Procurement Intelligence Unit

I could not agree more, Kraljic is a fundamental tool and should be the primary driver behind the buying approach used for a category.

However I think the practical difficulty arises in objectively agreeing where each category sits on the 'Supply Risk' or 'Profit Impact' scales of Kraljic. My experience is this scoring can be very arbitrary and buyers indeed have a bias toward the strategic quadrant.

For the CPO the problem is arriving at a consistent measure of supply risk and profit impact that he/she can use to place categories objectively on this scale. Its only with the Kraljic framework in place can buyers then be directed to using the purchasing approach appropriate to the Kraljic quadrant their category sits in and avoid ‘strategic drift’.

I was once given the task segmenting a £2bn of GNFR spend for a major retailer into the Kraljic quadrants. I started this task by asking each category buyer to rank their own categories but for all the reasons described this did not work as most buyers regarded their category as strategic, when in a lot of instances this was obviously not the case.

What was needed was a consistent but above all simple measure of supply risk. The approach I took was to find the Standard Industry Code (SIC) for every GNFR supplier (2000 +) we used. There are 1500 or so SIC codes and they are used by companies house (amongst others) to categorise companies into industry sectors. With each supplier categorised by SIC code I then divided the number of suppliers we used in each group by the total available suppliers in that SIC group. This gave me a percentage of suppliers we used in relation to the total population of available suppliers in that SIC group.

The logic was simple; the lower this %, the lower the supply risk, the higher this %, the higher the supply risk. The supply risk scale became the minimum to maximum of these percentages with all the suppliers sitting somewhere along this scale. For grading profit impact I used spend. With this in place we then refined the supply risk again with each buyer down from the SIC code level to the individual category level.

This formed the basis of the departments overall buying strategy for the next 2 years and the department was re organised so we had the right number of buyers correctly trained in the appropriate buying techniques for each Kraljic quadrant and therefore each category.

I would not say it was easy, it involved a lot of data crunching and there were a few arguments along the way but it became much harder for a buyer to justify their category was strategic if clearly it wasn’t.

Hi Alex,

Thank you for your thoughtful comment. 

It's interesting that you tied strategic suppliers to the level of risk that they presented. I think that this is an intriguing starting point in identifying the key suppliers. 

Your point about impact on profit is very powerful means of weeding out those companies that have a significant influence on the running of the business. 

When it comes to buyers, the temptation to talk in "strategic" terms is strong, but deploying these sorts of metrics are an excellent means to prevent strategy inflation. 

Fully agree, and honestly if this is happening extensively within a Procurement team, I would say there are weak CatMan processes in place.  I read a similar article on this already this evening regarding the tendency for firms to push the partnership approach w/ suppliers because it's considered a positive thing.  My thought is that strong category management practices will prevent this drift to a strategic relationship approach. A fundamental activity in Category Management is supplier segmentation, which requires the Category Manager to consider the commodity's market difficulty, business impact to the firm and a number of other factors.  If done properly, with insightful challenge and input from peers and leaders in procurement, which should include the broad context of the business, the categories that land as "strategic" to a business should be quite few and far between.

In order to form a successful Partnership Agreement one has to track and measures good performance levels in order qualify key vendors to enter into such a strategic collaboration. The sharing of business plans and product obsolescence issues needs to be discussed thoroughly in order to drive out any surprise elements in product production. Effective communications often would help add value and drive out unnessary costs from the supply chain.