Sourcing professionals have been using portfolio models to optimize supply management strategies for more than three decades. The time has come to apply these practices to the procurement of printing and marketing services.
In a landmark 1983 article in the Harvard Business Review, Peter Kraljic introduced a purchasing portfolio model using a 2 x 2 matrix. The Kraljic model was based on the premise that purchased products and services can vary significantly in terms of importance and risk. Based on this, procurement professionals should use different sourcing and supplier management strategies depending on the importance and risk profile of each purchase. The Kraljic Matrix quickly became the standard in the field of purchasing portfolio models.
The diagram below shows my rendition of the Kraljic Matrix. Kraljic’s model classifies purchased products and services along two dimensions: profit impact (or, more broadly, the importance of the product or service to the business), and supply risk (number of capable suppliers in the market, abundance or scarcity of raw materials, geo-political issues, etc.).
Source: Adapted from Kraljic, Peter, “Purchasing Must Become Supply Management,” Harvard Business Review (September 1983).
The matrix creates four categories of purchases and the diagram includes some of the major attributes of each category, as well as the key supply management objective for each category.
- Non-Critical Items (low impact, low risk) – This category typically involves a high volume of low-value purchases. A classic example would be office supplies. The products and services are widely available, and capable suppliers are abundant in the market. The key supply management objective for this category is to reduce transaction costs by leveraging e-procurement technologies, catalog-based buying and similar techniques.
- Leverage Items (high impact, low risk) – The products and services in this category have a moderate to high level of importance to the business. Still, they are widely available from numerous capable suppliers. The key supply management objective for this category is to exploit the company’s bargaining power by requiring competition among potential suppliers (e.g., extensive use of competitive bidding/RFQ’s/RFP’s).
- Bottleneck Items (low impact, high risk) – The products and services in this category do not have a high impact on the company’s operations. They are subject to supply disruption, usually because there are a limited number of capable suppliers in the market. The key supply management objective for this category is to ensure the continuity of supply while simultaneously looking for alternative suppliers, products or services.
- Strategic Items (high impact, high risk) – These products and services are essential to the core operations of the company. Think tires for an auto manufacturer. There is also a natural scarcity in these markets because there are usually only a few suppliers that can provide these products or services. The key supply management objective for this category is to build and sustain deep and mutually beneficial partnerships with suppliers.
Using the Kraljic Matrix with Print and Marketing Services
While the Kraljic Matrix has been widely used in most areas of procurement for more than three decades, I rarely see it discussed in the context of printing and marketing services. This is unfortunate because the principles underlying the matrix are as applicable to printing and marketing services as they are to other products and services.
Because of their diversity, purchases of printed materials and marketing services can fall into any of the four quadrants of the Kraljic Matrix. In our experience, however, most will be found on the left side of the matrix, which means most purchases will involve non-critical items or leverage items.
One of the defining attributes of non-critical and leverage items is a low supply risk because of an abundance of capable suppliers in the market, and this is true for most types of printed materials and marketing services. Under these circumstances, the procurement/supply management strategies prescribed by the Kraljic Matrix are entirely appropriate for this spend category.
Non-Critical Items – As noted earlier, this category typically involves a high volume of low-value purchases, and many purchases of printed materials fit this description. Such purchases can have high transaction costs when they are managed using manual processes. The key to managing this category of purchases effectively is to use e-procurement technologies to streamline and automate buying processes. For printed materials that are purchased frequently and used by geographically dispersed parts of the organization, e-catalogs are a particularly effective tool for enabling decentralized buying and reducing transaction costs.
Leverage Items – Many job-based or project-based purchases of printed materials and marketing services will fall into this quadrant of the Kraljic Matrix. These products and services are widely available from numerous suppliers, so purchases in this quadrant will usually be made in a “buyer’s market.” For these purchases, the best way to maximize value creation for the company is to foster competition among prospective suppliers through the consistent use of competitive RFQs and RFPs.