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Management-Term Paper
The Application of Kraljic Purchasing portfolio:
The Case of TPCC
Fridolin Wilbard
12/2/2008
Strategic Marketing Management-Term Paper
Table of Contents
1. INTRODUCTION TO THE RESEARCH ................................................................................................. 4
1.2 Introduction ................................................................................................................................... 4
1.3 Nature of the study ........................................................................................................................ 4
1.4 Statement of the problem............................................................................................................... 5
1.5 Objectives of the study .................................................................................................................. 6
1.6 Brief history of the organization.................................................................................................... 6
1.7 How does the company manage purchases ................................................................................... 6
2. THEORY ................................................................................................................................................ 8
2.1 Conceptual background ................................................................................................................. 8
2.2 Portfolio approaches ...................................................................................................................... 8
2.3 The Kraljic Matrix ......................................................................................................................... 9
2.4 Brief analysis of the article .......................................................................................................... 10
2.4.1The importance of the matrix ................................................................................................ 10
2.4.2 Classification of products ..................................................................................................... 11
2.4.3 The power dependence between the buyer and the supplier ................................................ 12
2.4.4 Strategic positioning of the products .................................................................................... 12
2.4.5 Long-term actions plans and strategies ................................................................................ 13
2.5 Organizational buying behavior .................................................................................................. 13
2.5.1 Factors influencing organizational buying behavior ............................................................ 14
2.5.2 Buying Tasks ........................................................................................................................ 16
3. METHODOLOGY............................................................................................................................. 17
3.1 Data collection............................................................................................................................. 17
3.2 Selection of company .................................................................................................................. 17
4. ANALYSIS ........................................................................................................................................... 18
4.1. Introduction ................................................................................................................................ 18
4.2 Purchasing set up ......................................................................................................................... 18
4.3 The organization and the purchasing department ........................................................................ 18
4.4 Relationship to Kraljic Matrix ..................................................................................................... 19
4.5 Strategic movement ..................................................................................................................... 20
5. DISCUSSION AND FINDINGS .............................................................................................................. 21
5.1 Products groups as per Kraljic matrix ......................................................................................... 21
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1.2 Introduction
This is a compulsory task of work with which the theoretical knowledge acquired in class
is supposed to be put in practice. In strategic marketing management, a course that form
part for of my studies at this university requires me to write a term paper in one of the
model that were taught in class. I set out to research on Purchasing Portfolio Model
specifically the one that was suggested and put forward by Peter Kraljic in an article titled
‘Purchasing Must Become Supply Management’ published in the Harvard Business
Review Sept-Oct, 1983. Basically the model analyses the purchasing portfolio of any firm.
In recent years purchasing portfolio models have been put in different perspective by both
academicians and business professionals (Narayambas and Rangani, 2004, Weele, 2002,
Gelderman 2000). It remains to be found if all products and buyer relationship are
managed in the same way as the model proposes. Gelderman and Weele 2003 admit that
despite the fact that other purchasing models being developed, The Kraljic Purchasing
portfolio is the dominant and is regarded as the professional tool in firm purchasing
strategies (Gelderman and Weele, 2003). This study has been carried out to investigate
how Tanzania Portland Cement Company Limited (TPCC) applies the Kraljic Model in its
procurement.
In this introduction I set out to give a preliminary setting of my study before I present the
theory in chapter two. The discussion of the theory features the literature as suggested by
various authors but focusing on suggestion by Kraljic. I discuss the methods and
methodology that enabled me to collect the required data in chapter three. The findings are
presented in chapter four, the main finding is that TPCC has not adopted nor know
anything about the Kraljic Portfolio matrix. I discuss the findings in chapter five. The
conclusion and implications are discussed in chapter six. Generally TPCC Ltd manages its
purchasing strategies through modern management techniques, but on studying the data it
is confirmed that what the company does falls in what is contained within the Kraljic
matrix.
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TPCC traces its history from the year 1959 when it was established in Tanzania by Cementia
Holding AG of Switzerland. By then the government owned 20% of company share. The
company was nationalized in 1973 at which the Tanzanian government owned its share to
100%. Following economic liberalization of 1990s, the government entered a joint venture
with two foreign companies, Scancem International ANS (13%) and Swedenfund
International AB (13%) the government retained 74% of the share. Due to consolidation of
Scancem International ANS into HeidelbergCement Group of Federal republic of German
(HC Africa), the former is now known as HeidelbergCement. In 2006 the Tanzanian
government sold its shares to the public. Now HC Africa owns 69.3% of shares and the rest is
owned by the public. Since then the company has been manufacturing and distributing quality
construction cement in the country. The company is currently the market leader in the cement
industry in the country. HeidelbergCement has invested more than $100 million to expand
TPCC operations. Now Heidelberg cement hold a majority of stake in TPCC that produce
more than 1.2million tons of cement a year (Annual Report, 2007)
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products as classified by Kraljic matrix. However at some lengths TPCC had employed
backward integration and acquired the supply of limestone (bottleneck) to the factory. The
company has outsourced the supply of engineering materials to a sole Chinese company
specializing in cement producing equipments. The company also gets power from the
government owned agency as the sole supplier of electricity to company. The rest of the
products are bought from a number of varied suppliers.
From what I have learnt, TPCC has a centralized purchasing process (CPP). From this system
once products are procured, they are then distributed to other specific departments. The CPP
is charged with responsibilities for strategic, standard issues, tools and methods as well as
procedures involved in purchasing activities.
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2. THEORY
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1. ‘‘the strategic importance of purchasing in terms of the value added by product line,
the percentage of raw materials in total costs and their impact on profitability’’
2. ‘‘the complexity of the supply market gauged by supply scarcity, pace of
technology and/or materials substitution, entry barriers, logistics cost or complexity,
and monopoly or oligopoly conditions’’ (Kraljic, 1983, p. 110).
Each dimension has two possible values: low and high. The resulting 2x2 matrix consists of
four quadrants (see figure 1). Depending on the category, Kraljic indentifies certain main
tasks for the firm in the interaction with its supplier. He also identifies the required
information and the decision level in the organization per category. From this construction, a
set of differentiated strategies and a policy for the more fundamental restructuring of the
whole firm portfolio can be determined. It is with this development that more than two
decades ago Kraljic advised managers to guard their firms against disastrous and haphazard
supply interruptions and to cope with evolving as well as changing economic and new
technologies. Kraljic gave a message as ‘purchases must become supply management’
(Kraljic, 1983 p.112). He proposed a four-stage approach as a framework in guiding the
supply strategy. These were:
Classify all the purchased materials or components in terms of profit impact and
supply risk
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cost and flexibility? To what extent might cooperation with suppliers or even competitors
strengthen long-term supply relationships or capitalize on shared resources. (Kraljic, 1983
pp. 110-113)
The matrix helps company in a number of ways. Through the Kraljic model company can
prepare portfolio analysis. It also helps firms focusing on purchasing department to spend
their time on those products that matter most and lastly firms can know non-critical and
leverage items that should be sourced out. Kraljic (1983, p. 114) recommends exploitation of
the suppliers’ dependence whenever possible: ‘‘to reduce the long-term risk of dependence on
a single source, the company should also search for alternative suppliers or materials or even
consider backward integration to permit in-house production. On the other hand, if the
company is stronger than the suppliers, it can spread volume over several suppliers, exploit
price advantages, increase spot purchases, and reduce inventory levels’’
High
Supply risk
Fig. 1 Kraljic Purchasing Portfolio Models (adapted from Kraljic, 1983 p. 111)
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approach and the complexity of the supply market (supply risk) is in proportion to the
strategic implications. In the strategic quadrant analytic techniques are needed to support
supply decisions. Kraljic gives examples of such techniques as market analysis, risk analysis,
computer simulation and optimization models, price forecasting and other microeconomic
analyses.
Specific market analyses and decision models are needed for bottleneck products and vendor
and value analysis, price forecasting models and decision models may be important for
leverage items. Non-critical items simplified market-analyses; inventory optimization and
clear decision policies are needed. The author also stress that supply and demand patterns can
shift the category for a material. He therefore points out the importance that any portfolio
classification calls for regular updating (p 112).
2.4.3 The power dependence between the buyer and the supplier
The second phase in Kraljic’s framework, after the classification of the product categories,
deals with market analysis by plotting the bargaining power of the suppliers against its own
strength as a buyer. This concerns everything from quality and quantity aspects to the relative
strength of existing suppliers. Important factors during this phase are the check of supplier’s
capacity utilization, supplier’s break-even stability, uniqueness of supplier’s product, past
variations in capacity utilization of main production units and the potential costs of non-
delivery and inadequate quality. Taken together, Kraljic stress the importance of knowing
both the supplier strength and company strength in order to do a good market analysis. The
evaluation criteria will also differ for different industries (p. 113).
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situation a balanced approach are used and when the supplier dominate a diversified approach
is used. This can also mean that the buyer should try to find material substitutes or new
suppliers. This can lead to inducements as longer contracts and higher prices. This stage is
more related to the prevailing conditions the purchasing department faces.
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TABLE 2
CLASIFICATION AND EXAMPLES OF VARIABLES INFLUENCING ORGANISATION BUYING
BEHAVIUR
Task No task
Individual Desire to obtain lowest prices Personal value and needs
Social Meetings to set specifications Informal, off-the-job interactions
Organization Policy regarding local supplier Methods of personnel evaluation
preference
Environmental Anticipated changes in prices Political climate
Adapted from Wbster, 1972.
Organizational buying behavior is not a simple but a rather complex process that involve
many people, multiple objectives and potentially contradicting decision making criteria.
Business to business marketing is based on the understanding of organizational buying
behavior that is influenced by the following factors discussed below.
Environmental influences are subtle and pervasive as well as difficult to identify and
measure. These influence the buying process by providing information as well as constraints
and opportunities (Webster ibid). Included in this category are physical realities such as
geographical, climate or ecological; technological, economic, political, legal and cultural
factors. They influence and exert pressure through a variety of intuitions such as business
firms (suppliers, competitors, and customers), governments, trade unions, political parties,
educational institutions, trade associations and professional groups. These are always out and
beyond of the buyer control. From table two above these factors impact the buying process in
a number of ways. They define the availability of goods and services, they define the general
business conditions facing the buying organization, they determine the value and norms
guiding the relationship between buyers and sellers and lastly, environmental forces influence
the information flow of marketing communication from potential suppliers (Webster, ibid).
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The organizational buying behavior has been defined as the decision-making processes by
which formal organizations establish the need for purchased products and services and
identify evaluate and choose among alternative brands and suppliers.” (Webster et al 1972).
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3. METHODOLOGY
This study takes an individual case study in order to analyze the chosen company. I adopt the
qualitative research method so as to deal with more complex context as I explore and get the
deep understanding of phenomenon that surround the company. The qualitative method
helped me to answer my research questions as stipulated in section 1.4 above. The method
helped me to gather information and source out more data and analysis based on
understanding and interpretation of information I managed to get through secondary sources
related to actor in a dyadic relationship. I adopted the case study approach. This helped me to
capture different situation and context that do not have any static traits as well as get
understanding of how people and their action are connected in different purchasing situations.
The case study is suitably fit to examine contemporary phenomena within real life context and
when the boundaries between phenomena and the context are not clearly evident. I intended to
gain an insight of how Kraljic purchasing portfolio model is applied in purchasing with this
company
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4. ANALYSIS
4.1. Introduction
TPCC produces a total of between 700, 000 and 750, 000 metric tons of cement annually. The
company serves more than 45% of the country cement market share which has three other
companies producing cement. TPCC has a growth of 30% revenue per a year. Other
information as revealed through questionnaire is that the company procures raw materials,
spare parts as well as consumables on arm’s length from Scancerm International, AN. By this
year, TPCC targets a total production of 1400,000 MT per annum serving 80% of the country
total cements consumption. Raw materials for cement production include gypsum, clinker and
limestone. The company also procures power from the government owned agency, Tanesco
and it has contracted one Chinese company CBMI, for the supply of cement producing related
equipments. The company has a purchasing department in place that is fully charged with all
commercial part with regard to company’s suppliers.
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The choice of suppliers is a mutual decision between the user and the purchasing department
even though the latter takes a lead in decision making. The purchasing department is more
centralized and globally oriented. This meant that the daily procurement work became more
synchronized and goals and strategies of the purchasing department do correspond to the
overall mission of the firm.
Furthermore the respondent stresses the importance that the purchasing department is working
closely with other functions of the company in order to find new capable suppliers. A
coordinated procurement system is basically on progress and that will hopefully increase the
synergy effects but also issues related to measurement and reporting. TPCC has a ‘sourcing
board’ which they call procurement and tendering committee. The board strives for increased
coordination procurement endeavors.
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method is not enough to deal with the specific context of the supply market. It follows the
reasoning by previous researchers regarding Kraljic, that the supplier side is a disregarded
element.
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relationship with suppliers of clinker as well as Tanesco which is the only local supplier of
electricity. The supply of these products is critical in the operation of the company, that’s why
TPCC has even acquired one supplier and now owns the supply of limestone. In total these
products accounts for 45% (estimates) of the company cost of goods.
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6. CONCLUSION
With TPCC, management portfolio management methods have not been endorsed by their
purchasing organization. The company is probably lagging behind both in terms of
professionalism and position of the purchasing organization in the overall company hierarchy.
The application of purchasing portfolio management seems to have prerequisites both in
terms of professionalism that needs to be present and the exposure. The application of
purchasing portfolio techniques requires skills extending beyond traditional administrative
competences. However, the purchasing strategies have a clear presence and position within
the organizational hierarchy of TPCC Ltd.
6.1 Recommendation
From the above findings, it is apparent that the Kraljic Purchasing Portfolio Matrix can be
applied to any company regardless of whether a particular firm applies it in explicit terms.
Although TPCC does not use the model in its purchasing strategies, what it does fall within
the literature suggested by Kraljic. My major recommendation is for the company to seek an
alternative supplier for electricity which critical for the production of its major product,
cement. Electricity fall within the bottleneck items in which the supplier dominates the
relationship. No mention has been made as regard with the use of IT especially on utilizing
the advantages of e-procurement. I think it is high time that the company strive to incorporate
e-procurement in its purchasing strategies. This should go in line with adapting the Kraljic
model in the procurement endeavors. Again, even though the relationship is mutual and
balanced with the leverage items, the company needs to look into more techniques of
maintaining this relationship as in case the supplies behave contrary, the company might face
difficulties in acquiring the basic raw materials. The company also needs to learn and acquire
the basic knowledge to manage its purchasing strategies by applying the portfolio techniques.
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Reference
Caniëls, M., Gelderman, C., 2005, Purchasing Strategies in the Kraljic Matrix – A power and
dependence perspective, p. 142, Journal of purchasing and supply management
Das Narayandas & V. Kasturi Rangan, 2004, Building and Sustaining Buyer-Seller
Relationship in Mature Industrial Markets. Journal of Marketing. Vol. 68 pp.63-77
Dubois, A., Pedersen, A-C., 2002, Why Relationships Do Not Fit into Purchasing Portfolio
Models – a comparison between the portfolio and industrial network approaches, p. 35,
European Journal of Purchasing and supply management
Dubois, A., 1998, Organizing Industrial Activities Across Firm Boundaries. Routledge,
London
Ellram, O., Olsen, L., 1997, A portfolio Approach to Supplier Relationships, p. 103,
Industrial Marketing Management
Gelderman and Weele, 2003, Handling Issues and Strategic Direction in Kraljic Purchasing
Portfolio. Journal of Purchasing and Supply management 9, pp.207-216
Kraljic, P 1983, ‘Purchasing Must Become Supply Management’, Harvard Business Review,
Vol. 61, September-October, pp. 109-117
Markowitz, H., 1952, ‘Portfolio Selection’, Journal of Finance, Vol. 7, March pp77-91)
Richardson, G.B., 1972. ‘The Organization of Industry’. The Economic Journal, September,
883–896
Webster, Frederick E., 1972, ‘A General Model for Understanding Organizational Buying
Behavior’ Journal of Marketing. April, 36, 000002 pp.12-19
Wedin, T., 2000. ‘Networks and Demand’. The use of electricity in an industrial process.
Ph.D. Dissertation. Department of Business Studies, Uppsala University
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Website sources
www.heidelbergcement.com/sfrica/en/twigacement/investor_relations/annual_report.htm
www.walnuthillcollege.edu/Instructors/Morrow/documents/07_Marketing.pdf
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