Reference no: EM132274032
Peter Kraljic distinguishes four types of product categories in these two dimensions:
1. Strategic items (High profit impact and high supply risk). These types of products are purchased from one supplier. There may be a balance of power between the company and the supplier, but when this supplier ceases to deliver, purchasing stagnates. In general, raw materials belong to this category. Raw materials determine to a large extent the value of the cost price of the finished product.
2. Bottleneck items (Low profit impact and high supply risk). These items do not represent a high value but they are a vulnerable factor in the entire supply chain. These are products that are essential for the production process but they are difficult to obtain. There is an imbalance of power between the company and the supplier, in which the supplier is the dominant factor. By creating buffer stock of these scarce items and by finding alternative suppliers, a company can undermine this position.
3. Leverage items (High profit impact and low supply risk). These types of products can easily be purchased from different suppliers and they determine to a large extent the value of the cost price of the finished product. A minor change in price or a change in quality will strongly affect the cost price. In the balance of power between the company and the supplier, the company is the dominant factor. By concluding good framework agreements and drawing up targeted pricing, the relationship between the company and the supplier continues to be in harmony.
4. Non-critical items (Low profit impact and low supply risk). These types of products cause the least problems with respect to purchasing performance. Such products represent a low value and they can be purchased in different varieties and from different suppliers. Most raw materials and substances fall into this category. There is a balance of power between the company and the supplier. By increasing product standardisation, much time and money can be saved.
After critiquing on the two dimensions (supply risk and profit impact) of Kraljic’s model, concentrating on how appropriate each dimension is for use in the development of sourcing strategies. Explain the limitations of the model and any information gaps that may result from using only the two dimensions.