- QUESTION
Write an evaluation that critiques the use of Kraljic’s Portfolio Purchasing Model as a tool for developing sourcing strategy. Focus your critique on the two dimensions (supply risk and profit impact) of Kraljic’s model, concentrating on how appropriate each dimension is for use in the development of sourcing strategies. As part of your evaluation, also explain the limitations of the model and any information gaps that may result from using only the two dimensions. Justify your conclusions (500 words).
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| Subject | Business | Pages | 4 | Style | APA |
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Answer
An evaluation of Kraljic’s Portfolio Purchasing Model
Introduction
There are two dimensions to Kraljic’s Portfolio Purchasing Model, which are supply risk and profit impact. These two dimensions are measured in terms of low risk to high risk resulting in four quadrants that represent the level of supply risk and profit impact of each of four categories of supply items (Kraljic, 1983). The four quadrants in the model represent strategic items with both high profit impact and supply risk, then bottleneck items with high supply risk and low profit impact followed by leverage items with high profit impact and low supply risk and lastly, non-critical items with low supply risk and low profit impact.
Supply risk
According to Kraljic’s model, the supply risk of each supply commodity is measured in terms of the ease of availability of scarce raw materials. The availability of scarce raw materials might be adversely affected by political instability among other factors that might be beyond the company’s control. Supply risk is also high in cases where there are few suppliers or the delivery logistics are challenging as well as in scenarios where the supply channels can be easily disrupted. Supply items with high supply risks are typically affected by one or more of the factors mentioned above (Gelderman and van Weele, 2005). Strategic items and bottleneck items both have high supply risk. Based on the model, it is advisable that the company diversifies its supply sources in order to reduce the supply risk associated with the supply of such items. This is especially true for bottleneck items.
Profit impact
Kraljic’s model also classifies supply items according to their profit impact on the company’s operations. Items with a high profit impact might be the main raw materials used by the company in the production of final goods or might be crucial components in the manufacturing process. Items with a low profit impact on the company’s operations are mainly items that are easily available from a variety of suppliers at affordable prices. Leverage items are items with a high profit impact and low supply risk, which places the company at a significant advantage as the company can decide to use its significant bargaining power to get good deals from suppliers (Caniëls and Gelderman, 2005). Strategic items have both high profit impact and high supply risk, in which case the company must take a balanced approach towards diversifying and exploiting its market power. Non-critical items have a low supply risk and a low profit impact, which means that they are items in steady supply and a minimal impact on the company’s operations. Such items are best produced in-house.
Conclusion and gaps identified
Kraljic’s model only identifies two categories of factors that might affect the supply of products in a supply chain. The management of supply chains is changing and this model does not take into consideration the impact of technology on the factors identified in the model. In some cases, companies that enter into forward contracts with suppliers might pay more as prices of products keep falling.
References
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Kraljic, P., 1983. Purchasing must become supply management. Harvard business review, 61(5), 109-117. Gelderman, C. J. and van Weele, A. J., 2005. Purchasing portfolio models: a critique and update. Journal of Supply Chain Management, (3). 19-28. Caniëls, M. C. and Gelderman, C. J., 2005. Purchasing strategies in the Kraljic matrix—A power and dependence perspective. Journal Of Purchasing And Supply Management, 11(The 14th Annual IPSERA Conference IPSERA 2005), 141-155.
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