Purchasing Transformation

When working with clients the last couple of years I have noticed a clear trend in the interest and usage of Kraljic’s Matrix as a tool to get a common view and understanding of commodities also on category level and not only on company level. When Peter Kraljic wrote his article “Purchasing Must Become Supply Management” back in 1983 I don’t think he intended the model to be used like that. If that was the intention he actually missed out on a big portion of information and recommendations.

What I am referring to is the fact that nowhere in his article you can find guidelines on exactly where you should plot in your sub categories in the Matrix when not fully aware of the big picture. It is all up to your subjective judgment. When looking at the Matrix from a category perspective, especially if the purchaser/category responsible is doing the analysis, there is an obvious risk for over-estimating the spend impact (y-axis) and also the complexity of the supply market (x-axis). The end result will be an overpopulation of “strategic” subcategories and you will miss out on a lot of easy-to-source subcategories where you simply put “apply the wrong medicine” to approach your category.

The result of overestimating “importance of purchasing” and the “complexity of supply market” leading to the wrong conclusions on how to act.

One quick fix for this problem is that purchasing mgmt decide and communicate general rules and guidelines on how to use the matrix. To once and for all define what they mean with small, big, large spend impact, number of suppliers, entry barriers etc. Some areas will still be judged subjectively but at least you have a framework for reference and that will prevent the tendency to move into the wrong part of the matrix with your sub categories leading to the wrong kind of decisions.

For sure, you may be presented with arguments such as:

• We are not able to retrieve and aggregate the quantities.
• We do not have the time to do it.
• We do not see the value of doing it.

However, the problem is how will you do a proper bid analysis without projected volumes? If not including projected volumes it will be a pure price list comparison which could be analytical correct but even worse; business wise completely misleading.

Usually, I compare this with a similar discussion of how to evaluate an RFI. Here, more commonly, there is a better understanding that we need to apply weights at questionnaire and question level in order to calculate a weighted total score of the responses. Because otherwise, what would a score say without the individual weights?

In the exact same manner projected volumes should be viewed as weights on individual items and where high runner items consequently are being priced as such. For low volume items, the price is more or less unimportant from a bid analysis perspective. So in essence, projected quantities are vital:

• To enable a proper bid analysis .
• To convey the “weights” for individual items that tend to run in high quantities, thus ensuring that the most competitive prices are given to these items specifically.
• To avoid a misleading result out of the bid analysis.

A final piece of advice, yes it is true that you probably have to work a bit to retrieve a quantity projection of the items. But be pragmatic and it does not necessarily mean that you have to be very specific in the estimated numbers. Start with an overview and make a percentage distribution between the items. Make a sanity check of the volume distribution together with the historical cost, check the calculated spend vs. historical data. A good guestimate is good enough and the importance is that you can identify the high and low runners.