Kraljic 1983- Purchasing must become supply management PDF

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Summary of Kraljic's theory and paper 'purchasing must become supply management'
explanation of the 4 stages and steps...

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Kraljic (1983) – Purchasing must become supply management

Purchasing materials should no longer be only a transactional activity but a strategic activity called supply management  "purchasing must become supply management." So, to help purchasers minimize the supply vulnerability, thus maximize supply security, and reduce costs by making most of their purchasing power, Kraljic proposed 4 stages to follow for a company in order to strategically develop a supply management course Phase 1: Classification Put the purchased items in 4 categories: -

Each category needs a different purchasing approach with varying decision levels

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strategic (high profit impact, high supply risk)- decision: top level (vice president)

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bottleneck (low profit impact, high supply risk) – decision: higher level (dept. heads)

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leverage (high profit impact, low supply risk) – decision: medium level (chief buyer)

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noncritical (low profit impact, low supply risk) – decision: lower level (buyers)

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Supply risk is high when the item is a scarce raw material, when its availability could be affected by government instability or natural disasters, when delivery logistics are difficult and could easily be disrupted, or when there are few suppliers.

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Profit impact is high when the item adds significant value to the organization's output. This could be because it makes up a high

proportion of the output (for example, raw fruit for a fruit juice maker) or because it has a high impact on quality (for example, the cloth used by a high-end clothing manufacturer). Phase 2: Market analysis Weighting -> so it’s basically like looking at Porter’s 5 Forces Evaluation criteria depend on companies and even industries; some examples are -

Uniqueness of suppliers’ product: if unique, less alternative sources/supplier competition – hence no forced cost reductions

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Logistics situation

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Annual volume purchased and expected growth in demand: economies of scale due to growing volumes to one supplier

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Potential costs in case of nondelivery or inadequate quality: costs that arise if a product/material is not supplied in time

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Cost and price structure

Phase 3: Strategic Positioning Put the products/materials that were identified as ‘strategic’ in stage 1 in the matrix in terms of company strength vs supplier strength -

Exploit: high company strength – low/medium supplier strength

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Balance: neither major visible risks nor major benefits

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Diversify: low company strength – high supplier strength

Phase 4: Action Plans Three purchasing strategies indicated are as follows: Exploit – make most of it! BUT: do not take any aggressive approach too far, just in case circumstances change.

Diversify – SINGLE SOURCING! BUT TO REDUCE THE LONGTERM RISKS OF DEPENDENCE  should be considered to strengthen company’s position...