Question

ps 200 P-vc QUESTION 2 1. Using a diagram, categorize purchase items sourced by an organization using profit and supply risk criteria. ( 5 Marks)

Answer 1

The above question talks about the KRALJIC PORTFOLIO PURCHASING MODEL.

The Kraljic Portfolio Purchasing Model was created by Peter Kraljic and it first appeared in the Harvard Business Review in 1983. Despite its age, it's a popular and useful model used in companies worldwide.

Its purpose is to help purchasers maximize supply security and reduce costs, by making the most of their purchasing power. In doing so, procurement moves from being a transactional activity to a strategic activity – because, as Kraljic said, "purchasing must become supply management."

The model involves four steps:

1. Purchase classification.
2. Market analysis.
3. Strategic positioning.
4. Action planning.

The question asks us to enumerate the different purchase items an organization would choose from. For this only FIRST STEP OF THE MODEL is required by the question.

Purchase Classification

Start by classifying all of the commodities, components, products, and services that you buy according to the supply risk and potential profit impact of each.

• Supply risk is high when the item is a scarce raw material when its availability could be affected by government instability or natural disasters, when delivery logistics are difficult and could easily be disrupted, or when there are few suppliers.
• Profit impact is high when the item adds significant value to the organization's output. This could be because it makes up a high proportion of the output (for example, raw fruit for a fruit juice maker) or because it has a high impact on quality (for example, the cloth used by a high-end clothing manufacturer).

Then mark each item in the appropriate place on the product purchasing classification matrix (see below):

High Leyerage Items Strategic Itemš Non-Critical items Bottleneck Items Low High Supply Risk Profit Impact

Kraljic recommends the following purchasing approaches for each of the four quadrants:

• Strategic items (high-profit impact, high supply risk).

These items deserve the most attention from purchasing managers. Options include developing long-term supply relationships, analyzing and managing risks regularly, planning for contingencies, and considering making the item in-house rather than buying it, if appropriate.

Note that step 3, below, provides detailed options for the best purchasing approach for these items, after considering other factors.

• Leverage items (high-profit impact, low supply risk).

Purchasing approaches to consider here include using your full purchasing power, substituting products or suppliers, and placing high-volume orders.

• Bottleneck items (low-profit impact, high supply risk).

Useful approaches here include overordering when the item is available (lack of reliable availability is one of the most common reasons that supply is unreliable), and looking for ways to control vendors

• Non-critical items (low-profit impact, low supply risk).

Purchasing approaches for these items include using standardized products, monitoring and/or optimizing order volume, and optimizing inventory levels.