Creating high-performance supply chain teams using the Kraljic model

Even though the era of ‘procurement through power’ is well over, I still see a lot of purchasers getting lost or sidetracked in the wrong quadrant of the Kraljic model in their quest for good prices to maximize profit. That is perfectly understandable, given the linear, results-oriented business culture in Europe. But focusing on the long term and allocating your resources to the right quadrant will take you to ‘best in class’ level and beyond, turning you into an efficient supply chain ‘high performer’.  

By Heidi Larsen

Regardless of your specific goal, optimizing your supply chain will always begin with an overview – and I personally prefer the Kraljic model to achieve that. The model itself is a simple two-by-two matrix linking profitability and risk. The model reveals not only what you are currently spending your time on, but also where your resources could be used much more efficiently in the future.

Non-critical items

The quadrant of low risk and low profitability contains the non-critical products. I think it goes without saying that this is where you should look into what digitalization and big data could do for you. Preferably, you should spend as little time as possible on items in this quadrant as they entail low risk and but also generate low profit.

Leverage items

These are the t-shirts to the fashion manufacturer. By that, I mean that these leverage products are fairly easy to produce and could generate a significant profit volume. Therefore, this is also where I see a lot of purchasers get lost as they tend to abuse their buying power created by volume to squeeze the prices a bit too much. This ultimately breaks the suppliers’ backs, creating a never-ending demand for new supplier sourcing. Not very efficient!

Bottleneck items

I also see a lot of purchasers lose their way here and that’s perfectly logical; when operating in a segment of high risk, it’s only natural to want to reduce that risk. However, it is very complex and time-consuming to balance and strengthen relationships without order volumes. And as this segment only accounts for a relatively small portion of profit, your time could certainly be much better spent elsewhere.

Strategic items

Now we’re getting somewhere! In this quadrant of both high risk and high profit impact, it makes a lot of sense to enter into strong and committed innovative collaborative partnerships. And I don’t mean the so-called partnerships that I have seen so many examples of: all processes involving R&D are dumped in your lap, and new products are only presented to the partners after the product development work is finished. Sometimes the second paragraph of the partnership agreement will even state that the customer will own all IP rights to all the innovations that the suppliers are forced to bring to the table. I’m sorry to say that this is not a true and committed partnership worthy of supply chain high performers.
Only companies who invite their strategic partners to be a part of the entire innovation process – from the empathize phase to the test phase – and really make an effort to help the supplier understand the ‘why’, and not least the ‘for whom’, will reap the sweet rewards by being the next business catalyst, ensuring a stronger and more sustainable supply chain in the future.

Adding ‘trust’ as the secret ingredient to these partnerships will without a doubt be a major game-changer for your company. And this is where SMEs will certainly have a chance against the bigger, more established companies because, when it comes to trust, it’s not size that matters – it’s flexibility and the ability to truly understand your customers. Just imagine what you could do by linking your customer insights and design know-how to your supplier’s expertise. The future will be a sea of opportunities!