Selecting the most appropriate purchasing strategy for the organisation’s products and services is paramount for any procurement professional. In this blog post, we review how both the Kraljic Matrix and Kenton Supply Model can be used to evaluate risk and maximise profit.
The Kraljic Matrix
The Kraljic Matrix (1983) and the variations developed over the years help management select the most appropriate purchasing strategies of different types of product and service, thereby optimising the trade-off between spend and upstream risk.
The basis for the Kraljic Matrix is to identify the total spend (Pareto Analysis) and then add a risk score based on the number of suppliers available and their logistical location in relation to the buying organisation.
Upstream refers to activities prior to the buying organisation receiving the goods or services. Low-risk would identify that the product or service is freely available from reliable sources that are logistically manageable. High-risk products and services may be from a monopoly or oligopoly and may be sourced from great distances across many frontiers or difficult terrain.
High risk and spend identifies items that are ‘Critical’ to the company and must be managed closely. High risk and low spend identify ‘Bottlenecks’ in the procurement process and requires security of supply. Low risk and high spend items of the buying organisation provide ‘Leverage’ in the marketplace where they will be able to negotiate on price and other variables. Low-risk items which have very little spend are considered ‘Routine’ and require minimal management.
Applying The Model
The Kraljic Matrix may be applied to both products and services. Engine parts for an aircraft may be only available from one supplier and incur a high spend in relation to all the other products and services a company buys. This would place the parts in the ‘Critical’ quadrant. Stationery may be purchased from several suppliers and represent a very small amount of total spend. This would represent a ‘Routine’ item.
Not all quadrants would be filled when conducting a Kraljic analysis. Some organisations may find that all of their purchases are routine, whilst another may find a mixture of critical and leverage.
The important point is that the analysis is carried out and reviewed on a regular basis to establish if any of the products or services have moved.
The Kraljic Matrix is ideal for the analysis of the upstream section of the supply chain. That is to say all of the activities prior to the product or service entering the buying organisation. But what if we want to consider the downstream section? The activities and final destination of the products and services after they have left the buying organisation.
The Kenton Supply Model
The Kenton (1995) supply model and the variations developed over the years help management select the most appropriate inventory strategies for different types of product and service, thereby optimising the trade-off between usage and downstream exposure.
The basis for the model is to identify the total usage (ABC Analysis) and then add an exposure score based on the importance of the item in terms of lost production, sales and market share downstream. Downstream refers to the demand activities after the product or service leaves the buying organisation.
Low exposure and low usage would identify that the item has no direct impact on production or market share and that these ‘Basic’ items are not used regularly. They can be managed with lower stock levels and stock monitoring. Low exposure and high usage identify there is no direct impact of these ‘Active’ items but stock needs to be held and managed closely due to high volumes.
High exposure and low usage items can ‘Choke’ the downstream activities and requires a stock level that can guard against the risk of stock-outs with stock monitoring on a periodic basis. High exposure and usage items are ‘Decisive’ in maintaining production or ensuring that the company can satisfy customer demand for the items. They will require the highest service level of stock and close inventory control.
Applying The Model
The Kenton Supply Model may be applied to both products and services. A pump for an oil rig may be low usage but may leave the oil company open to high exposure in terms of lost oil production if it is not available. It would, therefore, be classified as ‘Choke’. Whereas components for the drill will be used and replaced regularly making them ‘Decisive’.
As with the Kraljic Matrix, not all of the quadrants need to be filled when undertaking a Kenton analysis. Some organisations may find that all of their products and services are placed in the ‘Basic’ quadrant, while others may have a mixture. The important point is that the analysis is carried out and reviewed on a regular basis to establish if any of the products or services have moved.
If the procurement and supply professional merely wishes to analyse the supply market, then using the Kraljic Matrix would be appropriate. If the procurement and supply professional simply wishes to analyse the demand market, then Kenton Supply Model would be appropriate. If the procurement and supply professional is analysing the whole of the supply chain, they would incorporate both models into their analysis.
Find out how to apply both models to your procurement strategies with a CIPS Diploma in Procurement and Supply. To find out more about our CIPS courses, contact us or call our team on 01865 515255.