Portfolio Analysis

One of the most widely used tools in procurement is portfolio analysis, based on the work of Peter Kraljic. Published in 1983, in the Harvard Business Review, Kraljic’s article, ‘Purchasing must become supply management’, was a milestone in the evolution of procurement. Kraljic pointed out that organisations should not buy their goods and services mechanistically by inviting three bids for all requirements. Instead, he proposed two key factors that should be considered in developing supply strategies. The first was the strategic importance of the category in terms of the value added by the category, the percentage of total spend and the impact on profitability. The second factor was the complexity of the supply market gauged by supply scarcity, the pace of technology, the availability of alternatives or substitutes, the barriers to entry, and market structures such as oligopoly or monopoly. Kraljic proposed that senior managers and procurement staff should develop category-specific categories based upon understanding the balance between risk and opportunity. Routine categories should be subject to lower level effort, as they were unimportant categories sourced from simple markets, although he anticipated that many categories were not sourced from simple markets. Leverage categories represented an opportunity to use competition to generate profit for the buyer, though he suggested that, leverage should not be a universal strategy. Bottleneck categories involved lower value acquisitions that were sourced from complex markets and strategic categories required careful management and longer-term agreements. The significance of Kraljic’s work was his emphasis on strategy, and the use of the word ‘strategy’ would have been considered revolutionary in the context of purchasing at that time. Rather than ad-hoc tactics, he advocated the need for business managers to be involved in strategising, and the necessity for different strategies across the spend portfolio. See also Critical, Leverage and Routine.