Applying Kraljic's Matrix in Remote Environments

MAASTRICHT SCHOOL OF MANAGEMENT
Application of Kraljics Purchasing Portfolio Matrix

in an Undeveloped Logistics Infrastructure

- The Staatsolie Suriname Case -

By
Dennis R. Mac Donald
(Suriname)

This paper was submitted in partial fulfillment of the requirements for the Masters of Business Administration (MBA)
degree at the Maastricht School of Management (MSM), Maastricht, the Netherlands, November 2006.

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ACKNOWLEDGEMENTS

This research was done with the support of some individuals to whom I am very grateful.

First of all, I want to express my deepest gratitude to my thesis supervisor, dr. Cees J . Gelderman
who helped me through the study with his valuable remarks, encouragement and inspiration. Thank
you Cees it was an honor to have you as my supervisor and for always being available to listen to
me and to guide me to the right direction.

Secondly, special thanks go to all my MBA-intake-II fellow students, especially my thesis team
members Dynaida, J uliette, Meryl and Clifton for their stimulation, valuable remarks and
instructions during the several stages of my research.

Furthermore, I would like to express my gratitude to the research team members at Staatsolie for
their substantial support to this research project. In particular, I would like to thank Peter, Robbin
and Kenneth, also many thanks to my colleague, Duncan for his inspiration and useful instructions.

Thanks to Hans Lim A Po and Ollye Chin A Sen and their administrative supporting team at the
FHR Lim A Po Institute for making this all possible and manageable.

I would also like to thank Iwan Kortram, Finance Director of Staatsolie, for giving me the
opportunity to follow the program for my future career development.

Last but not least, I would like to thank my family, Hortence, Arusha, Xavaira and Silvio for their
inspiration and patience during this process.

Dennis R. Mac Donald
Paramaribo, November 2006

i
ABSTRACT

Portfolio models in purchasing have received large-scale recognition and have gained an increased
degree of adoption, especially in Western Europe (Gelderman, 2003). Kraljic (1983) introduced the
first comprehensive portfolio approach for purchasing and supply management. This approach
includes the construction of a portfolio matrix that classifies products on the basis of two
dimensions: profit impact and supply risk. Purchasing portfolio models, including Kraljics,
have been developed from a point of view of a well-developed industrialized logistics
infrastructure. The buyer-supplier relationships of companies situated in remote areas with an
undeveloped logistics infrastructure, however, are subject to, and often defined by, those (poor)
logistics infrastructures. A poor logistics infrastructure will have an impact on the supply risk, but
the Kraljic approach does not explicitly deal with issues of logistics and (a poor) infrastructure. This
led to the following problem statement, How may Kraljics purchasing portfolio model be used
under conditions of remote suppliers and an undeveloped logistics infrastructure?.

To deal with this problem statement the following four research questions were formulated:
1. Which characteristics of remoteness should be considered when adapting the Kraljic model for
use in remote areas?
2. Which adaptations to the dimensions of the Kraljic matrix are required, when using the Kraljic
approach under conditions of remote suppliers and an undeveloped logistics infrastructure?
3. Which adaptations to the categories of the Kraljic matrix are required when using the Kraljic
4. Which adaptations to the strategic recommendations of the Kraljic matrix are required when
using the Kraljic approach under conditions of remote suppliers and an undeveloped logistics
infrastructure?

The research method started with a literature review that included the research of many subject
areas that are related to purchasing, such as, ABC-analysis, commodity analysis, purchasing
portfolio models, and logistics as well as literature review on the characteristics of remote
environments. The information gained from the literature review formed a framework for the
adaptation of the Kraljic purchasing portfolio matrix for remote environments.
In this study remoteness or a remote environment is assumed to be geographically distant suppliers
where the buyer is located in an environment of poor or undeveloped logistics infrastructure, often
ii
developing countries (Caddick and Dale, 1987 and Fawcett, 2000). The characteristics to consider
for a remote environment are mainly linked to logistical problems and a lack of understanding of
the importance of logistics for the supply chain. The answer to the second research question reveals
that the dimension of profit impact is less dependent on the location of the business; therefore this
dimension does not need to be adapted for a remote environment, while for the supply risk several
factors have been identified that could have an impact on the supply risk dimension. With respect
to adaptations to the categories of the Kraljic matrix, no need was found to adapt these for remote
environments. Therefore, the original four categories, bottleneck, non-critical, leverage, and
strategic quadrants, can be used for remote environments. This study resulted in the addition of two
strategic recommendations to the Kraljic matrix: one strategy is the use of remote purchasing agents
and the other is the use of an advanced logistics management system between buyer and supplier.
Both these strategies are aimed at reducing the supply risk for remote environments.

In conjunction with the result from the literature study an action research method was used to apply
the adapted Kraljic matrix for the State Oil Company of Suriname, Staatsolie, a company that has to
do business within a remote environment.

In order to fill in the matrix and to arrive at the strategic recommendations, a five-step approach as
outlined by Gelderman (2003) was used. The use of this methodology upon a sample of 44
materials or classes of materials at Staatsolie resulted in a current purchasing portfolio matrix with
three main clusters in respectively the non-critical, the leverage and the strategic quadrant. The
portfolio matrix demonstrates that Staatsolie is facing an extreme supply risk with a substantial part
of its items that have a high profit impact, as a result of which it depends only on one or a limited
amount of suppliers for these materials.

Through application of differentiated purchasing strategies, the supply risk can be reduced, resulting
in a much better negotiating position for Staatsolie. The reduced supply risk will protect Staatsolie
against disastrous supply interruptions and unplanned shutdowns of its operations. Due to the
stronger negotiating position Staatsolie can make the most of their potential buying power.

This study made clear that for remote environments adaptations have to be made to the Kraljic
matrix at the supply risk dimension and to the strategic recommendations. Further research is
recommended to gain a deeper understanding of the impact of remote aspects on the Kraljic matrix.
iii

ABBREVIATIONS

BCG Boston Consulting Group
E&P Exploration & Production
HRM Human Resources Management
HSE Health Safety and Environment
ISO International Organization for Standardization
LDC Less Developed Countries
MCC Maintenance Control Center
MMBLS Million Barrels
MW Mega Watt
PEP Production Expansion Program
PPP Purchasing Policy and Procedures

iv
CONTENT

ACKNOWLEDGEMENTS...........................................................................................................i

ABSTRACT.....................................................................................................................................ii

ABBREVIATIONS.......................................................................................................................iv

CHAPTER 1. INTRODUCTION..............................................................................................1
Section 1.1. General.....................................................................................................................1
Section 1.2. Problem Statement and research questions.............................................................2
Section 1.3. Research methods ....................................................................................................3
Section 1.4. Scope and Limitations..............................................................................................4
Section 1.5. Chapter Overview....................................................................................................4
Section 1.6. Summary...................................................................................................................4

CHAPTER 2. LITERATURE REVIEW.................................................................................5
Section 2.1. From Pareto to Kraljic ............................................................................................5
Section 2.2. The Kraljic Purchasing Portfolio Matrix.................................................................8
Section 2.3. Criticisms and Support of the Kraljic Matrix ........................................................16
Section 2.4. Remoteness.............................................................................................................19
Section 2.5. Summary.................................................................................................................21

CHAPTER 3. THE KRALJ IC MATRIX ADAPTED TO REMOTENESS................22
Section 3.1. Adaptations to the Dimensions ..............................................................................22
Section 3.2. Adaptations to the Categories................................................................................24
Section 3.3. Impact on the strategic recommendations .............................................................25
Section 3.4. Summary.................................................................................................................27

CHAPTER 4. PORTFOLIO ANALYSIS WITH THE KRALJ IC MATRIX..............28
Section 4.1. Methodology...........................................................................................................28
Section 4.2. Summary.................................................................................................................31

CHAPTER 5. BUSINESS CONTEXT ..................................................................................33
Section 5.1. Company description .............................................................................................33
Section 5.2. Purchasing Function within Staatsolie..................................................................34
Section 5.3. Inventory Management ..........................................................................................35
Section 5.4. Summary.................................................................................................................36

CHAPTER 6. RESEARCH RESULTS..................................................................................38
Section 6.1. Preparation............................................................................................................38
Section 6.2. Designing and filling in the matrix ........................................................................38
Section 6.3. Interpretation of the results....................................................................................41
Section 6.4. Defining strategic directions..................................................................................44
Section 6.5. Summary.................................................................................................................49
v
CHAPTER 7. CONCLUSIONS AND RECOMMENDATIONS...............................50
Section 7.1. Conclusions........................................................................................................50
Section 7.2. Recommendations ..............................................................................................52

APPENDIX 1: Stages of Purchasing Sophistication, Kraljic 1983..............................53

APPENDIX 2: The Purchasing Portfolio Matrix, Kraljic 1983.....................................54

APPENDIX 3: Organization Structure Staatsolie.............................................................55

APPENDIX 4: Organization Structure Procurement Division Staatsolie...................56

APPENDIX 5: Customer Classes for Materials................................................................57

APPENDIX 6: Commodity Groups (short list)....................................................................58

APPENDIX 7: Material Classes and Products for Supply Risk....................................59

APPENDIX 8: Staatsolies Purchasing Portfolio Matrix (Linear Scale)........................60

APPENDIX 9: Staatsolies Purchasing Portfolio Matrix (Logarithmic Scale)...............61

APPENDIX 10: Strategic Recommendation for Staatsolie Purchasing Portfolio.......62

APPENDIX 11: Staatsolies Improved Purchasing Portfolio Matrix.............................63

BIBLIOGRAPHY:........................................................................................................................64

vi
CHAPTER 1. INTRODUCTION

Section 1.1. General

Portfolio models have been used in strategic planning and marketing, but their application to the
field of purchasing has been limited. This, however, appears to be changing as procurement
management is viewed more and more as being of strategic importance (Nellore and Sderquist,
2000). According to Kraljic (1983), instead of simply monitoring current developments,
management must learn to use these developments to its own advantage. This calls for nothing less
than a total change of perspective: from purchasing which is an operational function, to supply
management which is strategic. The introduction of the Kraljic portfolio approach can be
considered a major breakthrough in the development of professional purchasing (Gelderman and
Van Weele, 2003). Kraljics approach has inspired many academics to undertake further research
into purchasing portfolio models (Canils and Gelderman, 2005).

Obviously, not all products and not all buyer-supplier relationships are to be managed in the same
manner. 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. Shortly after the oil crisis in 1973, he posited that purchasing
must become supply management, advising companies to progress toward more effective supply
management. Kraljic accompanied this advice with a practical portfolio tool for shaping the supply
strategy.

Kraljics categories and strategies recommendations matrix was developed for BASF, a European
chemical multinational, in the early seventies, around 1973, 1974. Kraljic (1983) made a reasonable
case for the usefulness of his portfolio approach by describing the experiences of four large
industrial companies. More recent empirical studies have corroborated the usefulness of the matrix
in practice (e.g. Carter, 1997; Lilliecreutz and Ydreskog, 1999; Gelderman and Van Weele, 2003
and 2005; J ohnson and Wagner, 2004). However, all of these studies have been carried out in
companies that are located in developed countries under conditions of a well-developed
infrastructure.

1
In many developing and former state-regulated countries the logistic infrastructure is poor, customs
and regulations unclear and inefficient, the logistics supply market underdeveloped, and the risk for
crime high (Andersson and Norrman, 2002). These conditions result in relatively high supply risks,
as the number of trustworthy or capable partners is low and the few existing ones enjoy a better
negotiating position. Obviously, for companies located in these environments it is more difficult
and more costly to develop close, productive relationships with their geographically distant
suppliers. The challenge begins with identifying and qualifying capable suppliers in regions of the
world where buyers have little experience (Fawcett, 2000). However, it remains unclear whether the
Kraljic matrix could be applied under such remote conditions. The concept remote conditions
within this study refers to a situation where a company is operating in a country or region where the
logistics infrastructure for the procurement of materials is limited or not well developed.

Section 1.2. Problem Statement and research questions

Purchasing portfolio models, including Kraljics, have been developed from a point of view of well-
developed industrialized logistics infrastructures. The buyer-supplier relationships of companies
situated in remote areas with an undeveloped logistics infrastructure, however, are subject to, and
often defined by, those (poor) logistics infrastructures. Poor logistics infrastructures will influence
lead times and therefore will impact the supply risk. It is clear that an undeveloped logistics
infrastructure should play a significant part in the Kraljic approach. However, the Kraljic approach
does not explicitly deal with issues of logistics and (a poor) infrastructure. This gave rise to the
problem statement for this study:

How may Kraljics purchasing portfolio model be used under conditions of remote suppliers and an
undeveloped logistics infrastructure?

In order to deal with the problem statement, the following research questions were answered by this
study:
1. Which characteristics of remoteness should be considered when adapting the Kraljic model for
use in remote areas?
2. Which adaptations to the dimensions of the Kraljic matrix are required, when using the Kraljic
2
3. Which adaptations to the categories of the Kraljic matrix are required when using the Kraljic
4. Which adaptations to the strategic recommendations of the Kraljic matrix are required when
using the Kraljic approach under conditions of remote suppliers and an undeveloped logistics
infrastructure?

Section 1.3. Research methods

The main objective of this research paper was to identify and describe the application of the Kraljic
purchasing portfolio model to remote areas. To establish a theoretical framework a literature
research was conducted. Based on the literature study, a revised version of the Kraljic approach was
developed, including adjusted dimensions (factors), and strategic recommendations. This new
purchasing portfolio model was tested and refined by means of action research in which the new
model was used in practice. The model was tested and evaluated in a location where the logistics
infrastructure is relatively poor, namely at the State Oil Company of Suriname, Staatsolie. Figure
1.1 provides an overview of the research model.

Purchasing
Portfolio
Theory
Logistics
Management
Theory
Adaptation to
Kraljic Model for
Remote Areas
Conclusions
and
Recommendations
Supply
Management
Remote Areas
Analysis Case Study
Expert Interviews

Figure 1.1. Research Model

3
Section 1.4. Scope and Limitations

The application of the adjusted Kraljic model for remote areas was validated for only one company.
Within the scope of this research paper no attempt was made to validate the framework through a
broader audience. The results of the study should not, therefore, be extrapolated to other companies
and other industries.

Section 1.5. Chapter Overview

This research paper is organized as follows:
Chapter one is an introduction of the research subject regarding purchasing portfolio models and the
characteristics of remote areas.
Chapter two provides an overview of the literature research pertaining to purchasing portfolio
models. In this chapter a detailed overview is given of the use of purchasing portfolio models to
define the different strategies in buyer supplier relations. In addition, the Kraljic purchasing
portfolio matrix is discussed in detail and some logistics constraints for remote areas are outlined.
Chapter three supplies an overview of the adaptations of the Kraljic matrix to remote environments
Chapter four supplies an overview of the research methodology used.
Chapter five describes the business context within which the study was carried out.
Chapter six expounds upon the findings and the analysis
Chapter seven provides the conclusion and recommendations.

Section 1.6. Summary

The present chapter demonstrated the need for adaptation of the Kraljic purchasing portfolio model
for use under conditions of remote suppliers and an undeveloped logistics infrastructure. The
process through which this paper attempted to arrive at such a model was laid down.
4
CHAPTER 2. LITERATURE REVIEW

Section 2.1. From Pareto to Kraljic

2.1.1. Pareto Analysis

For a long while the ABC-analysis or Pareto-analysis was the only tool available for differentiating
between important and less important purchases (Gelderman, 2005). In a Pareto curve items are
placed into one of three classes according to the cumulative number of purchasing orders and their
cumulative value. The A-category contains 20% of the number of orders, which typically accounts
for 80% of the total value. The B-category contains 30% of the items accounting for less than 20%
of the spending. The remaining 50% of the items accounts for less then 2% of the total spending of
the C-category. ABC-analysis is considered to be helpful in situations where the majority of
purchases spend is generated by a limited number of material categories.

ABC-analysis is usually applied to the financial value of the purchasing portfolio, essentially a
volume characteristic. Another volume characteristic is the number of parts, especially important in
discrete production. Instead of a volume dimension, it is also possible to use the cumulative number
of supplies. This classification differentiates suppliers with significant spend from the mass
suppliers with only small purchase volumes (Hartmann et al., 2002).

ABC-analysis concentrates on the financial value of items and ignores the cost of poor quality
(Burt, 1989), performance risk, social risk and other components (Hartmann et al., 2002). In
addition, the ABC-analysis fails to discriminate between the methods which should be used to
obtain different item categories (Steel and Court, 1996). ABC-analysis does not recommend spe-
cific strategies for each category, it merely provides information on the concentration of purchase
spend. It is a classification tool, not a portfolio model, since it does not provide (differentiated)
purchasing and supplier strategies.

2.1.2. Commodity Analysis

Commodity analysis is another example of a classification tool in purchasing (Gelderman, 2005).
This type of analysis divides the total purchasing volume in percentages for all combinations of
5
product groups and principal users. It reveals key users and the commodities that are most
important to them (Bauer, 1977). Commodity analysis identifies critical procurement areas, is
helpful for setting priorities, and provides recommendations with respect to the organization of
purchasing (assignment of responsibilities and centralized or decentralized purchasing). J ust as in
ABC-analysis, commodity analysis should be classified as a classification tool, since it too does not
provide (differentiated) purchasing and supplier strategies. They are both examples of a spend
analysis which is limited to the classification of the items and suppliers according to their financial
value.

2.1.3. Portfolio Analysis

A portfolio refers to a collection of related items. The portfolio concept stresses the importance of
the whole rather than the parts. It reflects the importance for balance in a collection on individual
elements. As a consequence it allows for differentiation and diversification, in our aim for balance
and an optimal use of limited resources. The portfolio concept has it roots in financial investments
in the 1950s. For business purposes, portfolio approaches haven been developed for applications in
investment theory, strategic management, marketing, and purchasing management. In general, the
portfolio concept focuses on the interdependencies among management decisions and emphasizes
an integrated approach (Turnbull, 1990).

According to Ellram and Olson (1997), portfolio models have primarily been used in strategic
decision-making to support resource allocation decisions among strategic business units. Perhaps
the most used, misused and discussed portfolio model is the Boston Consulting Groups (BCG)
growth/share matrix.

Portfolio models have been used in strategic planning and marketing, but their application to the
field of purchasing has been limited. This seems to be changing, however, as procurement
management has become more strategic (Nellore and Sderquist, 2000).

6
2.1.4. Kraljics Comprehensive Portfolio Approach

Kraljic (1983) introduced the first comprehensive portfolio approach for purchasing and supply
management. This approach includes the construction of a portfolio matrix that classifies products
on the basis of two dimensions: profit impact and supply risk with both a low and high end. The
result is a 2x2 matrix and a classification in four categories, figure 2.1 below.
With the help of this matrix, professional purchasers can differentiate between the various items and
supplier relations and choose strategies that are appropriate for each category, thereby effectively
managing suppliers (Nellore and Sderquist, 2000). Quite a number of scholars have introduced
variations on the original Kraljic matrix (e.g. Elliot-Shircore and Steele, 1985; Syson, 1992; Evans
and Hadeler, 1994; Ellram and Olsen, 1997; Gelderman, 2000; Van Weele, 2002). However, the
proposed matrices are very similar to the Kraljic matrix; the models employ practically the same
dimensions, the same categories and the same recommendations (Gelderman and Van Weele,
2005).

Non-Critical
Leverage Strategic
Bottleneck
Supply Risk
Profit Impact
Diversify
Balance
Exploit
Low High
L
o
w
H
i
g
h
Non-Critical
Leverage Strategic
Bottleneck
Supply Risk
Profit Impact
Diversify
Balance
Exploit
Low High
L
o
w
H
i
g
h

Figure 2.1. Kraljics categories and strategic recommendations matrix, source Kraljic (1983)

It is fair to conclude that the Kraljic matrix has become the standard in the field of purchasing
portfolio models (Gelderman, 2003).
7
In the course of time the Kraljic approach entered many textbooks on purchasing and supply
management. Purchasing portfolio models have gained ground in both research and practice
(Nellore and Sderquist, 2000).

The Kraljic portfolio approach can be considered an important breakthrough in the development of
theory in the field of purchasing and supply management. Syson (1992) characterized it as a
powerful tool to be used for diagnostic and prescriptive purposes and that goes far beyond the well-
known, rather simplistic ABC-analysis.

Commenting on purchasing management Ellram and Olson (1997), stated that portfolio models
could be used to improve the allocation of scarce resources by being one method of identifying
which groups of products, suppliers or relationships warrant greater attention than others.

Section 2.2. The Kraljic Purchasing Portfolio Matrix

Section 2.2.1. General

Kraljic (1983) advised managers to guard their firms against damaging supply interruptions and to
deal with continuous technological change and economic growth. In his seminal paper he advised
companies to establish more effective supply management. He proclaimed, purchasing must
become supply management (Kraljic 1983, p. 109). He presented a figure as Exhibit I (see
Appendix 1) that classified the stages of purchasing sophistication within companies. This figure
identified four stages: (1) purchasing management, (2) materials management, (3) sourcing
management, and (4) supply management. Kraljic (1983, p. 111) further argued that supply
management is particularly relevant when the supply market is complex and the importance of
purchasing is high.

Specifically for the fourth stage of purchasing sophistication, supply management, Kraljic (1983)
proposed a four-phase framework for developing supply strategies for single products or product
groups. In the first phase, a company is to classify all its purchased products depending on the
associated profit impact and supply risk into one of four categories: Strategic, Bottleneck, Non-
Critical, and Leverage. Subsequently, the company should weigh the bargaining power of its
suppliers against its own power. At the third phase, the company should position the products that
8
were identified in the first phase as strategic (high profit impact and high supply risk), in a portfolio
matrix. Finally, depending on the companys own strength and the strength of the supply market,
the company is to develop purchasing strategies and action plans for products labeled strategic.
Three general purchasing strategies are recommended: exploitation, in the case of buyer dominance;
balance, in the case of a balanced relationship; and diversification, in the case of supplier
dominance.
In his 1983 article Kraljic introduced a nine-block Purchasing Portfolio Matrix to be used for
strategic items as Exhibit IV (see Appendix 2).

It should be noted that Kraljic focuses on strategic products; for the other item categories,
bottleneck, non-critical, and leverage, Kraljic merely formulated a number of main tasks. Other
scholars have filled this gap (e.g. Van Weele, 2002; Syson, 1992; Elliott-Shircore and Steele, 1985).
They refined the matrix and elaborated on the 'main tasks' for bottleneck, non-critical and leverage
items. In addition, they formulated strategic recommendations, resulting in an overall purchasing
strategy recommendation for each portfolio quadrant (see figure 2.2). This refined matrix is
commonly referred to as Kraljics Purchasing Portfolio Matrix (e.g. Ellram and Olsen, 1997;
Lilliecreutz and Ydreskog, 1999; Van Weele, 2002; Gelderman, 2003), not to be confused with his
original nine-block model.

With the help of the refined Kraljic Purchasing Portfolio Matrix, professional purchasers can
differentiate between the various supplier relations and choose strategies that are appropriate for
each category and thereby effectively manage suppliers (Nellore and Sderquist, 2000).

Supply Risk
Profit Impact
Assure supply
Form partnerships Exploit purchasing power
Ensure Efficient processing
Non-Critical
Leverage Strategic
Bottleneck
Low High
L
o
w
H
i
g
h
Supply Risk
Profit Impact
Assure supply
Form partnerships Exploit purchasing power
Ensure Efficient processing
Non-Critical
Leverage Strategic
Bottleneck
Low High
L
o
w
H
i
g
h

Figure 2.2: The Kraljic Purchasing Portfolio Matrix (modified from Kraljic, 1983, p. 111)
9
Gelderman (2003), has discussed and evaluated Kraljic approach on: dimensions; categories; and
strategic recommendations. This is described in the following sections.

2.2.1.1. Dimensions

a. Theoretical foundations of the Kraljic Purchasing Portfolio Matrix
A generally accepted view on the purchasing function is that it should prevent disruptions in
production of other activities. Some authors describe the general objectives of purchasing and
supply management in terms of the five rights which professional purchasing should achieve in
the acquisition of materials: the right quality, from the right supplier, in the right quantity, at the
right time, and at the right place (Dobler and Burt, 1996). The right supply, the right time and the
right place refer to logistics aspects of supply management. Products should be bought for the right
price, which refers to the commercial and financial aspects of purchasing. An attractive feature of
the portfolio approach is that it encompasses two key variables with respect to these crucial aspects:
profit impact is linked to the commercial requirements, supply risk is related to logistics issues,
amongst others. However, it is not clear why only these particular dimensions are selected for use in
Kraljics portfolio approach. Gelderman (2003) concluded that Kraljics article does not provide
any reference to a theoretical foundation or comprehensive perspective. In his article Kraljic offers
a basic tool for purchasing management, although it is without any reference to literature or
documented evidence. The tool is developed for practical use. The combination of the two
dimensions is to minimize supply vulnerability and make the most of potential buying power
(Kraljic, 1983: 112).

b. Measurement issues
In general, decisions based on portfolio models are proven to be sensitive to the choice of
dimensions, factors and weights. There is a demarcation problem with respect to the measurement
of key variables. What is the exact distinction between high and low supply risk. Ellram and
Olson (1997) emphasized that the weighting of each factor is the most important of the
implementation process, but at the same time very subjective. De Boer (1997) suggested a fully
customized approach: organizations should determine their own criteria as well as their own
specific threshold values. Nellore and Sderquist (2000) pointed out that there is a risk that the
variables used in portfolio analysis might not be accurate proxies for the dimensions they are
suppose to measure.

10
c. Confusion with the first matrix dimensions
According to Gelderman (2003) many authors refer to the Kraljic approach as being a single
portfolio matrix, based on the dimensions strategic importance (or just importance) and
complexity of the supply market, see for instance Kamann (2000), Ellram and Olson (1997), and
Lilliecreutz and Ydreskog (1999). Kraljic himself is partly responsible for this confusion over the
names of the dimensions Gelderman (2003). Before introducing the portfolio approach, Kraljic
(1983: 111) presented a figure in as Exhibit 1 (see Appendix 1) that uses importance of
purchasing and complexity of supply market as dimensions. However, this figure is not part of
the portfolio approach, it does not classify product categories, nor does it provide strategic recom-
mendations. The name of the picture clarifies the purpose of the matrix; the stages of purchasing
sophistication.

2.2.1.2. Categories

a. The focus on one category
Kraljic is concerned about disastrous supply disruptions of vital materials. From this perspective it
is logical that Kraljic should focus on strategic items with a high profit impact and a high supply
risk. The second matrix, presented by Kraljic as Exhibit IV (see Appendix 2), only applies to
strategic items. For the other categories a list is provided merely of main tasks, the required
information and the advised decision level. The conclusion is that these categories are disregarded.
An elaboration for strategies for bottleneck, leverage and non-critical items was offered by Van
Weele in 1992.

b. The role of power and dependence
The fundamental assumption of portfolio models seems to be that differences in power and
dependence between buyer and supplier exist (Canils and Gelderman, 2005). However, Kraljics
approach does not explicitly deal with issues of power and dependence. Some of the strategic
recommendations obviously refer to prevailing power structure (exploitation of power), others do
not. In Kraljics first matrix it is not clear in what way profit impact and supply risk are related
to the relative power position of the buying company. Presumably, the buyer is more powerful than
the supplier in the case of leverage items, while the opposite might be true for bottleneck items. In
the second matrix, for the strategic item categories, the role of power is more clearly defined; a
buyer-supplier relationship can be balanced, buyer-dominated or supplier-dominated. The Kraljic
11
approach deals in a rather implicit way with issues of power and dependence. The application
implies dealing with two matrices without being clear about the role of power and dependence.

2.2.1.3. Strategic Recommendations

(a) The Suppliers side
The Kraljic approach does not explicitly take into account the possible strategies and reactions of
suppliers (Kamann, 2000). Nellore and Sderquist (2000) confirmed that it is imperative for any
portfolio used to indicate the characteristics of the supplier with regard to the specification
generation, the required relationship and required type of specification for a given component.
Unquestionably, the suppliers side should be included in any strategic thinking in the field of
purchasing and supply management. Different solutions have been proposed for this issue, although
it should be said that the Kraljic approach does not imply the neglect on the suppliers side. The
impression might be nourished by Kraljics focus on supply vulnerability, threats of material
scarcity and the situation on supply markets (Kraljic, 1983:109). Lilliecreutz and Ydreskog (1999)
proposed an additional evaluation of suppliers according to three dimensions: performance
assessment, relation characteristics and network position.
The most appropriate approach to adopt with each supplier can be determined by combining the
assessment of the suppliers view with the own purchasing Kraljic matrix. For example, a product
could be termed a strategic or bottleneck item from a purchasing perspective, but the account
categorized by the supplier as nuisance or exploitable; any aggressive or confrontational behaviour
could result in the supplier withdrawing from the situation, leaving the buying company with a
serious problem. Alternatively, should a product be strategic in the Kraljic matrix and also be core
for the supplier, there will be possibilities in forming close relationships and a partnership.

(b) Influencing the power balance: dynamics in the matrix
Lilliecreutz and Ydreskog (1999) stated: strategies that are based solely on Kraljics matrix lack
the dynamics of the power that the suppliers can obtain. They too stressed the importance of taking
the suppliers situation into account. Kempeners and van Weele (1997) pointed at the natural
conflict of interests in buyer-supplier relationships. Both are likely to prefer a dominant power
position due to the attached benefits. As a result, positions in the Kraljic matrix will always be
amendable to the dynamics of buyer-seller relationships. Parties are inclined to seek possibilities for
influencing their relatively powerful position.

12
(c) The nature of strategic recommendations
Gelderman (2003) argued that the strategic recommendations in the Kraljic matrix are quite reactive
in nature. They react and adapt to the prevailing structure of power in buyer-supplier relationships.
It is not clear if and how other positions in the matrix are to be pursued through the implementation
of the recommended main tasks. However, Kraljics Exhibit IV Purchasing Portfolio Matrix
for strategic items is especially designed to develop counter-strategies vis--vis key suppliers
(Kraljic, 1983). By plotting the buying strengths against the strengths of the supply market, three
basic power positions are identified and associated with three different suppliers strategies:
balance, exploit and diversify. It should be noted, however, that the strategies are rather generic by
nature, providing only rough indications for the most appropriate suppliers strategies. Discussing
Kraljic, most publications are limited to his figure with stages of purchasing sophistication shown in
his article as Exhibit I in Appendix 1 with the well-known categories: strategic, leverage, non-
critical and bottleneck. It might be assumed that all strategic products are to be managed by means
of (strategic) partnership. Looking at Kraljics Purchasing Portfolio Matrix for strategic items in
Appendix 2, we must conclude that this was certainly not Kraljics intention.

Section 2.2.2. The Kraljic Matrix with its Strategic Directions

A recent study by Gelderman and Van Weele (2003) paid attention to the experience of purchasing
professionals with the use of the portfolio matrix in practice. On the basis of three in-depth case
studies they found that practitioners distinguish between several separate purchasing strategies
within each portfolio quadrant. Some of these strategies focused on keeping the current position in
the quadrant, while other strategies were directed towards moving to another position. The case
studies revealed that, in addition to Kraljic's theory, experienced practitioners were very aware of
the different choices within each quadrant.
Based on the interviews and the overview of selected strategies, it was concluded that for each
category two different kinds of strategic directions could be distinguished:
1. actions to hold the same positions in the matrix, and
2. actions to pursue other positions in the matrix.

Holding on to a position implicitly means that current circumstances are taken for granted.
Gelderman and Van Weele (2003) observed that a position in the matrix could be accepted for
different reasons, sometimes positive, sometimes referring to a negative choice. A position might be
preferred because a firm is convinced that it is the best position for a certain item. In other cases a
13
position might be accepted, because there are no realistic possibilities for change. The first type of
strategy is of a more active, radical nature. When possible and desirable, other positions in the
matrix are identified and pursued. Figure 2.3 gives an overview of strategic directions for all
categories. If we take a look at the bottleneck and strategic quadrant at the right side of the matrix,
those movements that reduce the supply risk are pursued. In terms of the matrix, this means moving
to the left. Non-critical items are moved upwards; leverage items could be exchanged for strategic
positions.

1
2
3
4
5
6
8
7
9
Maintain strategic partnership
Accept the locked-in partnership
Terminate partnership, find new supplier
Develop a strategic partnership
Exploit buying power
(partner of convenience)
Individual ordering, pursue
Efficient processing
Pooling of requirements
Reduce dependence and risk,
Find other solutions
Accept the dependence, reduce
the negative consequences
Suppl y Ri sk
Low High
L
o
w
H
i
g
h
Pr of i t
Impact
St r at egi c
Bot t l eneck Non-cr i t i cal
Lever age
1
2
3
4
5
6
8
7
9
Terminate partnership, find new supplier
Exploit buying power
Efficient processing
Pooling of requirements
Reduce dependence and risk,
Find other solutions
Suppl y Ri sk
Low High
L
o
w
H
i
g
h
Pr of i t
Impact
St r at egi c
Bot t l eneck Non-cr i t i cal
Lever age

Fig. 2.3. The Kraljic Purchasing Portfolio Matrix with Strategic Directions for all categories

he strategic positions and directions as illustrated in figure 1 can, according to Gelderman and van
Source: Gelderman and Van Weele (2003)
T
Weele (2003), be elaborated as follows:

14
Bottleneck items

(1) Moving to another position: decomplex the product, find a new supplier
Bottleneck items are by definition of low value and high risk. It should be interesting enough,
especially from an economic point of view, to search for other solutions. The solutions must lead to
a lower level of supply risk and a lower level of dependency on a supplier. This means shift towards
the non-critical quadrant.

(2) Holding the position: accept the dependency on a supplier, assurance of supply
If no other options are feasible, the position remains the same.

Non-critical items

(3) Moving to another position: pooling of requirements
Preferably, non-critical items are put together in large quantities, increasing the buying power of the
firm. If necessary, a process of standardization is pursued. The strategic direction is in all cases
towards the leverage quadrant, resulting in lower direct and indirect purchasing costs.

(4) Holding the position: individual ordering efficient processing
Whenever it is not possible to combine the purchasing requirements, the only remaining option is
some type of individual ordering. The purchasing strategy is aimed at reducing the administrative
costs which are connected to administrative activities.

Leverage items

(5) Holding position: exploit buying power, maintain a partnership of convenience
This generally preferred leverage position can be used for a rather aggressive supplier management.
Competitive bidding and short-term contracts are feasible options to exploit the leverage position.

(6) Moving to another position: develop a strategic partnership
Exceptionally, the leverage position is abandoned in search for a more strategic partnership with a
supplier. A cooperative strategy is only pursued, if the supplier involved is willing and capable of
contributing to the competitive advantage of the firm. Such a role is only feasible for
technologically advanced suppliers.

15
Strategic items

(7) Holding the position: maintain a strategic partnership
Long-term relationships with key suppliers should always contribute to the competitive advantage
of the firm. Such relationships include mutual trust, mutual commitment, and an open exchange of
information. A successful partnership can be very valuable for both parties.

(8) Holding the position: accept a locked-in partnership
A position in the strategic quadrant may be due to not chosen, unfavorable conditions (e.g. patents,
monopoly, high switching costs). These circumstances produce an involuntary stay at the strategic
quadrant.

(9) Moving to another position: terminate a partnership, find a new supplier
A suppliers performance may become unacceptable and incorrigible. The firm will have to search,
develop and contract another supplier, while bringing the relationship with the non-performing
supplier to an end.

Section 2.3. Criticisms and Support of the Kraljic Matrix

In contrast to the growing acceptance and usage, purchasing portfolio models have become the
target of severe criticism (Gelderman and Van Weele 2005). Some argue that the complexity of
business decisions does not allow for just simple recommendations. Kraljic (1983) made a
reasonable case for the usefulness of the portfolio approach by describing the experiences of four
large industrial companies.

Section 2.3.1. Support of the Kraljic Matrix

Some case studies indicted that a purchasing portfolio model is a powerful tool for:

Coordinating the sourcing patterns of fairly autonomous strategic business units within
companies, resulting in leverage and synergy (Gelderman and Van Weele 2002).
Differentiating the overall purchasing strategy, with different strategies for different supplier
groups (Lilliecreutz and Ydreskog 1999)
16
Discussing, visualizing and illustrating the possibilities of the development of differentiated
purchasing strategies (Gelderman and Van Weele 2002)

Some other case studies indicated that:
Portfolio approaches can be used to improve the allocation of scarce resources (Olsen and
Ellram 1997)
A portfolio model provides a framework to understand and to focus a companys supply
strategy (Evans and Hadeler 1994)
A portfolio approach can make the difference between an unfocussed, ineffective purchasing
organization and a focused, effective one (Evans and Hadeler 1994), especially for those
companies that have never thought systematically about their procurement expenditure (Cox
1997)
The utilization of this purchasing methodology may lift the purchasing activity out of the
tactical, firefighting mode into a strategic role (Elliot-Shircore and Steele 1985)
It convinces top management of the effective role that purchasing can play in contributing to a
companys profit and success (Carter 1997)

Section 2.3.2. Criticism of the Kraljic Matrix

Purchasing portfolio models have been severely criticized too and there are doubts and questions
with respect to the following measurement issues:

The selection of variables: How could one know whether the most appropriate variables are
being used? (Nellore and Sderquist 2000)
The suppliers side: Why is the suppliers side disregarded in most portfolio models?
(Homburg 1995, Kamann 2000)
The operationalization of dimensions: What is exactly meant by profit impact and supply
risk? (Ramsay 1996)
The measurement of variables: How should the weighting of factors take place? (Olsen and
Ellram 1997)
The line of demarcation: What is the exact difference between high and low supply risk?
(Homburg 1995)
The simplicity of recommendations: How could one deduce strategies from an analysis that is
based on just two dimensions? (Dubois and Pedersen 2002)
17

Other criticisms relate to more fundamental issues and objections:
Portfolio models have a tendency to result in strategies that are independent of each other (Coat,
1983)
Portfolio models do not depict the interdependencies between two or more items in the matrix
(Olsen and Ellram 1997)
From a difference perspective, Cox (1997) condemned the portfolio methodology, because it
does not provide any proactive thinking about what can be done to change the existing reality in
the various supply chains in which companies are involved.

Gelderman and van Weele (2003) reported that experienced users have found a reply to the critique
of portfolio models, stressing that there is no simple, standardized blueprint for the application of
portfolio models. It requires critical thinking and sophistication of the purchasing function.

A more recent study by Gelderman and Van Weele (2005) attempted to provide new insights into
the relationship between purchasing sophistication (or maturity) and the usage of purchasing
portfolio models. Purchasing sophistication can be viewed as a key characteristic of the purchasing
function. The sophistication level of the function determines the extent to which the purchasing
function will be included in strategic management decision process (Pearson and Gritzmacher
1990). In the study of Gelderman and Van Weele (2005), purchasing sophistication is defined as the
level of professionalism of the purchasing function. Gelderman and Van Weele (2005) used the
following characteristics for the development of a purchasing sophistication construct:

Based on a survey of purchasing professionals by Gelderman and Van Weele (2005), the study
provides evidence that purchasing portfolio usage is associated with purchasing sophistication.
Users contrast in a positive way with nonusers of the portfolio, especially on their professionalism
(skills) and their position within their companies. The results of the study imply that top managers
discovering that portfolio management methods have not been endorsed by their purchasing
organizations should question the relative sophistication of the purchasing function. These
companies are 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, i.e., locus that the purchasing domain has within the overall company
organization. The application of purchasing portfolio techniques requires skills extending beyond
18
traditional administrative competences. In addition, the purchasing function needs to have a clear
presence and position within the organizational hierarchy.

Section 2.4. Remoteness

In this study remoteness is limited to geographically distant suppliers where the buyer is located in
a developing country with an environment of poor or undeveloped logistics infrastructure (Caddick
and Dale, 1987 and Fawcett, 2000).

According to Fawcett (2000), it is simply more difficult and more costly to develop close,
productive relationships with geographically distant suppliers. Logistics problems have been
identified as the biggest obstacle in international sourcing. However, neither the purchasing nor the
logistics literature contains much information on logistics considerations in global sourcing.

As stated by Das and Handfield (1997), overseas transactions affect lead times and lead times
variability and carry increase risks of supply interruptions. Other common problems in international
sourcing include buyer-supplier time-zone lags, costs of obtaining post purchase supplier services
and rectifying errors in quality, part count, billing, etc. Add to that the basic difficulty in forming a
meaningful relationship with a supplier separated by oceans, customs, cultures and language.

The challenges many less developed countries (LDCs) currently face in developing their logistics
systems are legacies of the past (Razzaque, 1997). These are fundamental problems inherited not
only from their embryonic trappings but also from lack of understanding of logistics role and
importance. Furthermore, Razzaque stated that a rich and expanding literature on logistics systems
and management in advanced nations is available, in contrast to which the literature on those in
developing nations is only emerging. A survey of 532 publications on logistics management in
major Western journals for the period J anuary 1971 to J une 1995 revealed less than 20
contributions on developing nations.

According to Das and Handfield (1997), a number of studies have examined logistics in various
countries and regions. Studies examining distribution systems in industrialized nations are most
prevalent. Caddick and Dale (1987), Waters and Soman (1989) and Cook (1989) concentrate on
19
developing regions and remote areas. These studies provide useful information on a range of issues
pertaining to international logistics.

In many countries, e.g. developing or formerly state-regulated ones, the logistics infrastructure is
bad, customs and regulations unclear and inefficient, the logistics supply market underdeveloped
and the crime risks are high (Andersson and Norrman, 2002). All this makes the supply risk high, as
the number of trustworthy or capable partners is low and the few existing ones enjoy a better
negotiating position.

Goonatilake (1990) provides useful insights into inventory management practices in developing
countries and contrasts them with those in developed countries. In developing countries inventory
control is lax and bureaucratic with little pressure to meet delivery dates and inventory costs;
infrastructure is poor; many of supply sources are overseas; and there is a shortage of trained
personnel. Thus inventories are used to buffer poor infrastructure and greater uncertainty.

If a country does not have a good base network of dependable transportation, warehousing,
communication and other related facilities, desired configuration of the network by the firm will be
difficult. Literature reveals that many LDCs lack an environment conducive to the development of a
good logistics system Das and Handfield (1997).

According to Razzaque (1997), it is clear that problems of logistics systems and barriers to logistics
development are unique to each country. The provision of links between productivity facilities and
consuming units, which is the fundamental role of logistics, is affected by differences in various
country specific factors such as geographical features, socio-economic and politico-legal systems,
cultural realities, industrial development and resources endowments.

As stated by Svensson (2000), disturbance in the supply chain may be mainly categorized as either
quantitative or qualitative. The causes of quantitative disturbances are events that create a lack of
components and materials for downstream activities in the supply chain, for example: breakdowns
or delays in transportation (i.e. by road or sea) caused by unexpected conditions, bad weather.
Causes of qualitative disturbance are events that lead to deficiencies in components and materials in
the supply chain, for example measurement errors in components, non-functioning articles. Due to
emerging situations suddenly affecting the supply chain, short-term disturbances appear often in the
context of quantitative and qualitative disturbances.
20

To conclude, this section has given the characteristics of remote environments in the supply chain.
These characteristics will be used in the next chapter in connection with the Kraljic matrix. The first
research question Which characteristics of remoteness should be considered when adapting the
Kraljic model for use in remote areas? has therefore been answered.


In this chapter the most common purchasing portfolio models are identified and one of the most
commonly used models, the Kraljic Matrix, is discussed in detail. The strategic directions as set by
Kraljic (1983), as well as other strategies recently published by Gelderman and van Weele (2003)
are also outlined. Some criticism and support on the Kraljic matrix are discussed. Studies by
Gelderman et al (2005) provide evidence that purchasing portfolio usage is associated with
purchasing sophistication. Further detailed analysis is given on the characteristics of remoteness and
especially the logistics problems associated with the remote areas as well as the impact remote areas
have on the supply risk. Remote conditions, as defined in section 2.4, have an impact on the supply
risk. Lead times are affected and due to the logistics constraints there is an increase risk of supply
interruptions. Because of the impact on the supply risk some of the purchasing strategies shall have
to be focused on reducing the risk or look for alternative sources of supply. The information
gathered from the literature, especially the information for remote areas, offers a framework for the
adaptation of the Kraljic matrix to these areas. The next chapter proposes specific adaptations to the
Kraljic matrix to remoteness.

21

CHAPTER 3. THE KRALJIC MATRIX ADAPTED TO REMOTENESS

In this study the characteristics to consider when studying the purchasing function in remote
locations are limited to geographically distant suppliers where the buyer is located in a developing
country with an environment of poor or undeveloped logistics infrastructure.
Purchasing portfolio models, including Kraljics, have been developed from a point of view of a
well-developed industrialized logistics infrastructure. However, for companies situated in remote
areas, as formulated in section 2.4, the supply risk is particularly influenced by the logistics
infrastructure. Kraljic also considers the logistics aspects in his matrix, which is included in the
supply risk dimension, but the impact of logistics in the supply risk was considered minor, a logical
consequence of the fact that his research was done in areas with an industrialized logistics
infrastructure. In the following sections the impact of remoteness on the dimensions and factors, the
categories as well as the impact on strategic recommendations will be discussed.

Section 3.1. Adaptations to the Dimensions

According to Nellore and Sderquist (2000), the rationale behind dimensions is experience-based.
The dimensions as used in the Kraljic 1983 matrix are the profit impact and the supply risk. Poor
logistics infrastructure will negatively influence lead times and therefore will increase the supply
risk. It is clear, therefore, that an undeveloped logistics infrastructure should play a significant part
in the Kraljic approach. However, the Kraljic approach does not explicitly deal with issues of
logistics and infrastructure. The logistics covered by Kraljic does not deal with an undeveloped
logistics infrastructure; it deals with normal practices with respect to the logistics infrastructure.
However, in an undeveloped logistics infrastructure the supply risk is particularly influenced by
remoteness factors. To have a clear view on the influence of the respective factors to the dimensions
of the Kraljic matrix, two tables were generated with respectively factors used by Kraljic and
factors that, according to the findings of the author, are specifically focused on remote
environments.
In table 3.1 the factors assigned by Kraljic to the two dimensions are listed. These factors are the
same used in Kraljics (1983) article.

22
Dimensions Factors

Profit Impact
Linked to commercial requirements
The profit impact of a specific items can be defined
by the following factors:
- Volume purchased and expected growth in demand
- Percentage of total purchase cost
- Impact on product quality
- Business growth

Supply Risk
Linked to logistics issues
The supply risk of a specific items can be defined
- Market Conditions (Availability/scarcity)
- Number of suppliers
- Competitive demand
- Make-or-buy opportunities
- Storage risks
- Substitution possibilities

Table: 3.1. Factors determining the dimensions of the Purchasing Portfolio Matrix, according to Kraljic (1983)

Based on the literature research and findings in section 2.4, the author thought it might make sense
to make a match between the factors originally assigned by Kraljic (1983) and those applicable for
remote environments.
Dimensions Factors Source

Profit Impact
Linked to commercial requirements
The profit impact of a specific items can be defined

- Volume purchased and expected growth in demand
- Percentage of total purchase cost
- Impact on product quality
- Business growth

Supply Risk
Linked to logistics issues
The supply risk of a specific items can be defined

Kraljic
- Market Conditions (Availability/scarcity)
- Number of suppliers
- Competitive demand
- Make-or-buy opportunities
- Storage risks
- Substitution possibilities

- On Time delivery (lead times)
Das and Handfield, 1997
- Cultural differences
- Lack of Logistical knowledge
Razzaque, 1997
Factors influencing the - Supply interruptions (strikes, hurricanes, etc)
Svensson, 2000
Supply Risk in Remote - Duty and Custom Regulations
Andersson and Norm, 2002
Environments - Shortage of qualified personnel
Goonatilake, 1990
- Complicated import procedures
Andersson and Norm, 2002
- Payment conditions
Svensson, 2000
- Logistical related facilities (harbor, roads,
warehouses, communications, etc)

Table 3.2. Factors determining the dimensions of the Purchasing Portfolio Matrix, for Remote Environments
Adapted by the author from Kraljic (1983)
23
In table 3.2 above the combined list with factors assigned originally by Kraljic and those applicable
for remote environments is found. Although this combined list is not a comprehensive one, it might
be noticed that there are quite a number of factors under remote conditions that influence the
supply risk. These factors will definitely increase this supply risk for remote areas. Profit impact
in this respect is practically the same in remote areas and areas with well-developed logistics,
because the factors defining this dimension depend only on the business and economies of scale in
which the company operates. With respect to this dimension, no others factors are found for
specifically remote areas.

The answer to the second research question, Which adaptations to the dimensions of the Kraljic
matrix are required, when using the Kraljic approach under conditions of remote suppliers and an
undeveloped logistics infrastructure? can be summarized as follows: profit impact is less depen-
dent on the location of the business and, therefore, does not have to be adapted for remote locations,
while for supply risk there are more defining factors than Kraljics considers, as illustrated in table
3.2. These additional factors do have an impact on the supply risk dimension as will be demon-
strated in chapter 6.

Section 3.2. Adaptations to the Categories

The four item categories used by Kraljic are strategic, leverage, bottleneck and non-critical. Other
authors such as Van Weele (1992), and Ellram and Olson (1997) who introduced similar models,
use the same categories. As stated previously, Kraljic (1983) focused in his second matrix, see
Appendix 2, on the strategic items, which are characterized by a high profit impact and a high
supply risk. For the other categories a list was provided merely of main tasks, the required
information and the advised decision level. Non-critical and leverage items, at the left side of the
matrix, are the ones most influenced by the increased supply risk due to the remote conditions and,
therefore, some of the leverage and some of the non-critical items will automatically shift to the
right half of the Kraljic matrix and become respectively strategic and bottleneck items for buyers
that have to deal with poor logistics.
To answer the third research question, Which adaptations to the categories of the Kraljic matrix
are required when using the Kraljic approach under conditions of remote suppliers and an
undeveloped logistics infrastructure?, it must be concluded that no new categories to be
24
formulated for remote conditions, but merely a shift will need take place for some items from the
non-critical and leverage categories to respectively the bottleneck and strategic categories.

Section 3.3. Impact on the strategic recommendations

Kraljics (1983) strategy recommendations were primarily meant for strategic items. A recent study
by Gelderman and van Weele (2003), however, based on three in-depth case studies found that
practitioners distinguish between several separate purchasing strategies for each portfolio quadrant.
Some of these strategies focused on keeping the current position in the quadrant, while other
strategies were directed towards moving to another position. The case studies revealed that,
additionally to Kraljic's theory, experienced practitioners were very aware of the different choices
within each quadrant. The strategies as outlined in section 2.2.2 are also applicable for remote areas,
but as the supply risk in a remote environment is mainly influenced by the logistics, the company
must therefore put more efforts in strategies that improve the logistics framework of the supplies.
These strategies are to decrease the supply risk and will be useful for bottleneck and strategic items.
As a result of the literature study it might be concluded that for remote areas primarily the logistics
environment between buyer and supplier influences the strategies for buyer-supplier relationships.

Due to the increased supply risk for remote areas, which is especially associated to the logistics
problems, this paper recommends the following two additional strategies for specifically bottleneck
and strategic items for inclusion in Gelderman and van Weeles adaptation to Kraljics Purchasing
Portfolio Matrix, see fig 3.1 (illustrated as strategy 10 & 11):

- Use of remote purchasing agents; Depending on the purchasing volume a strategy to consider is
the use of a purchasing agent as intermediate between the remote supplier and buyer. As the
purchasing agent will be responsible to supply a major part of buyers materials and supplies he
will be forced to manage the flow of material from suppliers warehouses up to the suppliers
export harbor or even up to buyers import harbor. As a purchasing agent he will also be
responsible to monitor the processing time of the orders and will be able to secure payments to
the supplier, packers, forwarders and third party logistics
1
, which will lead to a fast release of
materials and therefore decrease the supply risk.

1
According to Knemeyer et al (2004), Third Party Logistics is the relationship between a shipper and a third party.
25
- Integrated logistics management system between buyer and supplier; A sophisticated integrated
logistic management system at buyer and supplier or purchasing agent facility will give real-
time information on material flow. Buyer can therefore take pro-active actions whenever any
deviation on processing time might occur.

It is clear that besides these two strategies, the strategies as elaborated by Gelderman and Van
Weele (2003) can also be used for such a remote environment. Likewise the strategies for a remote
environment can also be used in an environment with a well-developed logistics infrastructure.
However, the improvement of the supply risk will be much smaller than in a remote environment.

1
2
3
4
5
6
8
7
9
T erminate partnership, find new supplier
E xploit buying power
E fficient processing
P ooling of requirements
R educe dependence and risk,
F ind other solutions
Su p p l y Ri s k
Low
High
L
o
w
H
i
g
h
Pr o f i t
Im p ac t
St r at eg i c
B o t t l en ec k No n -c r i t i c al
L ev er ag e
10 & 11
Use remote purchasing agent
Use logistics management system
1
2
3
4
5
6
8
7
9
T erminate partnership, find new supplier
E xploit buying power
E fficient processing
P ooling of requirements
R educe dependence and risk,
F ind other solutions
Su p p l y Ri s k
Low
High
L
o
w
H
i
g
h
Pr o f i t
Im p ac t
St r at eg i c
B o t t l en ec k No n -c r i t i c al
L ev er ag e
10 & 11
Use remote purchasing agent
Use logistics management system

Fig 3.1. The Kraljic Purchasing Portfolio Matrix with Strategic Directions for all Categories, adapted for Remoteness
Adapted from: Gelderman and Van Weele (2003)

It is suggested to call this matrix the Kraljic Remote Environment Matrix.

The identification of two additional strategies, namely the Use of remote purchasing agents, and
implementing an Integrated logistics management system between buyer and supplier, give the
26
answer to the forth research question: Which adaptations to the strategic recommendations of the
Kraljic matrix are required when using the Kraljic approach under conditions of remote suppliers
and an undeveloped logistics infrastructure?


In the present chapter the influence of remote conditions on the Kraljic purchasing portfolio matrix
is outlined. Profit impact depends mainly on the scale on which the company operates, and
therefore a remote area has no major impact on this dimension. Because of the complicated logistics
involved for remote areas, supply risk for these areas is defined by more factors than Kraljic
considered, compared to environments with well-developed logistics infrastructures, and therefore
these remote areas are facing an increased supply risk. Remoteness has no impact on the existing
four categories of the matrix, but with respect to the strategy recommendations for the category of
strategic items, two strategies, focusing on improved logistics, have been added to the matrix. In the
next chapter the methodology to fill in the matrix and define the strategic recommendations is
discussed.

27
CHAPTER 4. PORTFOLIO ANALYSIS WITH THE KRALJIC MATRIX

Section 4.1. Methodology

In order to systematically fill in the matrix and to identify the strategic recommendations for a
particular firm or industry, a five-step approach as outlined by Gelderman (2003) will be used. This
five-step approach consists of five successive steps, main questions and issues that have to be
addressed.
1. Preparation
2. Design and filling in the matrix
3. Interpretation of results
4. Strategic actions
5. Evaluation and Follow-up
1. Preparation
2. Design and filling in the matrix
3. Interpretation of results
4. Strategic actions
5. Evaluation and Follow-up

Fig. 4.1 A five-steps approach to portfolio analysis
Source: Gelderman (2003)

Section 4.1.1. The Preparation

The complete process of the portfolio analysis is time consuming, therefore making it imperative to
start adequate preparations. For reasons of support and implementation a cross-functional team is
required, with representatives from all relevant departments and specialist fields. Considerable time
and energy will have to be put in the preparation phase, getting the organization ready for action.
Both the top management and the line management from the various departments of the
organization will have to be convinced of the project. The first step requires the formation of a team
and a clear description of its mission.

The preparation phase will be completed when the following questions are answered:
28
- What is the objective of the analysis?
- What information is available and/or needed?
- What are the limiting conditions in terms of time and money?
- Who will participate in the team?

Section 4.1.2. Designing and filling in the matrix

The next step is designing and filing in the matrix. In designing the matrix the main issues are the
level of aggregation, the selection of dimensions, variables, weights, and the method of
measurement. In determining the level of aggregation there is a wide range of possibilities; these
can vary from individual components to complete assemblies or even suppliers. The first option
might result in positioning of thousands of components, which will lead to an unworkable situation.
As a rule the grouping of items will be necessary, but should take place without unacceptable loss
of information and relevance. Grouping too many items will lead to loss of information. The level
of aggregation might be so high that the outcome of the analysis is far too general and therefore not
useful anymore, so there must be a balance between level of aggregation and detail. Major or
unique purchases should always be classified by commodity groups or type of purchase. If there are
important individual items within a commodity group with significant other values on the two
dimensions of the matrix, those should be taken out and analyzed separately. To conclude, there
should be a balance between relevance and practicability when deciding on the level of aggregation.

The dimensions profit impact and supply risk can be interpreted in many different ways. Kraljic
(1983) stated the following constituting factors:
For profit impact:
Purchase volume; percentage of total purchase value; impact on product quality; and impact on
market growth.

For supply risk:
Availability/scarcity of the product; number of available suppliers; substitution possibilities; risk of
transport and storage; and possibilities to switch between make or buy

However, as recognized by Kraljic, these lists are not exhaustive, other factors could be relevant for
both dimensions. In section 3.1 factors that determines the supply risk dimension for remote
conditions are listed, these are: Lead times; cultural differences; lack of logistics knowledge; duty
29
and custom regulations; supply interruptions (hurricanes, strikes, etc.); shortage of qualified
personnel; complicated import procedures; logistically related facilities.

To avoid misunderstanding and unproductive discussions at a later stage, the team has to come to an
agreement on factors that constitute profit impact and supply risk. Consensus should be found,
preferably within the project team, concerning the use of variables and the way these variables are
measured. In measuring these variables there are three general accepted methods:
- The consensus-based method; this is a trial and error method, requiring each variable to be
discussed in the team until consensus is reached.
- The one-by-one method; a method whereby just one key variable is selected per dimension.
- The weighted factor score method; a well-known method and allows for a complete
customized approach, when deciding on factors, weights, and scores.

Section 4.1.3. Interpretation of the results

Non-experienced portfolio users might under-estimate the interpretation of a filled-in matrix. This
might be in a supposition that the strategic actions can be derived from the matrix in a rather
deterministic way: if bottleneck, then strategy X. The positioning of items in the matrix is the
starting point of the portfolio analysis, not the finishing point. The portfolio user should be focused
on the position of the items and the consequences of these positions. Leading questions are can the
found results be explained? and what do they actually mean? The team is likely to benefit from a
critical comparison between prior, sometimes implicit, expectations and the actual found positions
in the matrix. There might be some disturbing discoveries, challenging the team to develop a more
profound understanding of the state of affaires. It might be revealed that, in contrast to prior beliefs,
there are no leverage items at all, or that all strategic items are positioned at the extreme right side
of the matrix, indicating that the company is facing extreme supply risk. The team should want to
know reasons for such findings and should want to reflect on the gravity of the situation; what is
acceptable and what is not? In addition, the team should take into account detailed information on
the overall business strategy, the situation on the supply market, and the capacity and intentions of
individual suppliers. The preceding considerations form the necessary input for the next step for the
portfolio analysis.

30
Section 4.1.4. Defining strategic actions

The fourth step is dedicated to the selection of strategic responses to the position in the portfolio
matrix for each of the products under consideration. One should always be aware of the fact that
there are various options to consider for each product category in the matrix. The leading question
is: Which improvements are desirable, necessary, and/or feasible? As a rough guideline one
should recognize that there are strategies for holding a position and strategies for moving to another
position. Obviously, changing positions will not always be possible. Whenever specific conditions
are met, it might be possible to switch to other, more favorable matrix positions. In this study the
most common switches within the matrix and the conditions that allow for these movements are
identified.

Section 4.1.5. Evaluation and follow-up

The selected strategies should be translated into day-to-day actions. Without a specific action plan it
is almost certain that nothing will happen, resulting in all the effort of the analysis being in vain.
Obviously, defining the strategy is not the end of the five-step approach. In fulfilling these action
plans the positions of these items in the matrix might change. The positions in a portfolio matrix are
a reflection of the current situation, providing a snapshot in time. Purchasing practitioners will
benefit most if they can compare the matrix with the matrix from a previous period. After a
reasonable amount of time the positions of the items should be assessed again, allowing for control
and additional intervention if needed. Shifts might require adjustments to the strategic actions


To conclude, practitioners might benefit from Geldermans five-step approach to portfolio analysis,
which is based on the observations and interviews during the study and the distinctive features are:
- it identifies the sequence and the substance of the main activities
- the approach is based on insights from experienced portfolio users
- it recognizes different possibilities of designing the matrix and of handling measurement
problems
- it emphasizes that reflection on a (filled) matrix is more important than the matrix as such (the
matrix is the starting point of the analysis, not the finishing point)
31
- it elaborates on the possibilities to formulate differentiated purchasing and supplier strategies,
including a focus on moving items to better positions in the matrix, whenever the conditions for
these strategies switches.

The next chapter describes the business context within which the study is carried out.
32

CHAPTER 5. BUSINESS CONTEXT

In order to test the adjusted Kraljic Remote Environments Matrix, as illustrated in figure 3.1, it was
applied to a real business context, utilizing the Gelderman five-step portfolio analysis. The compa-
ny chosen for this purpose was the State Oil Company, located in Suriname, a country that bears the
remoteness characteristics defined in section 2.4.

Section 5.1. Company description

Staatsolie Maatschappij Suriname NV, State Oil Company of Suriname, was founded on December
13, 1980, as a company with limited liability under Surinamese Law with the right to explore and
produce hydrocarbons in Suriname. The Republic of Suriname owns all shares. Initially, Staatsolie
was merely meant to be an advisory body on behalf of the government, with the principal task of
monitoring the activities of oil companies petroleum activities in Suriname. However, by taking
the development of onshore discoveries into its own hands, an integrated petroleum company was
created that now employs 640 people. The organizational structure of Staatsolie can be found in
Appendix 3. With an estimated turnover for 2006 of more than two hundred and fifty million US
dollars, Staatsolie is a sizeable generator of foreign currency in Suriname.

Staatsolies petroleum operations are concentrated on onshore Suriname. The companys crude
production amounts to 13,000 barrels per day and its remaining recoverable reserves amount to 110
million barrels (MMBLS).

In August 1997, an oil refinery was put into operation with a processing capacity of 7,000 barrels
per day, producing diesel oil, heavy vacuum gas oil, fuel oil, and asphalt bitumen. Most of the
produced petroleum products find their way to the local market, while the surplus is exported to
Caribbean markets. During the last two years, Staatsolie has also expanded into the ship bunkering
business, and is now a noticeable provider of this service to both local and foreign customers.

In line with Staatsolies strategic objective the company has entered into the power generation
market; a 15 MW power plant was put into operations in August 2006.

33
In December 2003, Staatsolies Tout Lui Faut Operations were ISO- certified and in February 2006
the whole company was ISO-certified. Staatsolie gives high priority to a healthy work environment
through implementing procedures necessary to prevent accidents and protect the environment. An
integrated HSE Policy steadily improves efficiency of occupational health and safety policies and
monitors the environmental effects of Staatsolies operations. This policy not only applies to Staats-
olies employees, but also to contractors and stakeholders.

Section 5.2. Purchasing Function within Staatsolie

The purchasing function of Staatsolie is centralized in the Procurement Division, see Appendix 4,
which is responsible for the procurement of all goods and services for the company, and is divided
in the following four departments:
- Operational Goods; for the purchasing of goods for the operational activities
- Operational Services; for the purchasing of all services for the operational activities
- Projects; for the purchasing of goods and services for all project investments
- Stores; for the management of inventory, warehouses and yards.

Some key figures of the purchasing function are listed in table 5.1.
6,700 Items on Stock
7,700 Purchasing orders processed
1000 Total number of suppliers
- Number Local Suppliers 700
- Number Foreign Suppliers 300
US$ 117 mln Purchasing Value Goods & Services
- Purchasing Value Goods US$ 63 mln
- Purchasing Value Services US$ 54 mln
US$ 200 mln Turnover of the Company
6,700 Items on Stock
7,700 Purchasing orders processed
1000 Total number of suppliers
- Number Local Suppliers 700
- Number Foreign Suppliers 300
US$ 117 mln Purchasing Value Goods & Services
- Purchasing Value Goods US$ 63 mln
- Purchasing Value Services US$ 54 mln
US$ 200 mln Turnover of the Company

Table 5.1 Key figures of the purchasing function at Staatsolie (2005)

Staatsolie has a Purchasing Policy and Procedures document (PPP). Purchasing of goods and
services must be in compliance with this document. In the PPP are outlined the purchasing policy of
34
Staatsolie; conflict of interest situations; the responsibilities of the Procurement division and the
relation with their suppliers; procedures for the purchasing of goods and services; and the
authorization table.
The Procurement Division processes annually about 8,000 purchase orders, using the software
application Datastream 7i. Due to the specific field in which Staatsolie operates, more than 90% of
the goods have to be procured from abroad.
The goods ordered abroad are primarily from the United States, where Staatsolie has two
purchasing agents to assist in the purchasing process. Without the purchasing agents it would have
been a much more difficult to monitor the flow of the purchased goods from a remote distance.
Staatsolie also faces limited schedules for ocean freight and airfreight from the USA to Suriname.
Very often, due to limited amount of freight, there is no direct shipment to Suriname, but the freight
is diverted to the island nation of Trinidad& Tobago where transshipment in smaller Suriname-
bound vessels takes place. This has an impact on the lead-times and the inventory levels. Staatsolie
also tries to anticipate the annual hurricane season in the Caribbean and North America, which
tends to disrupt sea freight to Suriname, by increasing the inventory levels and by having materials
for its investment program in house before the start of the season. Another aspect which the
company faces is the frequency of labor strikes at customs. All of these variables result in higher
supply risk for the company and requires much effort from the Procurement Division to meet the
internal customers requirements for on-time delivery.

Section 5.3. Inventory Management

Staatsolies inventory database is managed in the same software application used for purchasing
and the Maintenance Control Centre (MCC) of the company, namely Datastream 7i. At present the
total number of parts held in stock at Staatsolie is 6.700, which have been organized into classes
and groups, see table 5.2. There are three major groups of materials.
6 , 7 0 0 T o t a l P a r t s
3,800 41 71 Spare Parts
2,300 11 40 Suppl i es
600 01 10 Proj ect M ateri al s
P a r t s C l a s s e s D e s c r i p t i o n
6 , 7 0 0 T o t a l P a r t s
3,800 41 71 Spare Parts
2,300 11 40 Suppl i es
600 01 10 Proj ect M ateri al s
P a r t s C l a s s e s D e s c r i p t i o n

Table 5.2. Inventory Classes
35
Each of these major groups is discussed is detail.
roject materials
are materials used for investment projects, also called the Production Expansion
upplies
are consumables, such as electrical materials, gaskets, office supplies, safety items,
pare Parts
constitute the major portion of the inventory, consisting of many types of spare parts,
ection 5.4. Summary
business context of Staatsolies petroleum activities concentrated on

P
Project materials
Program (PEP). Materials for the PEP are not kept as regular stock items, but are bought based on
the project schedules and are temporary kept in stock for the customer. The level of these stocks
and their turnover depends on the amount of projects under execution and on how fast they are
executed. There are about 600 different parts under this group, divided into 10 classes. Due to the
nature of the project materials, most are custom-made; the lead times are therefore very long. For
some of the engineered items the lead times are between four and six months. Staatsolie is the only
company in Suriname that is operating in this field, so it is not possible at all to get materials for the
Production Expansion Program from local sources.

S
Supplies
chemicals, lubricants, and all kind of filters. The turnover on supplies is normally higher than on
spare parts. The supplies are divided into 30 classes, representing about 2,300 different supply items
in the warehouse.

S
Spare Parts
from the smallest items to complete spare systems for refinery and drilling operations. There are a
number of complete pumps that are kept as 'warehouse spares, which can be installed immediately
should there be an emergency or failure involving an installed pump. At present there are a total of
3,800 different parts under this category and they are divided into 31 classes.

S
This chapter describes the
onshore Suriname. The activities of the company are in the field of crude oil exploration and
exploitation, refining, and power generation. The purchasing function is centralized with a
purchasing volume of US$ 117 mln in 2005. The company has an advanced procurement database
in place to manage the complete purchasing process and their inventory database of approximately
6,700 items. Due to the remote environment of Staatsolie and the limited schedules for ocean
36
freight and airfreight to Suriname, Staatsolie is facing a higher supply risk for materials from
abroad and is trying to minimize this supply risk by using purchasing agents and increasing the
inventory levels. In the next chapter, the results will be presented of the application at Staatsolie of
Kraljics purchasing portfolio matrix for remote environments.
37

CHAPTER 6. RESEARCH RESULTS

Section 6.1. Preparation

During the preparation phase a team was formed, which has a clear understanding of the objective
of this research within the company. In this research the main objective was to investigate the
application of the Kraljic purchasing portfolio matrix for remote areas and to validate the adjusted
portfolio matrix within Staatsolie. This will be done according to the methodology as explained in
chapter 4.

Some data used for this research is stored in the procurement database at Staatsolie. A period of
three months was scheduled to do the research with a team consisting of the Procurement Manager,
Procurement Administrator, Industrial Engineer, Procurement External Consultant, and for final
consultation meetings were scheduled with the Production Operations Manager, the Engineering &
Development Manager, and the Manager Technical Services.

Section 6.2. Designing and filling in the matrix

To fill in the matrix, the level of aggregation, the variables, their weight, and the method of
measurement were defined.

Level of aggregation and detail
In the existing database about 6,700 items are grouped in to approximately 70 classes, which have
been set up to serve the internal customers of Staatsolie. Depending on their responsibility, the
authorized customers are able to pick materials from the Stores from one or more classes. If, for
instance, an internal customer is authorized to pick welding equipment & supplies from class 05 at
the Stores (see Appendix 5), this customer will be able to pick any item from this class whether
mechanical, electrical, or any other material related to this class. For this research, Staatsolies
existing material classes were not useful because they focus on internal customers and are not
classified according to commodity groups or suppliers. The first step was to regroup the classes and
classify them according to commodity groups, with approximately the same supply risk, in which
38
materials can be ordered in a package and the focus on the buyer-suppliers relationship is
maintained. The regrouping resulted in 30 commodity groups or classes of which a short list is
illustrated in Appendix 6.
The above-regrouped classes are stock items, but also materials relating to the annual production
expansion program are considered, given that these materials represent a major part of the annual
investments and therefore have the biggest annual profit impact for Staatsolie.

Due to the limited timeframe only 40 products and/or classes were selected for this research. To
show both stock items as well as items from the annual production expansion program in the
matrix, it was decided to take 20 items from the list of commodity groups with the highest turnover
and 20 items from the production expansion program with highest profit impact. The commodity
groups as illustrated in Appendix 6 each represent a very large amount of materials and were too
many to investigate, so a second filter was applied to the selected 20 classes by taking 3 items per
class with the highest turnover value.

To summarize, the following selection was applied:
In Stock
6.700 line items
70 customer classes
Sample to investigate
40 groups and items
Regrouped in to 30
commodity groups
Select 20 commodity
groups with highest
turnover value
Select 3 items per
commodity group with
highest turnover value
Annual Production
Expansion Program
60 items
Select 20 items with
highest value
L
Kraljic Matrix
B N
S
For Remote Environments

Fig 6.0. Selection Process

Four items in the selected commodity groups were separated from their class as these had a
different supply risk or could not be ordered at a single supplier. The overall result is a list of 44
classes and/or items for investigation.

Determining the variables and their weight
For both dimensions of the Kraljic matrix, profit impact and supply risk, the factors and their
weight for the 44 selected classes/items needed to be determined. With respect to profit impact it
was decided to take the purchase price of the items and project these in the matrix. The supply risk
39
under remote conditions, as summarized in section 3.4, impact all imported materials. Given that
more than 90% of the materials are imported, the supply risk on these materials will have a higher
weight than materials purchased on the local market. The factors used for supply risk for this
research were the number of suppliers, on-time delivery, market conditions, and the availability of
substitutes.

Filling in the matrix
In order not to lose too much detail it was not possible for this research, to group too many items
together. Per class a maximum of three items was grouped. In defining the groups it was necessary
to know what materials could be ordered together and would also have approximately the same
supply risk. Finally, some items were left ungrouped. The grouping resulted in a total of 44 classes
and/or ungrouped items, which can be found in Appendix 7.

Finding the values on the profit impact axis was rather straightforward, since the purchased value
was the only factor. All purchased value information was available in the procurement database.
For ungrouped items the total value of annual consumption was plotted in the matrix and for the
classes the sum of the respective items per class.

Determining the supply risk was much more time consuming, because there are many variables
determining this dimension. The consensus-based method as described in section 4.2 was used; in
accordance with this is a trial- and error method each class/item was discussed in the team until
consensus was reached. For the factors number of suppliers, on-time delivery, and market
conditions a Likert scale from 1 to 5 was used while for substitutes available the category Yes
or No could be selected. With respect to number of suppliers the information available in the
database was used. The factor on-time delivery could primarily also be found in the database,
although for some items it was not so easy because not all required information was in the database.
By means of this factor it was possible to determine whether or not the products were delivered
according to the agreed delivery schedule. There were only three items boiler parts, airboats and
wooden poles where the on-time delivery was very poor, which resulted in a score of 1. The factor
market conditions gave a reflection of the actual market situation on the supply and demand of the
items. If the supply was excellent and met any demand, the score for market conditions was VG
or very good. In situations where the supply market did not meet the demand at all, the score was
VB, meaning very poor. The last variable or factor for the supply risk dimension indicates
whether or not a substitute is readily available for the product and could be used without any major
40
implication or adjustment on the operations. For each class or item the team members filled in his
results and, based on the available data and outcomes, and after in-depth discussions, the team
reached a common understanding per class or item. When Yes was selected for the factor
substitutes available it was much easier to arrive to the final supply risk because the agreed
average figure of the three Likert scales could be used as reference. If no substitutes are available
the impact on the final supply risk depends on the respective values in the three Likert scales. If for
instance there is only one supplier and there is no substitute available for the item, the final supply
risk will be much higher than in the case where there are more suppliers with the same product on
the market. All the positions were mutually agreed upon in the team.

Section 6.3. Interpretation of the results

After classification and discussion, the profit impact and supply risk for all collected items or
classes was determined and filled in the matrix. Details of the items and the respective scores can be
found in Appendix 7. The final supply risk in Appendix 7 had a scale ranging from very low to very
high. Four items among the 44 selected had a medium supply risk and should be positioned on the
middle vertical axis of the matrix but will give difficulties in defining the strategies. For these
items, in case there is no substitute available, the position in the matrix is in the right section
because of the increased supply risk.
0
500.000
1000.000
400.000
100.000
200.000
300.000
900.000
600.000
700.000
800.000
Leverage Products
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Supply Risk Low High
Non-critical Products

Figure 6.1. Staatsolies Purchasing Portfolio Matrix (Linear Scale)
41
The values on the profit impact dimension axis in fig. 6.1 above, are between a view hundred US$
and US$ 1.8 mln. Since only 3 items are reaching a value above the US$ 1.0 mln sign and most
other items are far below, the range on the linear scale varied between 0 and 1 mln US$.

Some details on the items and/or classes could be found in on Appendix 8, figure A. Because there
were so many low value items in the non-critical quadrant it was not possible to position the items
with their respective product name or class on the right scale. In figure B, the second matrix on
Appendix 8, which is the same as fig. 6.1, the product names have been left out and the products
could be projected on the right position in the matrix.

Using a linear scale as in fig. 6.1 means that more than 85% of the items are positioned in the lower
section of the matrix and does give a representative projection of the Staatsolies low a high
profit impact. Plotting the results with the data of the profit impact dimension on a logarithmic
scale gives a much better distribution of the items. On a logarithmic scale the limit for a low profit
impact ends at US$ 100.000 which is a more acceptable value, since the company is using within
the frame work of its ISO 9001:2000 certification a value above US$ 100.000 as medium to high
impact on its operations.
100.000
1000.000
56.000
30.000
18.000
10.000
560.000
300.000
180.000
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Leverage Products

Figure 6.2. Staatsolies Purchasing Portfolio Matrix (Logarithmic Scale)

With the logarithmic profit impact axis 24 items are positioned in the leverage and strategic
quadrants and the other 20 items in the non-critical and bottleneck quadrants. The positions of the
42
items as illustrated in figure 6.2 give an indication of the actual situation of procuring materials at
Staatsolie and the associated profit impact and supply risk.
Keeping the objective of this research in mind and the Kraljic portfolio theory, focus was placed on
the validation of the fourth research question Which adaptations to the strategic recommendations
of the Kraljic matrix are required when using the Kraljic approach under conditions of remote
suppliers and an undeveloped logistics infrastructure?

By observing the actual position of the products in the matrix in figure 6.3 it can be concluded that
there are three clusters of items; The first cluster is found in the non-critical quadrant and consists
of items with a low profit impact and very low supply risk. The supply risk here is very low,
because of the large number of suppliers and/or alternative products. Without a good purchasing
strategy, the high number of low value items can increase the purchasing cost of the company.
100.000
1000.000
56.000
30.000
18.000
10.000
560.000
300.000
180.000
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Leverage Products

Figure 6.3. Staatsolies Purchasing Portfolio Matrix, Clusters

The second cluster is found in the leverage quadrant and consists of items with a high profit impact
and a medium supply risk. Almost all items are positioned in the right section, implying that for
most items in this section the company still faces certain problems with the supply, which is a result
of the remote conditions in which the company operates. Special attention should be given to the
logistics in this quadrant. Finally, the third cluster is found in the strategic quadrant and consists of
items with medium to high profit impacts and an extreme supply risk.

43
Another way to read the matrix is to look at the total value of the items in each quadrant as
illustrated in table 6.1. The strategic quadrant with 32% of the items represents the biggest profit
impact, namely US$ 8,565,000 or 72% of the total profit impact of the matrix.
Quadrant Items % %
Bottleneck 3 7 68,000 0
Non-critical 17 38 544,000 5
Leverage 10 23 2,699,000 23
Strategic 14 32 8,565,000 72
Total 44 100 11,876,000 100
Profi t Impact ($)

Table 6.1: The actual profit impacts in the Kraljic quadrants

The conclusion is that the company is facing a very high supply risk with the biggest part of its
profit depending on a limited amount of suppliers. The 14 items in the strategic quadrant can place
the company in a difficult negotiating position if the companys strength is low compared to the
suppliers strength. Especially when focusing on the field in which the company operates with an
increase in demand on products related to the oil industry. As a relatively small company it is,
therefore, necessary to decrease the number of strategic items and move to the leverage quadrant.

Section 6.4. Defining strategic directions

Karljic (1983) defined a set of generic strategies and Gelderman et al (2003) elaborated on these
strategies arriving at a larger number of strategies, by taking into account the different specific
conditions and circumstances. A distinction was made between strategies aimed at switching to
another position and strategies aimed at staying in the same category. The first type of strategy is
one of a more pro-active nature, while the second type is of a more re-active nature. Obviously,
moving in the matrix is not always possible or desirable. In chapter 3, the author introduced the
Kraljic Remote Environments Matrix as figure 3.1. This figure with the different purchasing
strategies, including those formulated by the author for remote environments, is illustrated for the
Staatsolie case as figure 6.4 in this chapter. In figure 6.4 the actual positions of the products are also
plotted in the matrix. All the items in the respective quadrants can be assessed by these different
strategies. In assessing the positions in the matrix and defining the strategic actions, attention
should be paid to the sector in which in company operates, the oil sector, and the volatility of the
market for some materials in this sector.
44
Reducing the supply risk will lead to a lower dependency on the supplier. Exceptionally, the
leverage position is abandoned in search for a more strategic partnership with a supplier. This is
only pursued if the supplier involved is willing and capable of contributing to the competitive
advantage of the company and is only feasible for technologically advanced suppliers. When a
partnership is not contributing, the company has to develop and contract another supplier, while
bringing the relationship with the non-performing supplier to an end.
The use of purchasing agents and/or an integrated logistics management system between buyer and
supplier will improve the logistics constraints and will reduce the supply risk for all items to be
imported directly by the company. This strategy is, therefore, not for a specific quadrant but
applicable to all directly imported items in the matrix, although it will have the biggest impact on
strategic and bottleneck items.

100.000
1000.000
56.000
30.000
18.000
10.000
560.000
300.000
180.000
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Leverage Products
Exploit Buying Power
Reduce Purchasing
costs
Keep partnership
if desirable
Keep extra stock
Long term contracts
P
o
o
l
i
n
g
Start Partnership
Find new supplier(s)
Find alternatives, change design
Use Purchasing Agents
Use Integrated logistics mngt System
= Strategy to Improve position = Strategy when holding position
Accept locked-in
partnership

Figure 6.4. Staatsolies Actual Purchasing Portfolio Matrix (with Differentiated Purchasing Strategies)

45
To improve the positions in the matrix the next assessment was done:
- analyze the design or process to find out whether improving the position of bottleneck and
strategic items is possible;
- define the strategic purchasing actions when the items hold their position deliberately or when
improvement is not possible;
- analyze if non-critical products can be pooled;
- determine if standardization can be applied, which could result in reducing the number of
suppliers.
- analyze the impact on the use of purchasing agents and/or an integrated logistics management
system

A summary of the strategic recommendation for Staatsolie is found in appendix 10.

Strategic products

In the portfolio matrix 14 items are positioned in the strategic quadrant. In four cases reducing the
supply risk is hardly possible and a strategic partnership can contribute to the competitive
advantage. A single supplier delivers the drive heads and the lead-time is approximately six
months. The tubing anchors are custom-made by only one supplier with a lead-time of three
months, while the market conditions for chemicals is fair but supplied by only two suppliers. The
logistics for these chemicals are very complicated, since due to strict customs regulation in the
United States for chemicals, it is not always predictable what kind of delay can occur. It is therefore
unavoidable to have a good logistics management system with the supplier in place to monitor the
flow of this product. A close involvement of the purchasing agent in this process can also lead to a
reduced supply risk.
By qualifying other suppliers and/or changing some specifications, six items can move to the
leverage quadrant. With respect to fill sand and shell sand the company already has started up a
process to identify new suppliers and have a tender among them. It is expected that this will not
only lead to a considerable reduction in the supply risk but it can also reduce the profit impact. For
casings and tubing the company must consider changing to other, more common, dimensions. In
the case of safety shoes, although substitutes are available, the company has standardized on a
certain brand were the market conditions are bad. It is, therefore, required to change to another
brand that will immediately lead to a reduced supply risk. In the actual situation the supply risk of
safety shoes is slightly improved by the involvement of the purchasing agent. The market
46
conditions for the Amka cables are bad because of a high demand. These cables are procured from
Europe with a very limited freight schedule to Suriname. Looking for other suppliers and/or
alternatives can improve the position in the matrix considerable.

Leverage products

The leverage quadrant is the most favorable position in the matrix because of the number of
suppliers and the good market conditions. The strategy is to bargain the best deal and switch
between suppliers if a better deal can be achieved. The supply risk of most of the products in this
quadrant can be improved by changing the specification of the products to meet the development in
the industry.

Non-Critical Products

The main strategy for non-critical products is to pool and to standardize. Some items can be pooled
and placed in supply agreements to improve the efficiency of the purchasing process. Where
possible the company must consider modifying the specifications to meet specific standards and
increasing the buying volume and improving the purchasing power. Another strategy to decrease
the purchasing cost is to use a Low Value order process and then increase the stock level for
products that have to be imported.

Bottleneck products

Bottleneck items cause numerous problems and risks. For the bottleneck products with a very low
profit impact, the stock levels should be increased; this could be the case for nitrogen and boiler
parts. If possible, the items should be moved to the non-critical quadrant where the supply risk is
much lower. If there are products in the top section of this quadrant, it is advisable to have an
agreement with the supplier to secure deliveries.

47
When the above-mentioned strategies are applied the improved matrix will be as illustrated in
figure 6.5, with a higher concentration of items in the leverage quadrant.

100.000
1000.000
56.000
30.000
18.000
10.000
560.000
300.000
180.000
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Leverage Products

Fig. 6.5. Staatsolies Improved Purchasing Portfolio Matrix

The profit impact in the respective quadrants of the improved matrix will be as follows:
Quadrant Items % %
Bottleneck 2 5 44,000 0
Non-critical 15 34 380,000 3
Leverage 20 45 9,052,000 77
Strategic 7 16 2,400,000 20
Total 44 100 11,876,000 100
Profi t Impact ($)

Table 6.2. The profit impact in the improved matrix

Because of the high number and value of items in the leverage quadrant, the company will have a
much better negotiating position against the supplier. About 77% of its profit impact can be
tendered among selected suppliers that will, among others, result in competitive prices and better
delivery conditions.

48


In this chapter the purchasing portfolio analysis was carried out for a total of 44 items and/or
classes. The positioning of items in the Kraljic matrix for remote environments resulted in three
major clusters in respectively the non-critical, the leverage, and the strategic quadrant.

In the current situation Staatsolie is facing an extreme supply risk with a substantial part of its
strategic materials. By applying differentiated purchasing strategies Staatsolie can reduce the supply
risk for some important items and improve its negotiating position against the suppliers.
Implementing the two remote purchasing strategies will reduce the supply risk for almost all
materials directly imported by Staatsolie.

Comparing the current portfolio with the improved purchasing portfolio matrix for remote areas, the
following improvements are identified:
- Reduction of the material classes by pooling
- Reduced number of bottleneck items from 3 to 2 and secured delivery of these bottleneck items
- Reduced number of strategic items from 14 to 7 and partnerships for these items
- Increased value in the leverage quadrant from 23% to 77% of the total purchase value.

The increased value of the leverage quadrant from 23% to 77% of the total purchase value, results
in more buying power for Staatsolie. With more buying power better agreements can be made,
resulting in overall reduced costs. Also, the reduced number of suppliers by pooling and
standardization of non-critical items leads to a more efficient purchasing process.

The reposition of bottleneck and strategic items by reducing the supply risk leads to less
dependency. The number of items with a high supply risk will be reduced from 17 to 9. For the
remaining items the risk should be covered by strategic partnerships, contracts securing delivery
and extra stock.

49

CHAPTER 7. CONCLUSIONS AND RECOMMENDATIONS

Section 7.1. Conclusions

Purchasing portfolio models, including Kraljics, have been developed from the point of view of a
well-developed industrialized logistics infrastructure. Many countries, especially less developed
countries, are facing an undeveloped logistics infrastructure that has a major negative impact on
their supply risk. To investigate the use of the Kraljic matrix in an undeveloped logistics infrastruc-
ture, the following problem statement was formulated How may Kraljics purchasing portfolio
model be used under conditions of remote suppliers and an undeveloped logistics infrastructure?.
This case study at Staatsolie reveals some new insights in the use of the purchasing portfolio
approach for remote areas in an undeveloped logistics infrastructure.

The first research question, Which characteristics of remoteness should be considered when
adapting the Kraljic model for use in remote areas?, revealed that remote areas primarily are
facing major logistics constraints that have an impact on the supply risk.

The second research question, Which adaptations to the dimensions of the Kraljic matrix are
required, when using the Kraljic approach under conditions of remote suppliers and an
undeveloped logistics infrastructure?, has resulted in additional factors for the supply risk
dimension. In remote areas the following factors have an impact on the supply risk dimension: on-
time delivery, cultural differences, lack of logistical knowledge, supply interruptions due to strikes
and hurricanes, duty and custom regulations, payment conditions, and logistically related facilities.
With respect to the profit impact no adaptations are needed for remote environments, since this
dimension is hardly influenced in these environments.

The research to the third research question, Which adaptations to the categories of the Kraljic
matrix are required when using the Kraljic approach under conditions of remote suppliers and an
undeveloped logistics infrastructure?, has not led to any new categories for remote areas. Thus,
the same categories are used for remote areas.

50
Two additional strategies have been formulated for remote environments, in particular, the use of
purchasing agents and the use of an integrated logistics management system between buyer and
supplier. By means of these new strategies the forth research question, Which adaptations to the
strategic recommendations of the Kraljic matrix are required when using the Kraljic approach
under conditions of remote suppliers and an undeveloped logistics infrastructure?, was answered.

Implementing the differentiated purchasing strategies for remote environments for Staatsolie will
significantly improve its purchasing portfolio. The following improvements can be achieved:
- For some bottleneck items a design change can decrease the supply risk of the items.
- The pooling of non-critical items and the use of supply agreements will reduce the number of
suppliers and the purchasing costs.
- By implementing the desired strategies for the strategic items, some of these items will shift
from the strategic to the leverage quadrant, which will improve Staatsolies negotiating position,
will reduce the supply risk and the dependency on suppliers.
- An increased volume of items in the leverage quadrant will result in more buying power for
Staatsolie. With more buying power better agreements can be made, resulting in a lower cost
price.
- The reduced supply risk will protect Staatsolie against disastrous supply interruptions and
unplanned shutdowns of its operations.
- Because of the improved negotiating position, especially for the items moved towards the
leverage quadrant, Staatsolie may reduce the purchasing costs and can have competitive bids
that will finally reduce its profit impact.

Not only Staatsolie but also other companies in Suriname and in other remote environments can
benefit from the results of this study by implementing the purchasing strategies as formulated in the
Kraljic Matrix for Remote Environments.

The analysis of the purchasing portfolio and the positions of the items in the matrix as well as the
implementation of the strategic actions is a continuous process to be re-evaluated periodically.
51

Section 7.2. Recommendations

This study has revealed that the supply risk dimension of Kraljics purchasing portfolio matrix
needs some adaptation when used in remote environments. Two additional strategies were
formulated to use the matrix in remote environments.

The use of the adapted matrix the Kraljic Remote Environments Matrix - seems to be a very
useful tool for companies operating in an environment with an undeveloped logistics infrastructure,
it is therefore recommended to position the other classes and products of Staatsolie in the adapted
matrix. This will give Staatsolie enough tools to adapt differentiated purchasing strategies,
especially the two strategies for remote environments, and allow Staatsolie to improve its position
against the suppliers that will reduce the supply risk.

In order to gain deeper understanding on this topic it is also recommended to expand the research
on logistics management in remote environments, because, compared to advanced nations there is a
big lack on literature for those environments. The results from the expanded research can be used to
better define the supply risk for the remote environments and the impact on the Kraljic matrix.
52
APPENDIX 1: Stages of Purchasing Sophistication, Kraljic 1983

EXHIBIT I Stages of Purchasing Sophistication

II
Materials
management

Procurement focus
Leverage items
(e.g., electric motors,
heating oil, EDP
hardware)

Time horizon
Varied, typically
12 to 24 months

Items purchased
Mix of commodities
IV
Supply
management

Procurement focus
Strategic items
(e.g., benzol
cyclohexane, scarce
metals, high-value
components)

Time horizon
Up to ten years;
governed by long-term
strategic impact (risk
and contract mix)

Importance of
purchasing

Criteria:
Cost of
materials/total
costs, value-
added profile,
profitability
profile, etc.

Key performance
criteria
Cost / price and
materials
flow management

Typical Sources
Multiple suppliers,
chieffy local
and specified materials

Supply
Abundant

Decision Authority
Mainly decentralized

Key performance
criteria
Long-term availability

Typical Sources
Established global
suppliers

Items purchased
Scarce and/or high-
value materials

Supply
Natural scarcity

Decision Authority
Centralized

I
Purchasing
management

Procurement focus
Noncritical items
(e.g., steel rods, coal,
office supplies)

Time horizon
Limited; normally
12 months or less

Items purchased
III
Sourcing
management

Procurement focus
Bottleneck items
(e.g., electronic parts,
catalyst materials,
outside services)

Time horizon
Variable, depending on
availability vs. short-
term flexibility-trade-
offs

Items purchased

Key performance
criteria
Functional efficiency

Typical Sources
Establish local suppliers

Commodities, some
specified materials

Supply
Abundant

Decision Authority
Decentralized
Key performance
criteria
Cost management and
reliable short-term
sourcing

Typical Sources
Global, predominantly
new suppliers with new
technology
Mainly specialized
materials

Supply
Production-based
scarcity

Decision Authority
Decentralized but
centrally coordinated

Low

High

Complexity of supply market

Criteria:
Supply monopoly or oligopoly conditions, pace of
technological advance, entry barriers, logistics
costs and complexity, etc.

53
APPENDIX 2: The Purchasing Portfolio Matrix, Kraljic 1983

EXHIBIT IV The Purchasing Portfolio Matrix

Company
strength

Low Medium High
Supply market strength

Exploit

Balance

Diversify

54
APPENDIX 3: Organization Structure Staatsolie

HEALTH, SAFETY
ENVIRONMENT
PUBLIC RELATIONS
QUALITY CORPORATE PLANNING
HUMAN RESOURCES
MANAGEMENT
E & P CONTRACTS
EXPLORATION &
FIELD EVALUATION
PRODUCTION
TECHNICAL SERVICES
DIRECTORATE
EXPLORATION & PRODUCTION
REFINERY OPERATIONS
MARKETING
ENGINEERING & DRILLING
DIRECTORATE
REFINING & MARKETING
CONTROLLING
FINANCE ADMINISTRATION
INFORMATION COMMUNICATION
TECHNOLOGY
PROCUREMENT
TREASURY
DIRECTORATE
FINANCE
MANAGING DIRECTOR

STAATSOLIE, HRM: 27 J ANUARY 2006

55

APPENDIX 4: Organization Structure Procurement Division Staatsolie

EXPEDITOR ADMINISTRATIVE ASSISTANT II
PLANNING & CONTROL OFFICER
BUYER
PURCHASING ASSISTANT I
PURCHASING ASSISTANT II
OPERATIONAL GOODS
PROCUREMENT ADMINISTRATOR
STORES ASSISTANT I
STORES ASSISTANT II
STORES CLERK
STORES SUPERVISOR
Saramacca Opeartions
STORES ASSISTANT I
STORES ASSISTANT II
STORES SUPERVISOR
TLF Operations
STORES
PROJ ECTS
OPERATIONAL SERVICES
PROCUREMENT MANAGER
FINANCE DIRECTOR

STAATSOLIE, HRM: 24 NOVEMBER 2005

56
APPENDIX 5: Customer Classes for Materials

St ock nr. Short descri pt i on
Cl ass 01 Inf rast ruct ure
15424 Sand, Shell
15423 Sand, fill-up
Cl ass 02 Wel l mat eri al s
18473 Screen duragrip tell tale
5130 Tubinghead Huber HFCS for 2-3/8" tubing
80067 Calcium chloride bags/50 lbs
15496 Potassium chloride bags/50lbs
80158 Pipe 3-1/2" coated
Cl ass 04 El ect ri cal mat eri al s
10024 Isolator Bell 13.2KV
10238 Cable Power Overhead (Azusa), on reels of 12000Ft
12758 Steunen gebogen HS 12.4 kV
16712 Anchor screw triple helic
80075 Cable AMKA T 3x70+50 U/L per meter
12015 Bolt with nut M12x30mm electrolytically galvanized
Cl ass 05 Wel l equi pment & suppl i es
15061 BOP Huber 2-1/2"
15494 Motor electric 10 HP 460V, 3ph. TEFC
17210 Stator kit Moyno 20N095
18538 PUP SUB 2-7/8" x 4"
5254 Pony Rod 3/4x6
Cl ass 14 Pai nt & pai nt suppl i es
17462 Paint finish industrial green
3441 Thinner multipurpose
3461 Brush paint flat 3"
9090 Paint primer red metal
Cl ass 16 Pi pe const ruct i on
16815 Pipe black, 1-1/4"
5286 Pipe black 3/4" sch 40
5304 Pipe galvanized 2"
8254 Pipe 1-1/4"
Cl ass 53 El ect ri c power equi pment
10787 Fuse time delay
12363 Cable VMVK 4x10
15416 Relay overload 3 phase 9-18A
18306 Wooden Poles
80250 Filter fuel element
Cl ass 60 Engi nes Cat erpi l l ar
10813 Filter element oil p/n 1R0714
10861 Starter 24V
11473 Indicator oil pressure
15572 Oil gas engine Caterpillar
15589 Pump water remanufactured
Cl ass 71 Int er-changeabl e suppl i es
10034 Bearing roller
16038 Filter hydraulic
17102 Bearing main
9240 Bearing ball SKF 6209
57

APPENDIX 6: Commodity Groups (short list)

AU - Automotive GA - Gases industrial PT - Piping Tools
BR - Bearings GS - Gasketing PU - Pumps and parts
CS - Chemicals HT - Heaters S&F - Steam & Fluid control
DCS - Process computer TLF IN - Instrumentation SA - Safety & Sanitary
DR - Drilling parts LA - Laboratory suppl & chem. SC - Steel structural
DT - Drilling tools LU - Lubrication ST - Small tools and supplies
EL - Electrical OF - Office supplies TE - Telecommunication
EX - Excavators PA - Paint WL - Welding
FA - Fasteners PI - Piping WS - Well supplies
FE - Filters lube oil PS - Piping Supplies WM - Well materials
Descripti on Class
Coolant radiator AU
Injector assy AU
Filter fuel Vamar 20911 AU
Battery 100 AH maintenance free AU
Bearing ball SKF-6309-2ZC3 BR
Bearing cylindrical SKF-NU2212C3 BR
Bearing angular contact SKF7207 BEP BR
Ultrion Nalco 8157 CS
Demulsifier Champion J XZ-1814 CS
Diesel ignition improver Naltene EC5308A CS
Conn. Anit for DSA1 130 DSTN N001 DCS
Shaft Kelly Drum DR
Extension piston rod DR
Valve hydraulic DR
Slip driall collar 4-3/4" DT
Compound thread pipedope DT
Blade Underreamer Drag type 4-3/4" OD Body x 2-7/8" API DT
Motor electric 10 HP 460V, 3ph. TEFC EL
Cable AMKA-T 3x70+50 U/L per meter EL
Mast bruinhart 9 & 12 M EL
Filter Oil FE
Filter fuel element FE
Filter oil FE
Filter element oil p/n 1R0714 FE
Gas Acetylene 250 Ft/cyl GA
Gas Oxygen 220 Ft/cyl GA
Gas nitrogen 98% purity GA
Gasket graphite 3/4" -150#1/16" Thick GS
Gasket sheet 1/8" x 60" x 60" GS
Sampl e Li st
58
APPENDIX 7: Material Classes and Products for Supply Risk

A B
Substitutes
available
VB B F G VG VB B F G VG VB B F G VG VL L M H VH
1 Piping Tools 1 5 5 5 Y
2 Small Tools 2 5 5 5 Y
3 Nitrogene Gas 4 1 4 4 N
4 Gaskets 5 5 5 5 Y
5 Filters lube oil 8 5 5 5 Y
6 Automotive parts 8 5 5 5 Y
7 Gases industrial 9 3 5 4 N
8 Steam control 9 5 4 5 Y
9 Bearings 15 5 5 5 Y
10 Instrumentation 18 2 3 4 Y
11 Calcium Chloride 19 3 4 5 N
12 Boiler parts 24 1 1 3 N
13 Heater parts 40 1 3 2 N
14 Electrical supplies, local 41 3 5 5 Y
15 Lab supplies 51 5 5 4 Y
16 Paint 68 5 5 5 Y
17 Piping Supplies 71 5 5 5 Y
18 Distribution Pumps 72 4 3 4 N
19 Sanitary 72 2 5 5 Y
20 Lubrication 75 3 5 5 Y
21 Office supplies 105 5 5 5 Y
22 Airboats 117 2 1 2 N
23 Potassium chloride 122 3 4 5 N
24 Drilling tools 122 3 5 5 Y
25 Safety Coveralls 143 5 2 4 Y
26 Bentonite 160 3 5 5 N
27 Amka Cables 161 2 2 2 N
28 Wooden Poles 180 4 1 2 N
29 Safety Shoes 205 1 2 2 Y
30 Electrical supplies, import 241 3 4 3 Y
31 Drilling Rig parts 246 1 2 2 N
32 Down hole pumps 251 1 2 2 N
33 Tubing anchors 283 1 3 2 N
34 Sucker rod 3/4" 311 5 3 4 N
35 Pipe 10-3/4" OD coated 394 5 3 3 Y
36 Packer set 2 3/8" 398 1 5 1 N
37 Pipe 3-1/2" OD coated 471 5 4 3 Y
38 Chemicals treatment plant 484 2 4 3 N
39 Drive heads 621 1 3 1 N
40 Pipe 6-5/8" OD coated 630 5 4 3 Y
41 Tubing 2-3/8" length 32' 642 5 3 2 N
42 Casing 5-1/2" length 42' 1,378 5 3 2 N
43 Zand, shell 1,767 1 5 1 N
44 Zand, fill 1,832 1 5 5 N
Total 'profit impact value' 11,876
VB =Very Bad VL =Very Low Y =Yes
B =Bad L =Low N =No
F =Fair M =Medium
G =Good H =High
VG =Very Good VH =Very High
C D
Description Profi t
Impact x
1000 US$
Suppl y Ri sk Factors Supply Risk
(Final) Number of
Suppliers
On Time
delivery
Market
conditions
59
APPENDIX 8: Staatsolies Purchasing Portfolio Matrix (Linear Scale)

0
500.000
Piping tools Piping tools
Chemicals treatment plant Chemicals treatment plant
Bearings Bearings
Lab Supplies Lab Supplies
Small tools Small tools
Sand, fill Sand, fill
Filters lub oil Filters lub oil
Potassium chloride Potassium chloride
Heater parts Heater parts
Tubing 2-3/8" Tubing 2-3/8"
Paint Paint
Casing 5-1/2" Casing 5-1/2"
Electrical local Electrical local
Nitrogen Gas Nitrogen Gas
Drilling tools Drilling tools
Office supplies Office supplies
Gaskets Gaskets
Piping Supplies Piping Supplies
Automotive Automotive
Industrial Gasses Industrial Gasses
Sanitary Sanitary
Safety Coveralls Safety Coveralls
Safety shoes Safety shoes
Lubrication Lubrication
Drive heads Drive heads
Packer set Packer set
Wooden Poles Wooden Poles
AmkaCables AmkaCables
Airboats Airboats
Tubing anchors Tubing anchors
Sand, shell Sand, shell
Down hole Pumps Down hole Pumps
Drilling Rig parts Drilling Rig parts
Instrumentation Instrumentation
Steam Control Steam Control
1000.000
Leverage Products
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Pipe 6-5/8" coated Pipe 6-5/8" coated
Sucker Rods Sucker Rods
Electrical import Electrical import
Calcium Chloride Calcium Chloride
Bentonite Bentonite
Distribution Pumps Distribution Pumps
Boiler parts Boiler parts

Fig. A. Linear scale with product or class names (position non-critical items for product information only)

0
500.000
1000.000
400.000
100.000
200.000
300.000
900.000
600.000
700.000
800.000
Leverage Products
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$

Fig. B. Linear scale without product or class names

60
APPENDIX 9: Staatsolies Purchasing Portfolio Matrix (Logarithmic Scale)

100.000
Airboats Airboats
1000.000
56.000
30.000
18.000
10.000
560.000
300.000
180.000
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Bearings Bearings
Paint Paint
Gaskets Gaskets
Sanitary Sanitary
Leverage Products
Bentonite Bentonite

Fig. A. Logarithmic scale with product names

100.000
1000.000
56.000
30.000
18.000
10.000
560.000
300.000
180.000
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Leverage Products

Fig. B. Logarithmic scale without product names
61

APPENDIX 10: Strategic Recommendation for Staatsolie Purchasing Portfolio
Purchasing Strategy Improvement of position New
When holding position Action to be taken Position
Heater parts Increase stock level B
Boiler parts Re-design boiler tubes to meet American
standards
N
Nitrogene Gas Increase stock level B
Lubrication Use Supply Agreement Pool via lubricant supplier L
Sanitary Use Supply Agreement Pool via sanitary supplier L
Piping Supplies Pool with 'piping tools' N
Electrical local Use Supply Agreement Pool via local electrical supplier L
Paint Use Supply Agreement N
Lab supplies No improvements possible N
Bearings Use Supply Agreement Better N
Distribution pumps No improvements possible N
Filters lub oil No improvements possible N
Industrial gasses Use Supply Agreement Better N
Small tools No improvements possible N
Automotive Pool with 'filters lub oil' N
Gaskets No improvements possible N
Piping tools Pool with 'piping supplies' N
Calcium Chloride No improvements possible N
Instrumentation No improvements possible N
Steam control No improvements possible N
Pipe 6-5/8" OD coated Change design and use HDPE Better L
Sucker rod 3/4" Change to 7/8" standard Better L
Electrical supplies, import No improvements possible L
Bentonite Use Supply Agreement at Purchasing agent Better L
Safety Coveralls Look for local suppliers and tender Better L
Drilling tools Look for more suppliers Better L
Potassium chloride No improvements possible L
Office supplies Use Supply Agreement L
Sand, fill Qualify other suppliers and tender L
Sand, shell Qualify other suppliers and tender L
Casing 5-1/2" Change to 7" standard Casings L
Tubing 2-3/8" Change to 2-7/8" standard L
Drive heads Contract supplier to guanrantee delivery. Look for
strategic partnership.
S
Chemicals treatment plant Contract supplier to guanrantee delivery. Look for
strategic partnership.
Intergated logistics management system
between buyer and supplier
Better S
Packer set 2 3/8" Contract supplier to guanrantee delivery. Look for
strategic partnership
Possibility to change to HDPE S
Tubing anchors Contract supplier to guanrantee delivery. Look for
S
Down hole pumps Change to other standard Better S
Drilling Rig parts Alternative available but expensive to modify design S
Safety Shoes Look for other safety shoes that meet
safety requirments
L
Wooden Poles Qualify other suppliers and tender L
Amka Cables Look for alternative cables and suppliers L
Airboats Contract supplier to guanrantee delivery. Look for
Better S
B =Bottleneck; N =Non-critical; L =Leverage; S =Strategic
Quadrant
Strategic products
Bottleneck products
Non-critical products
Leverage products
62
APPENDIX 11: Staatsolies Improved Purchasing Portfolio Matrix

Fig. A. Staatsolies Improved Matrix with product names
100.000
Airboats Airboats
1000.000
56.000
30.000
18.000
10.000
560.000
300.000
180.000
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Bearings Bearings
Paint Paint
Gaskets Gaskets
Sanitary Sanitary
Leverage Products
Bentonite Bentonite

Fig. B. Staatsolies Improved Matrix without product names

100.000
1000.000
56.000
30.000
18.000
10.000
560.000
300.000
180.000
Strategic Products
Bottleneck Products
P
r
o
f
i
t

I
m
p
a
c
t

i
n

U
S
$
Leverage Products

63

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