, 1999; Olsen and Ellram, 1997). Obviously, not all products and not all buyer–supplier relationships are to be managed in the same way. In general, purchasing portfolio models aim at developing differentiated purchasing and supplier strategies. Kraljic (1983) introduced the first comprehensive portfolio approach for purchasing and supply management. Kraljic's approach includes the construction of a portfolio matrix that classifies products on the basis of two dimensions: profit impact and supply risk (‘low’ and ‘high’). The result is a 2×2 matrix and a classification in four categories: bottleneck, non-critical, leverage and strategic items, see Fig. 1.Each of the four categories requires a distinctive approach towards suppliers. Non-critical items require efficient processing, product standardization, order volume and inventory optimalization. Leverage items allow the buying company to exploit its full purchasing power, for instance through tendering, target pricing and product substitution. Bottleneck items cause significant problems and risks which should be handled by volume insurance, vendor control, security of inventories and backup plans. A further analysis of the strategic items is recommended. By plotting the buying strengths against the strengths of the supply market, three basic power positions are identified and associated with three different supplier strategies: balance, exploit, and diversify. The general idea of Kraljic's model is to minimize supply risk and make the most of buying power (Kraljic, 1983, p. 112).
Although other models have been developed, Kraljic's approach subsequently became the dominant approach to what the profession regards as operational professionalism Cox (1997, p. 270). Lamming and Harrison (2001, p. 596) confirmed that Kraljic's matrix remains the foundation of purchasing strategy for many organizations across different sectors. Purchasing portfolio models have gained ground in both academic research as well as in practice (Nellore and Söderquist, 2000, p. 246). In the course of time, the Kraljic approach has entered many textbooks on purchasing and supply management. In contrast with a growing acceptance and use of purchasing portfolio models, there are problems and unanswered questions.
The case studies departed from the contention that we needed to gain a better understanding of how purchasing portfolio models are being used in practice and how they could be used by purchasing professionals in order to pursue effective differentiated purchasing strategies. Publications have identified a number of problems and unanswered questions, but they do not reveal how purchasing professionals actually handle those issues. This study has clarified these issues, describing advanced practices with respect to purchasing portfolio models. The research questions referred to measurement issues and portfolio-based strategies.
The investigated cases provided useful insights in the possibilities and actual employment of purchasing portfolio analysis. The cases studies revealed three distinctive measurement methods:
(1)
consensus method,
(2)
one-by-one method,
(3)
weighted factor score method.
Each method satisfies the needs and expectations of the different users. The reason for this can be found in the additional steps that have to be taken in the portfolio analysis. Before strategic actions are determined, it is imperative to complete a further process of interpreting and reflecting on the results. The filling of a matrix should be considered as the starting point of portfolio analysis, definitely not the finishing point. After the matrix is filled, it is imperative that users reflect on the results. If necessary, manual adjustments should be made. In-depth discussions on the positions in the matrix are considered as the most important phase of the analysis. Strategic discussions provide deeper insights and may lead more easily to consensus-based decisions. It is felt by the users that the Kraljic framework facilitates these important discussions to a large extent.
Some argue that the complexity of business decisions does not allow for simple recommendations. How could one deduce strategies from a portfolio analysis that is based on just two basic dimensions (e.g. Dubois and Pedersen, 2002, p. 40)? Actually, the answer is simple: one cannot! In addition to the various factors that constitute the two dimensions of any matrix, we have found that experienced portfolio users always included additional information on:
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the overall business strategy (related situations on end markets),
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the specific situations on supply markets, and
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the capacities and the intentions of individual suppliers.
Unquestionably, the supplier's side should be included in any strategic thinking on the field of purchasing and supply management. Practitioners have found a reply to the critique of the Kraljic approach, which stated that the supplier's side is a disregarded element in Kraljic's model.
The selection of portfolio-based purchasing strategies was explored as well. Based on the case studies, a conceptual model of strategic directions has been presented, providing insights and overview of the main strategic choices for the categories in the matrix. In addition to Kraljic's strategic recommendations, different kinds of strategic responses were identified and described for each item category. A dichotomy was identified between:
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strategies to hold a position (1), and
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strategies to move to another position (2).
At the right side of the matrix (in the bottleneck and the strategic areas), movements are pursued in order to reduce a high level of supply risk. In terms of the matrix, this means moving to the left. Non-critical items are preferably moved upwards, exceptionally leverage positions are exchanged for strategic positions. These are the most common movements within the matrix.
We have described and discussed the critique of Kraljic's model. Publications have stated questions and problems with respect to:
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the measurement of variables,
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the disregard for the supplier's side,
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the selection of strategies based on two dimensions,
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the limited and deterministic character of the strategic recommendations, and
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the absence of explicit movements within the matrix.
The research findings indicate that experienced practitioners have found effective solutions to these problems. We must conclude that the portfolio approach is very helpful in positioning commodities in the different segments and in developing differentiated purchasing strategies. However, we should bear in mind that there is no simple, standardized blue print for the application of the portfolio analysis. It requires critical thinking and sophistication of purchasing management. Although the findings are based on a limited number of case studies, the authors feel that the study has contributed to a better assessment of the critique on Kraljic's model and to a better understanding of the possibilities of a purchasing portfolio approach in practice.
