Tweaking the Kraljic Model

More than 25 years ago Peter Kraljic published his seminal “portfolio purchasing model,” which has been both a widely critiqued and widely accepted method for assessing procurement demand, risk and profit factors for supply chains.

The model distinguishes among four product categories: leverage items, strategic items, noncritical items, and bottleneck items.

My take on the model, as outlined in The Vested Outsourcing Manual, has been that procurement philosophies such as Kraljik’s encouraged businesses to use their buying power selfishly to condition the supply chain and force a change in the demand curve in order to lower dependency on service providers. The ultimate objective of the buying approach is to trigger lower-cost entrants into the market and force reductions in price and, by default, validate the make/buy decision.

Of course, the more companies applied these win-lose behaviors, the more service providers hunkered down to protect their margins. These heavy-handed transaction-based approaches lead to perverse incentives and missed opportunities to innovate that were outlined in Vested Outsourcing.

They also focus too heavily on transactions, rather than outcomes. This approach can be lucrative in the short term if the buyer gets away with it; however, it is inefficient over the long term, especially in cases where a service provider wants (or needs) to make investments in business infrastructure that require trust and cooperation to deliver results.

Recently I came across a CPO Agenda article from 2008, which featured a long interview with Kraljik, who is director emeritus at McKinsey, where he spent 32 years and held a number of senior positions until his retirement in 2002.

Kraljik’s interviewers, Philip Usherwood and Dick Russill, caught up with Kraljik to mark the 25-year anniversary of his Harvard Business Review article, “Purchasing must become supply management .”

There are many thought-provoking takeways in the CPO interview/article, one being that Kraljik’s description of the economic and political turbulence of the early 1980s and its impact on business procurement decisions is highly relevant today.

Kraljic’s statements about the need for simplicity and consideration of the total value chain when it comes to risk also caught my eye.

More importantly, at the end of the interview Kraljic was asked how he might rewrite or change his original article: “The first thing is that I would not address it to the purchasing community, but to the CEO. CEOs know what it takes, they can appoint the right people, and then they can uplift and anchor supply management so that is clearly visible.

“As regards the basic message of identifying critical items and building management talent, no, I would not change it other than to add trust into the equation – the importance of trust in long-term relationships with suppliers. You need to create win-win.”

Adding the concepts of top-down buy-in, visibility and trust to get to the win-win are hallmarks of the Vested Outsourcing approach, and it seems to me, takes the Kraljic Model out of a selfish, win-lose interpretation.

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