Kraljic Model

for
Strategic Sourcing

Ref PPT :
ITC Modular System

Suitably modified by:

Dr. Suhas Rane
Let’s demystify some jargon -

Concept Purpose

1. SRM Extending Supplier Relationship

judiciously

2. ABC Always Better Control - for Selective

Inv. Control & Cost Reduction

3. VED To meet - production urgencies

& criticalities.
ABC (Always better control ) Analysis:
Nos. of Items Annual Cons. Value Category
( $)
High Cons. Items 40 10% 470 M 70% A

Medium Cons. Items 80 20% 134 M 20% B

Low Cons. Items 280 70% 68 M 10% C

Total Purchase Items 400 100% 672 M 100%

 ABC : Strategic Actions -
A items B items C items

1. High consumption Moderate value Low value

Value (Rt. X Qty.)
2. Very strict control Medium control Loose control

3. Low Safety Stock Low safety stocks High safety stk.

(but spend more time) (spend less time)

4. Daily /JIT Deliveries Weekly/ Monthly Bulk/ Quarterly

5. Multi-sources Few sources Max.- 2 sources

for the catégorie.

6. Accurate forecasts Estimates Guesti-mates

7. Central storage Storage in each plant Multi-Site storage

8. Max. Cost control Minimum efforts Less efforts .

 VED Analysis
This method can be better suited for stocking
Critical item for production (or maintenance)

V – Items of vital importance,

E – Items of essential importance,
D – Items of desirable importance.

Vital - Indicating that production stops without ‘V’ Item.

Essential - Production can be saved (but without efficiency)

or maintenance of m/c by compromising parameters as
such efficiency, noise reduction etc. (e.g. Lub Oil )

Desirable- Production can be managed without them

Or M/c can run but factor of safety, industrial formalities
can’t be satisfied (e.g. - wearing Ear-plugs)
 SRM – What’s that ?

We being a good customer means:

Paying on time

Being efficient & effective

To avoid being “bothersome”

We appointing an “account manager” for the supplier

Responding swiftly to his queries

Being professional & ethical

But can we offer best SRM to all our suppliers ?

ITC M4:U3:3.9-8
How to balance between ABC & VED ?
How to balance between ABC & VED ?

Auto Cons. Value As per As per

Component ( per Car) ABC VED

Tire 5 X $100 = $ 500 A V

5 X Rs.2000= Rs.10K

Wheel Washer 16 X $ 0.1= $ 1.60 C V

16 X Rs.0.20= Rs. 3.2

Music System 1 X $ 400 = $ 400 A D

1X Rs.20K = Rs.. 20 K

Floor Mat Paper $ 0.1 / set, or Rs. 2 /set C D

Strategic Sourcing
◼ A disciplined, systematic process for reducing the
Total cost of Prodn. (TCP) of externally purchased
materials, products and Out-Sourced services, while
maintaining or improving levels of quality, service
and technology

Kraljic Model
◼ It helps us to take decisions in Strategic Sourcing,
based on the concepts of ABC & VED Analysis
◼ It guides us in the areas of :
Right Actions, Right Vendors & Right Buyers
 Product Categorisation
by Value & Criticality

Criticality/ M
Risk rating

N 80% of items = 20% of value 20% of items = 80% of value

Expenditure
ITC M4:U2:2.2-4
 Product Categorisation by Value & Criticality
H

Criticality/
Risk rating
LV-LR
Routine/
L
General

N
80% of items = 20% of value 20% of items = 80% of value

Expenditure
ITC M4:U2:2.2-4
 Product Categorisation by Value & Criticality
H

Criticality/
Risk rating
LV-LR HV-LR
Routine/ Bulk
L
General Purchase/
Leverage

N
80% of items = 20% of value 20% of items = 80% of value

Expenditure
ITC M4:U2:2.2-4
 Product Categorisation by Value & Criticality
H LV-HR

M
Critical /
Bottleneck
Criticality/
Risk rating
LV-LR HV-LR
Routine/ Bulk
L
General Purchase/
Leverage

N
80% of items = 20% of value 20% of items = 80% of value

Expenditure
ITC M4:U2:2.2-4
 Product Categorisation by Value & Criticality
H LV-HR HV-HR

M
Critical /
Strategic
Bottleneck
Criticality/
Risk rating
LV-LR HV-LR
Routine/ Bulk
L
General Purchase/
Leverage

N
80% of items = 20% of value 20% of items = 80% of value

Expenditure
ITC M4:U2:2.2-4
 Routine Items
What are they? (LV, LR)

Standard items - readily available

Many suppliers

Our annual expenditure on the item is low

The item is low risk to our company

Our expenditure only represents a small part

of the supplier’s turnover
ITC M4:U4:4.2-2
 Routine Items
You would therefore like to:

Have simple procurement processes

Minimize administrative costs

Minimize intervention with the supplier (Low SRM)

Delegate actual buying to end-users

(but do not allow them to fix price)

ITC M4:U4:4.3-1
 Routine
Items

To avoid high efforts and costs,

Try to use one single “preferred supplier”

Have a long-term, ARC or “evergreen” contract

which covers as many items as possible

You can link prices to an index or use cost-

reduction clauses

ITC M4:U4:4.3-2
 Suppliers of Routine Items
- desirable characteristics

Able to provide a wide range of items and

to supply these over the long term

Have processes which are simple, consistent & reliable

Able to provide consolidated monthly bills

Able to accept purchasing cards and/

or trade electronically

ITC M4:U4:4.5-1
 Buyer of Routine Items

Good understanding for how processes

work and how they can be simplified

Junior level officer may be sufficient

More senior buyers need to be involved

in the setting up of bigger contracts

ITC M4:U4:4.5-2
 Leverage Items
What are they? (HV & LR)

Standard item

Many suppliers &

the item is readily available

Your annual expenditure on the item is high

The item is low risk to your company

Your relatively high expenditure makes your

purchases attractive to suppliers
ITC M4:U5:5.1-1
 Leverage Items

Since the value is high & risks are low, you will
focus on price. Hence negotiate best rate.
(Leverage on your high value of Buying)

Price changes can have a significant impact on your

company

Since the value is high, a degree of switching costs

can be tolerated
ITC M4:U5:5.1-2
 Suppliers of Leverage Items
- desirable characteristics

Basic capabilities (spot purchases)

Cost competitive suppliers in the short- & medium-

term (term contracts)

Prefer suppliers that wouldn’t exploit their strong

bargaining position once the contract has been
awarded (long-term contract)

ITC M4:U5:5.5-1
 Leverage Items -
Buyer Characteristics

Strong negotiators who are comfortable

with arms-length relationships (spot
purchases and when entering into term
contracts)

If switching costs are high, the person

managing the contract need to be good
at establishing and maintaining a co-
operative relationship

ITC M4:U5:5.6-1
 Bottleneck Items
What are they? (LV HR)

The item is high risk to your company

There are few suppliers

It is not a standard item

Your annual expenditure on the item is low

Your relatively low expenditure is likely to

make your purchases unattractive to suppliers
ITC M4:U6:6.1-1
 Bottleneck
Items
What to do (I):

Focus on reducing risks –

price & cost of acquisition is of secondary
importance

If possible, buy multiple items from one

supplier for increased leverage

If needed, keep two suppliers as an

alternative, in case problems arises

ITC M4:U6:6.2-1
 Bottleneck
Items
What to do (II):

Develop a close & long-term relationship

with the supplier(s)

Negotiate a guaranteed volume (e.g., per month)

to reduce risks & sign a long-term contract

Be a “good customer (offer CRM) ”

ITC M4:U6:6.3-1
 Suppliers of
Bottleneck Items
- desirable characteristics
The supplier should be reliable and not
behave opportunistically or exploit its
strong bargaining position

It should be able to supply the required item

for the long term

If the risks are upstream the supply chain, the supplier

needs to have sufficient clout & sound strategies with
his suppliers

ITC M4:U6:6.5-1
 Buyer Characteristics
- Bottleneck Items

The buyer should be a team player

who can work with other functions
in your company to reduce risk

It is important to maintain a good

impression of the supplier and to be a
good customer

The buyer should be more of a

relationship manager than a hard
negotiator

ITC
M4:U6:6.5-2
Critical /Strategic Items
What are they?

They are non-standard

There are few suppliers

Few alternatives exist

The risk to your company is high

Your annual expenditure on the item is high

Your relatively high expenditure makes your

purchases attractive to suppliers
ITC M4:U7:7.1-1
 Critical Items

Suppliers will typically have a small number of

large customers

The numbers of suppliers to switch to will be

limited

Partnership is the ideal relationship

ITC M4:U7:7.2-1
 Developing
Strategic partnership:
Partnerships involve time &
effort and are based on trust

You need to be willing to work closely with the supplier

and to share information

Select a partner with which you can develop a

competitive advantage

The contract is more of an expression of GOAL

long-term commitment and one that
states the ground rules

ITC M4:U7:7.2-2
 Suppliers of Critical Items
- desirable characteristics

Be financially stable and have a sustainable

market position
Understand & agree to the concept of partnership

Not seek to exploit their situation

Not have a similar relationship with a competitor
Be cost & technologically competitive in the medium and long term
Have a business strategy that is compatible and aligned with yours
Be able to benefit from the relationship

Be able to reduce any upstream supply risk if applicable

ITC M4:U7:7.5-1
 Buyer Characteristics
- Critical Items

The buyer needs to be highly creative

and a relationship builder

It is important that negotiators are

strategically oriented and don’t damage
the relationship

Supply decisions for critical items

should be made at the highest level

ITC M4:U7:7.5-2