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Sourcing Strategies that are Appropriate to each of the Four Quadrants of the Kraljic Matrix

To answer this question, we will use the article of {Caniels, M.C.J., and Gelderman, C.J. (2005)} as a template.

Cousins P (2008) argued that Kraljic suggested that selecting the best supply strategy is a function of the level of supply exposure, technical risk and the strategic nature of the product or service.

Kraljic classifies product on the basis of two dimensions: profit impact and supply risk (“low” & “high”) Gelderman, C.J. and van Weele, A.J. (2002). (Figure 1).

 

Caniels, M.C.J., and Gelderman, C.J. (2005) explains Kraljic quadrant strategies through nine (9) prospected scenarios as the following:

A-     Quadrant of Strategic Items:

1-      Maintain strategic partnership: to reduce the supply risk, firms will aim at building a partnership relationship with its supplier. As an example, SABIC (the Saudi petrochemical giant) signed a contract with Williams F&HC as a single source to supply huge fire fighting equipments (pumps, trailer monitor & fire fighting foam) in project called SAFE. No firm could supply such equipments worldwide, so it was a partnership committed by both firms.

2-      Accept a locked-in partnership: This strategy often occurs when the buyer is subject to unfavorable conditions of the supplier and is unable to pull out of the situation. As an example, SCOTT equipments became standard by the end user in Chevron globally. Hence, Saudi Chevron accepts the locked-in partnership and pay high prices for required equipments to maintain the supply. Also to avoid any out-of-stock situation, Saudi Chevron keep comparably high stock of SCOTT approved products.

3-      Terminate a partnership: This strategy is employed when a supplier’s performance has become unacceptable and incorrigible. A an example, Saudi Aramco used to buy Self Contained Breathing Apparatus (SCBA) from Draeger for all its fire stations in KSA through their local agent (HEBA Fire). Although the prices Aramco paid were very competitive comparing to other customers of Draeger in KSA, but the quality and after sales services were dropping when compared to Aramco standards and demands. Finally, in 2009, Saudi Aramco stopped buying Draeger products and switched totally to SCOTT products.

Note: Fire Fighting and respiratory products are very vital to Oil & Gas and Petrochemical industries in Saudi Arabia. Without those products there is no operation allowed.

B-      Quadrant of Bottleneck items:

4-      Accept dependence, reduce negative consequences: The main focus of this strategy is to assure supply. As an example, KATAKIT (Confectionary Development Industrial Company – Syria) used to buy printing ink/cartridges for packing-machines printers from the supplier the printers. Cartridges are of low impact on profit, but no one else can supply models that fit their printers. KATAKIT accepted dependence, but to reduce negative consequences, they used to keep minimum stock one year operation. However, due to huge amount KATAKIT buy, they could use a kind of power on their supplier to maintain flow of products. That strategy lasted for about 10 years (the warranty period).

5-      Reduce dependence and risk, find other solutions: This strategy is geared towards reducing the dependence on the supplier. For the same example of scenario 4, KATAKIT could find a Chinese supplier for duplicated cartridges with high quality. After 10 years, the warranty of printers was over. KATAKIT kept buying original product from the main supplier. However, with the Chinese alternative, KATAKIT could shift that product from Bottleneck quadrant to non-critical items quadrant.

C-      Quadrant of Leverage Items:

6-      Exploit buying power: In this strategy the firm pursues competitive bidding. Since suppliers and products are interchangeable, there is no need for long-term supply contracts. As an example, there are a massive number of fire trucks manufacturers worldwide. The product is of high impact on company operation as it is not allowed to operate without its availability. Nevertheless, each bid of fire truck is a big business for each supplier; this is because, as a fully customized product, fire truck is very expensive one, beside, the product life time is 25 years. Hence, the buyer has leverage on the supplier to award the bid.

7-      Develop a strategic partnership: In a few cases practitioners choose to abandon the leverage position and opt for a strategic partnership with a supplier. As an example, the competition for computer market is very high and the product/supplier is interchangeable to a certain limit, but the product and its services are fundamental. This gives the buyer power on the supplier, but keeps the need of the best services and on time supply. Customers usually develop strategic partnership with the supplier.

D-     Quadrant of Non-critical items:

8-      Pool purchasing requirements: The handling of noncritical products requires a purchasing strategy aimed at reducing the logistic and administrative complexity. Companies usually need a lot of stationeries, with variety of required items. These types of products have a very low impact on profit. Jarir bookstore usually gets the best deals with big companies only because Jarir simply pool most of required stationery items. Comparatively their prices are usually high.

9-      Individual ordering, efficient processing: Whenever it is not possible to pool the purchasing requirements, professional purchasers adopt some kind of individual ordering. As an example, petrochemical companies usually try to shift these products to the Leverage quadrant through B2B business model, but sometimes they need some items that are not included in the B2B contract. For that, buyers usually buy required products through individual orders.

 

Kraljic article is over 20 years old, and yet, it is still widely used by academics and practitioners. However, it has been severely criticized. i.e. Gelderman, C.J. and Van Weele, A.J. (2005) see that the model does not provide and proactive thinking about what can be done to change the existing reality of power in the various supply chains. Caniels, M.C.J., and Gelderman, C.J. (2005) argue that Kraljic merely formulated a number of ‘main tasks’.

 

Conclusion suggests that Kraljic draw basic guidelines that each professional purchaser can tailor it to fit the needs for better role of purchasing in the strategy of his firm.

References

 

1-      Chapter 4: Cousins P, Lamming R, Lawson B and Squire B. (2008). Strategic Supply Management. Pearson.

2-      Kraljic, P. (1983). “Purchasing must become supply management.” Harvard Business Review.

3-      Gelderman, C.J. and van Weele, A.J. (2002). “Strategic direction through purchasing portfolio management: A case study.” The Journal of Supply Chain Management, Spring: 30-37.

4-      Caniels, M.C.J., and Gelderman, C.J. (2005). “Purchaing strategies in the Kraljic matrix – A power and dependence perspective.” Journal of Purchasing and Supply Management, 11(2-3): 141-155.

5-      Gelderman, C.J. and Van Weele, A.J. (2005). “Purchasing portfolio models: a critique and an update.” Journal of Supply Chain Management, 41(3): 19-28.