Fredo Schotanus Ph.D.

Developing a purchasing strategy

Purchasing must become
strategic supply management
In this session, we dive into the meaning and application of the
Kraljic portfolio model
The model is just a simplification of reality
There are several other models
But can assist in developing a purchasing strategy
2
AN INTRODUCTION TO THE KRALJIC PORTFOLIO MODEL
First determine: what is the commodity / category to be bought?

Not given: can be determined by buyer

Determines the market (and players) the buyer is operating on

And the competitive environment, the technological development, the
possibilities for risk sharing, etc.
Linked: technical or functional specifications
Linked: different lots or all in one?
Linked: how many suppliers to contract?
Basic attitude: different situations require different approaches
Therefore also termed: portfolio management
3
AN INTRODUCTION TO THE KRALJIC PORTFOLIO MODEL
4
SEGMENTING PURCHASING STRATEGIES:
THE KRALJIC PORTFOLIO MATRIX
Supply risk
(number of suppliers, developments,
complexity, etc.)
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1
Bottleneck
Assure delivery (second sourcing),
reduce risks
2
Change specification, standardize, find
alternative suppliers
3
4
Routine
Bundle purchasing needs
Minimize buying costs, low investments
5
Leverage
Competition, auctions, short term
contracts, group buying
6
Preferred supplier-strategy, shared
development, partnership
7
Strategic
Optimize contribution, develop relationship
8
Find or develop a new supplier
1
8
7
6
5
4
3
2
Source: Kraljic, 1984
SEGMENTING PURCHASING STRATEGIES:
THE KRALJIC PORTFOLIO MATRIX
Supply risk
(number of suppliers, developments,
complexity, etc.)
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New product
Sales
increase
Increased
supplier base
End of life
cycle
5
1
Bottleneck
Assure delivery (second sourcing),
reduce risks
2
Change specification, standardize, find
alternative suppliers
3
4
Routine
Bundle purchasing needs
Minimize buying costs, low investments
5
Leverage
Competition, auctions, short term
contracts, group buying
6
Preferred supplier-strategy, shared
development, partnership
7
Strategic
Optimize contribution, develop relationship
8
Find or develop a new supplier
6
SEGMENTING PURCHASING STRATEGIES:
THE KRALJIC PORTFOLIO MATRIX IN MORE DETAIL (1)
Source: Kraljic, 1984
7
In which quadrant would you use framework contracts?
Can limit process costs (e.g., contracting tasks)
For routine products (cheap and not so important, e.g., maintenance):
less work involved
Can deliver purchasing power through bundling
For leverage products (commodity which needs a lot of money, e.g.,
temporary labour): better conditions
For bottleneck products (not much money at a time, but very specialized,
e.g., engineering): becomes an alliance through bundling volumes
Therefore: different backgrounds (= different purchasing strategies)
for different services
SEGMENTING PURCHASING STRATEGIES:
THE KRALJIC PORTFOLIO MATRIX IN MORE DETAIL (2)
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SEGMENTING SELLING STRATEGIES:
THE ACCOUNT PORTFOLIO MODEL
Source: Carter, 1995
Relative value
A
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s
1 Core
Retain and/or expand. Develop new
products. Deliver superior service & quality.
2 Development
Offer extra service. Try to develop more
business. Seek added value and/or new
possibilities.
3
4
Exploitable
Maximize short term profit. Beware for
losing the client.
Nuisance
Pay (hardly) no attention. Invest mainly in
automation and efficiency. Withdraw if there
is no profit or perspective.
1 2
3 4
SEGMENTING PURCHASING STRATEGIES:
THE WINDMILL MODEL
Strategic Bottleneck Leverage Routine
Nuisance
Exploitable
Core
Development
Increase attractiveness/aggregate/rationalise
Change source of supply/use competition
Increase attractiveness/aggregate/rationalise
Change source of supply/use competition
Consolidate relationship
Maximise profit
Maximise
efficiency
Develop supplier to secure
advantage/continuity
Develop supplier to increase
competition
Development
Supplier development
opportunities
Encourage
participation
Nuisance
Mismatch
Accept short term
Change supplier
Core
Sound position
Improve own profit
Exploitable
Adversarial relationship
Check power balance
Consider other sources
Leverage
Development
Potential match
Work closely together
to develop business
Nuisance
Very high risk
Seek competition
Raise attraction
Core
Good match
Potential long term
relationship
Exploitable
Great caution
Raise mutual
dependency
Seek competition
Strategic
Development
Potential risk
Raise mutual
dependency
Offer inducements
Nuisance
High service risk
Change supplier
Offer incentives
Core
Good match
Intensify relationship
Maintain long term
relationship
Exploitable
Moderate cost risk
Closely monitor price
and service
Change supplier
Bottleneck
Development
Good supplier interest
Offer incentives
Raise mutual
dependency
Nuisance
Possible mismatch
Passive relationship
Seek alternative
supplier
Core
Strong position
Maintain relationship
Offer other
opportunities
Exploitable
Moderate risk
Monitor price trend
Seek alternatives
Routine
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SEGMENTING PURCHASING STRATEGIES:
THE WINDMILL MODEL
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A CASE FROM THE PROVINCE OF GELDERLAND:
ICE-CLEARING SYSTEMS

Objective
To find (a) new supplier(s) for ice-clearing
Restriction

Suppliers should be involved with the job
Supply side

Local farmers

Large national companies

Relatively simple but crucial service
Value

Annual purchasing volume of 1 million

Bad ice-clearing can have a large negative effect on daily
business and traffic safety
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A CASE FROM THE PROVINCE OF GELDERLAND:
ICE-CLEARING SYSTEMS
Supply risk
V
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Source: Kraljic, 1984; Carter, 1995
Relative value
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A CASE FROM THE PROVINCE OF GELDERLAND:
ICE-CLEARING SYSTEMS

Main strategic choice 1: focus on local suppliers & prevent
dependency on just one supplier
Split the order in 100 small lots, so local SMEs can participate

Involved with the province and the job

Inform local farmers using conventional communication

Use short and simple tender documents

Main strategic choice 2: minimize costs
Award the contract based on lowest price per lot
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THE CHALLENGE IS THE RIGHT BALANCE BETWEEN
STRATEGY AND EXECUTION
Poor
Excellent
Wins on the Field
Rambo
Wins on Paper & Field
(writer Art of war)
General Sun Tzu
What Game?
Mr. Bean
Wins on Paper but
cant find the Field
Inspector Clouseau
Excellent
Strategy
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The model supports your decisions in both tactical and strategic
areas

Tactical
Plot existing suppliers to reaffirm current approaches (in terms
of negotiation strategy, and time spent) or to better define your
negotiation approach

Strategic
Look for approaches to move the leverage to your favor. Goal is
to move categories to the left side of the model. (Shift the axis
by looking at alternative suppliers/ markets or substitutable
products)
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CONCLUSION
Fredo Schotanus Ph.D.
Developing a purchasing strategy
Purchasing must become
strategic supply management