purchasing portfolio model

Strategic Marketing Management-Term Paper The Application of Kraljic Purchasing portfolio:

The Case of TPCC

Fridolin Wilbard

12/2/2008

Strategic Marketing Management-Term Paper

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Table of Contents 1. INTRODUCTION TO THE RESEARCH ................................................................................................. 4

1.2 Introduction ................................................................................................................................... 4

1.3 Nature of the study ........................................................................................................................ 4

1.4 Statement of the problem............................................................................................................... 5

1.5 Objectives of the study .................................................................................................................. 6

1.6 Brief history of the organization .................................................................................................... 6

1.7 How does the company manage purchases ................................................................................... 6

2. THEORY ................................................................................................................................................ 8

2.1 Conceptual background ................................................................................................................. 8

2.2 Portfolio approaches ...................................................................................................................... 8

2.3 The Kraljic Matrix ......................................................................................................................... 9

2.4 Brief analysis of the article .......................................................................................................... 10

2.4.1The importance of the matrix ................................................................................................ 10

2.4.2 Classification of products ..................................................................................................... 11

2.4.3 The power dependence between the buyer and the supplier ................................................ 12

2.4.4 Strategic positioning of the products .................................................................................... 12

2.4.5 Long-term actions plans and strategies ................................................................................ 13

2.5 Organizational buying behavior .................................................................................................. 13

2.5.1 Factors influencing organizational buying behavior ............................................................ 14

2.5.2 Buying Tasks ........................................................................................................................ 16

3. METHODOLOGY ............................................................................................................................. 17

3.1 Data collection ............................................................................................................................. 17

3.2 Selection of company .................................................................................................................. 17

4. ANALYSIS ........................................................................................................................................... 18

4.1. Introduction ................................................................................................................................ 18

4.2 Purchasing set up ......................................................................................................................... 18

4.3 The organization and the purchasing department ........................................................................ 18

4.4 Relationship to Kraljic Matrix ..................................................................................................... 19

4.5 Strategic movement ..................................................................................................................... 20

5. DISCUSSION AND FINDINGS .............................................................................................................. 21

5.1 Products groups as per Kraljic matrix ......................................................................................... 21


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5.2 Non-strategic products ................................................................................................................ 21

5.3 Strategic product .......................................................................................................................... 21

5.4 Bottleneck products ..................................................................................................................... 22

5.5 Leverage products ....................................................................................................................... 22

5.6 Power balance.............................................................................................................................. 22

6. CONCLUSION ..................................................................................................................................... 23

6.1 Recommendation ......................................................................................................................... 23

6.2 Limitation to the study ................................................................................................................ 23

Reference .............................................................................................................................................. 24


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1. INTRODUCTION TO THE RESEARCH

1.2 Introduction

This is a compulsory task of work with which the theoretical knowledge acquired in class

is supposed to be put in practice. In strategic marketing management, a course that form

part for of my studies at this university requires me to write a term paper in one of the

model that were taught in class. I set out to research on Purchasing Portfolio Model

specifically the one that was suggested and put forward by Peter Kraljic in an article titled

‘Purchasing Must Become Supply Management’ published in the Harvard Business

Review Sept-Oct, 1983. Basically the model analyses the purchasing portfolio of any firm.

In recent years purchasing portfolio models have been put in different perspective by both

academicians and business professionals (Narayambas and Rangani, 2004, Weele, 2002,

Gelderman 2000). It remains to be found if all products and buyer relationship are

managed in the same way as the model proposes. Gelderman and Weele 2003 admit that

despite the fact that other purchasing models being developed, The Kraljic Purchasing

portfolio is the dominant and is regarded as the professional tool in firm purchasing

strategies (Gelderman and Weele, 2003). This study has been carried out to investigate

how Tanzania Portland Cement Company Limited (TPCC) applies the Kraljic Model in its

procurement.

In this introduction I set out to give a preliminary setting of my study before I present the

theory in chapter two. The discussion of the theory features the literature as suggested by

various authors but focusing on suggestion by Kraljic. I discuss the methods and

methodology that enabled me to collect the required data in chapter three. The findings are

presented in chapter four, the main finding is that TPCC has not adopted nor know

anything about the Kraljic Portfolio matrix. I discuss the findings in chapter five. The

conclusion and implications are discussed in chapter six. Generally TPCC Ltd manages its

purchasing strategies through modern management techniques, but on studying the data it

is confirmed that what the company does falls in what is contained within the Kraljic

matrix.

1.3 Nature of the study

The management of buyer- supplier relationship is essentially very important for any firm.

Even though the management of this relationship is not necessarily the same throughout

all organizations, this relationship has paramount importance to most if not all firms. The

fact that most firms has moved in industrial markets from adversarial relationships


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focused on a single exchange to collaborative partnerships focused on building long term

relationships through non markets modes of governance has been shaping organization in

various ways. The paramount benefit behind this relationship is the reduced transaction

cost, efficiency and increased productivity as well as higher economic returns for both

customers and suppliers (Das Narayandas & V. Kasturi Rangan, 2004). This admission

however does not rule out the possibility of players in this relationship to behave

opportunistically at which benefits accrues asymmetrically to one member at the expense

of other partner. Effective purchasing and supply management thus requires the selection

of strategies that are appropriate to the prevailing circumstances. It is with this reality that

the successful supply chain management requires the effective and efficient management

of a portfolio of relationship. Most firms today have purchasing managers who are overall

in charge for the task of developing and executing a set of supplier strategies. The need of

supplier strategies calls for attention being put on various approaches in handling different

suppliers. To this end it follows that a portfolio model for supplier relationship is a useful

tool for any sustainable supply chain activities within any firm. With this study, behind is

an assumption that a mismatch between buyers and seller can prevail just in case if the

firm does not take into account how the supplier assesses the prevailing business

atmosphere. The essence of this study was to iron out the real relationship between TPCC

Ltd as a firm and its suppliers as well as establishing if the Kraljic takes root in application

of procurement strategies in this company.

1.4 Statement of the problem

Apart from fulfilling the requirement of the academic requirement, this study is aimed at

analyzing the application and methods in buying strategies followed with TPCC Ltd.

Basically I present the literature around the Kraljic Purchasing Model and set out to find

out if this company applies the model in its purchasing and procurement management. It is

not necessary that the model is spelled out explicitly in the purchasing strategies but I

would rather gather information, study to find out if the methods applied falls with the

knowledge in the literature of Kraljic Purchasing Model. The central attention of the study

is to establish whether this company applies the Kraljic Purchasing Portfolio Matrix in its

purchasing strategies and if not to find out if the default strategies used by the company

fall with the model.


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1.5 Objectives of the study

Generally the study aims at exploring the strategies use by TPCC Ltd in its purchasing and

procurement management. Organizational buying can take a complex picture as a business

undertaking. This study stands to establish how the relationship between buyers and

suppliers are managed and whether it falls with the literature suggested by Kraljic

Purchasing Portfolio. Specifically the study will answer the following questions:

Does TPCC manage its suppliers in line suggested by Kraljic?

What are practical perspectives does TPCC Ltd follow in its procurement

management?

What is the classification of products bought by TPCC Ltd (in line with Kraljic

Model)?

1.6 Brief history of the organization

TPCC traces its history from the year 1959 when it was established in Tanzania by Cementia

Holding AG of Switzerland. By then the government owned 20% of company share. The

company was nationalized in 1973 at which the Tanzanian government owned its share to

100%. Following economic liberalization of 1990s, the government entered a joint venture

with two foreign companies, Scancem International ANS (13%) and Swedenfund

International AB (13%) the government retained 74% of the share. Due to consolidation of

Scancem International ANS into HeidelbergCement Group of Federal republic of German

(HC Africa), the former is now known as HeidelbergCement. In 2006 the Tanzanian

government sold its shares to the public. Now HC Africa owns 69.3% of shares and the rest is

owned by the public. Since then the company has been manufacturing and distributing quality

construction cement in the country. The company is currently the market leader in the cement

industry in the country. HeidelbergCement has invested more than $100 million to expand

TPCC operations. Now Heidelberg cement hold a majority of stake in TPCC that produce

more than 1.2million tons of cement a year (Annual Report, 2007)

1.7 How does the company manage purchases

Organizational buying process is a form of problem solving, and a buying situation is created

when someone in the organization perceives a problem- a discrepancy between the desired

outcome and the present situation-that can potentially be solved through some buying actions.

TPCC Ltd has purchasing as one of the fundamental task of the organization. From the

information I gathered, this company has a variety of suppliers supplying categories of


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products as classified by Kraljic matrix. However at some lengths TPCC had employed

backward integration and acquired the supply of limestone (bottleneck) to the factory. The

company has outsourced the supply of engineering materials to a sole Chinese company

specializing in cement producing equipments. The company also gets power from the

government owned agency as the sole supplier of electricity to company. The rest of the

products are bought from a number of varied suppliers.

From what I have learnt, TPCC has a centralized purchasing process (CPP). From this system

once products are procured, they are then distributed to other specific departments. The CPP

is charged with responsibilities for strategic, standard issues, tools and methods as well as

procedures involved in purchasing activities.


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2. THEORY

2.1 Conceptual background

In this section I present the theories used for this study in relation to Kraljic purchasing

portfolio model. I analyze the model, discuss the types of products are expressed by Kraljic as

well as discussing the buyer-seller relationship and how do the organization manage the

purchasing activity.

2.2 Portfolio approaches

Portfolio models have basically been used in strategic decision making to support resource

allocation decisions, by identifying which groups of products, suppliers, or relationships that

require greater attention than others. It is thereby also seen as a useful management tool

(Ellram, O., Olsen, L., 1997). From the purchasing perspective purchasing portfolio models

are needed to support decisions regarding different kinds of supplier relationships.

Portfolio approaches are used for management problems in various fields and disciplines. The

portfolio concept has its origin from the financial and investment field in early days of 1950s

following the work of Markowitz. This work is the origin of modern portfolio theory for the

investment purpose as an instrument for managing equity investment. Markowitz brought

forward an idea that rational investors should select portfolios that maximize the individual

investors’ utilities by maximizing the expected return for a given level of risk. Putting in

balance the objectives of high yield and low risk, this portfolio approach focuses on the

efficient allocation models of limited resources (Markowitz 1952). In the 1970s and 1980s a

number of portfolio models, notably in strategic management, marketing management and

ultimately purchasing management were developed (C. J. Gelderman, 2000). The portfolio

concept reflects the importance for balance in a collection of individual elements. This results

in the concept to allow for differentiation and diversification in pursuit of balance and an

optimal use of resources. The basic idea is the simplification of a complex problem by

classifying objectives/subject in a two dimensional matrix and providing strategic

recommendation of each cell in the matrix. A portfolio model method helps to improve

management’s ability to allocate resources. According to Gerderman, ibid the actual using

and customizing of portfolio models lead to a better understanding of the strategic issues at

hand.


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2.3 The Kraljic Matrix

Kraljic 1983 introduced a comprehensive portfolio approach as a tool for professional

purchasers. With a help of portfolio matrix, professional purchasers could optimize the use of

capabilities of different supplies (Nellore and Soderquist, 2000) and thereby effectively

manage suppliers. Kraljic approach includes the construction of two portfolio matrices. The

first matrix classifies a firm’s purchased products on the basis of two dimensions:

1. ‘‘the strategic importance of purchasing in terms of the value added by product line,

the percentage of raw materials in total costs and their impact on profitability’’

2. ‘‘the complexity of the supply market gauged by supply scarcity, pace of

technology and/or materials substitution, entry barriers, logistics cost or complexity,

and monopoly or oligopoly conditions’’ (Kraljic, 1983, p. 110).

Each dimension has two possible values: low and high. The resulting 2x2 matrix consists of

four quadrants (see figure 1). Depending on the category, Kraljic indentifies certain main

tasks for the firm in the interaction with its supplier. He also identifies the required

information and the decision level in the organization per category. From this construction, a

set of differentiated strategies and a policy for the more fundamental restructuring of the

whole firm portfolio can be determined. It is with this development that more than two

decades ago Kraljic advised managers to guard their firms against disastrous and haphazard

supply interruptions and to cope with evolving as well as changing economic and new

technologies. Kraljic gave a message as ‘purchases must become supply management’

(Kraljic, 1983 p.112). He proposed a four-stage approach as a framework in guiding the

supply strategy. These were:

Classify all the purchased materials or components in terms of profit impact and

supply risk

Analyze the supply market for these materials

Determine the overall strategic supply position

Develop materials strategies and actions plans


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2.4 Brief analysis of the article

2.4.1The importance of the matrix

The article by Kraljic highlights purchasing as an important managerial area with an

enormous impact on profit. Because of the article’s message that the purchasing area was an

important management issue, the implicit effect was the need of better models used in

purchasing. Another important reason for the success of the model was the different clearly

distinguished purchasing situations and the logical recommendations how to act in these

situations (Dubois, A., Pedersen, A-C., 2002). The matrix classifies the stages of purchasing

sophistication within companies and identifies four stages: purchasing management; materials

management; sourcing management; and supply management. The argument behind Kraljic

was that supply management is critical when the supply market is complex and the

importance of purchasing is high (Caniëls, M., Gelderman, C., 2005). A company must act in

its own advantage and this changes the perspective from purchasing (an operating function) to

supply management (a strategic one).

The author continues that supply management becomes relevant when critical items are

procured throughout complex situations. Supply management becomes even more important

if the uncertainty in the buyer-supplier relationship increases (Kraljic, 1983). Kraljic means

that two factors are important for a supply strategy. The first factor concerns the strategic

importance of the purchasing in terms of the value added by the product line, the percentage

of raw materials of the total costs and the impact on profitability and so forth (profit impact).

The second factor concerns the complexity of the supply market measured by supply scarcity,

pace of technology and/or materials substitution, entry barriers, logistics cost and/or

complexity, and monopoly and/or oligopoly conditions (supply risk).

An understanding of these two dimensions, profit impact and supply risk, improves the

understanding of the top management and the senior purchasing executives and can lead to

appropriate supply strategies. This can help companies improve the power balance with their

suppliers and thereby exploit its buying power towards important suppliers. This approach can

also reduce the risk (aspects as the contractual coverage, regional spread of supply sources

and availability of scarce materials contributes to the risk profile of the company) the

company faces. Kraljic stressed the importance that companies answer the following

questions: Is the company making use of opportunities for concerted action among different

divisions or subsidiaries? Can the company avoid anticipated bottlenecks and interruptions?

How much risk is acceptable? What make-or- buy policies will give the best balance between


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cost and flexibility? To what extent might cooperation with suppliers or even competitors

strengthen long-term supply relationships or capitalize on shared resources. (Kraljic, 1983

pp. 110-113)

The matrix helps company in a number of ways. Through the Kraljic model company can

prepare portfolio analysis. It also helps firms focusing on purchasing department to spend

their time on those products that matter most and lastly firms can know non-critical and

leverage items that should be sourced out. Kraljic (1983, p. 114) recommends exploitation of

the suppliers’ dependence whenever possible: ‘‘to reduce the long-term risk of dependence on

a single source, the company should also search for alternative suppliers or materials or even

consider backward integration to permit in-house production. On the other hand, if the

company is stronger than the suppliers, it can spread volume over several suppliers, exploit

price advantages, increase spot purchases, and reduce inventory levels’’

Profit High

Impact

Low

High

Supply risk

Fig. 1 Kraljic Purchasing Portfolio Models (adapted from Kraljic, 1983 p. 111)

2.4.2 Classification of products

As can be seen from figure 1, the matrix classifies products as strategic, bottleneck, leverage

and non-critical. The dimensions used for the classification are profit impact and supply risk.

In the article where Kraljic presented the matrix, a working method with four phases should

be followed – classification, plotting bargain power between the buyer and the different

suppliers, strategic positioning of products identified in the classification phase and finally

setting up long-term action plans.

Classification of a company’s different commodities based on the dimensions leverage,

strategic, noncritical and bottleneck. Profit impact and supply risk, is the first phase in

Kraljic’s working method. The classification in the four categories requires a distinctive

Leverage items:

Material management

Strategic items:

Supply management

Non-critical items:

Purchasing management

Bottleneck items:

Sourcing management


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approach and the complexity of the supply market (supply risk) is in proportion to the

strategic implications. In the strategic quadrant analytic techniques are needed to support

supply decisions. Kraljic gives examples of such techniques as market analysis, risk analysis,

computer simulation and optimization models, price forecasting and other microeconomic

analyses.

Specific market analyses and decision models are needed for bottleneck products and vendor

and value analysis, price forecasting models and decision models may be important for

leverage items. Non-critical items simplified market-analyses; inventory optimization and

clear decision policies are needed. The author also stress that supply and demand patterns can

shift the category for a material. He therefore points out the importance that any portfolio

classification calls for regular updating (p 112).

2.4.3 The power dependence between the buyer and the supplier

The second phase in Kraljic’s framework, after the classification of the product categories,

deals with market analysis by plotting the bargaining power of the suppliers against its own

strength as a buyer. This concerns everything from quality and quantity aspects to the relative

strength of existing suppliers. Important factors during this phase are the check of supplier’s

capacity utilization, supplier’s break-even stability, uniqueness of supplier’s product, past

variations in capacity utilization of main production units and the potential costs of non-

delivery and inadequate quality. Taken together, Kraljic stress the importance of knowing

both the supplier strength and company strength in order to do a good market analysis. The

evaluation criteria will also differ for different industries (p. 113).

2.4.4 Strategic positioning of the products

The third phase concerns strategic positioning of the materials/products identified in phase

one. This makes it possible spot opportunities and vulnerabilities in the supply markets and it

also makes it possible to develop counterstrategies. Three basic risks categories are possible

in the strategic quadrant depending on where in the matrix a product category is positioned:

exploit, balance and diversify. Different actions are needed for volume, price, contractual

coverage, new suppliers, inventories, own production, substitution, value engineering and

logistics. The normal situation is that companies will have different roles when different items

and suppliers are regarded. The company will have more flexibility in negotiations if the

company is stronger than its supplier. The exploit strategy is used when the buyer plays a

dominant role and the supplier’s strength is medium or low; there should however be a

balance in order not to jeopardize the relationship with the supplier. With an equal power


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situation a balanced approach are used and when the supplier dominate a diversified approach

is used. This can also mean that the buyer should try to find material substitutes or new

suppliers. This can lead to inducements as longer contracts and higher prices. This stage is

more related to the prevailing conditions the purchasing department faces.

2.4.5 Long-term actions plans and strategies

The fourth face concerns setting up actions plans for the long term and opens up for changing

the prevailing conditions in phase three above. The previous phases have dealt with volume,

price, supplier selection, material substitution, inventory policy and so forth. The fourth phase

makes it possible to improve the general sourcing strategy. This can mean securing long-term

supply and taking actions depending on the risks the company faces. Options with clear

objectives, steps, responsibilities and different measurements need to be clear for the top

management. The fourth phase should lead to strategies for critical purchasing materials both

considering time and what actions that needs to be taken (p 115). Kraljic also discuss in his

article the importance that the purchasing department reflects the overall corporate set-up.

This concerns for example, if the purchasing department should be centralized or

decentralized. He also points out the problem of the purchasing department not being

informed when new actions are taken and that the information period is too short. The

purchasing department needs information at least three to six months before the start-up of a

new project, in order to negotiate prices, rescheduling supply quantities and so forth. Tailor

made systems are probably also needed for complex companies with numerous products and

multiple plants. This can include forecast systems, extended delivery point (EDP) supported

planning, integration of purchasing systems with other corporate systems, purchasing analyses

approaches such as commodity analysis, value analysis and improved systems support, both

in order to work less with administrative task but also in order to be more efficient.

2.5 Organizational buying behavior

Similar to his consumer goods counterpart, the industrial marketer could find a model of

buying behavior useful in identifying those key factors influencing response to market efforts.

A buyer behavior model can help the marketer to analyze available information about the

market and to identify the needs for additional information. Webster defines organizational

buying as ‘a decision-making process carried out by individuals, in interactions with other

people in the context of a formal organization’ (Webster, 1972 p13). Webster classifies the

determinants of organizational buying behavior into four variables. These are individual,

social, organizational and environmental


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2.5.1 Factors influencing organizational buying behavior

Factors that influence the organizational buying behavior are mainly categorized into two

major groups, that those that are directly related to the buying problem, called task variable

and those that extend beyond the buying problem called non task variables.

TABLE 2

CLASIFICATION AND EXAMPLES OF VARIABLES INFLUENCING ORGANISATION BUYING

BEHAVIUR

Task No task

Individual Desire to obtain lowest prices Personal value and needs

Social Meetings to set specifications Informal, off-the-job interactions

Organization Policy regarding local supplier

preference

Methods of personnel evaluation

Environmental Anticipated changes in prices Political climate

Adapted from Wbster, 1972.

Organizational buying behavior is not a simple but a rather complex process that involve

many people, multiple objectives and potentially contradicting decision making criteria.

Business to business marketing is based on the understanding of organizational buying

behavior that is influenced by the following factors discussed below.

Environmental influences are subtle and pervasive as well as difficult to identify and

measure. These influence the buying process by providing information as well as constraints

and opportunities (Webster ibid). Included in this category are physical realities such as

geographical, climate or ecological; technological, economic, political, legal and cultural

factors. They influence and exert pressure through a variety of intuitions such as business

firms (suppliers, competitors, and customers), governments, trade unions, political parties,

educational institutions, trade associations and professional groups. These are always out and

beyond of the buyer control. From table two above these factors impact the buying process in

a number of ways. They define the availability of goods and services, they define the general

business conditions facing the buying organization, they determine the value and norms

guiding the relationship between buyers and sellers and lastly, environmental forces influence

the information flow of marketing communication from potential suppliers (Webster, ibid).


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Organizational influences such as strategic priorities, strategic roles of purchasing, policies

and strategic trends of purchasing result in individual decision making to act differently than

they would if they were functioning alone in a different organization. According to Webster

ibid, ‘organizational buying behavior is motivated and directed by organization’s goals and

is constrained by its financial, technological and human resources’ pg14. Webster contends

that organizations are composed of four interacting variables, these are:

Tasks-the work to be performed in accomplishing the objectives of the organization

Structure-subsystem of communication, authority, status, rewards and workflow

Technology-problem solving invention used by the firm as well as program for

organizing and managing work

People- the actors in the system

The four subsystems work interactively to define the information, expectation, goals attitudes

and assumptions used by each individual actor in their decision making.

Social (interpersonal) influences relate to three classes of variables. Identification of the

various roles played in the buying centre, relationship between persons in the buying centre

and the outsiders, and the dimensions of the functioning of the group as whole must be

considered. According to Webster ibid, within the organization only the subset of the

organization actors is actually involved in a buying situation. The buying centre does the

following roles:

Users-those members of the organization who use the purchased goods and services

Buyers-those with formal responsibility and authority for contracting with suppliers

Influencers-those who influences the decision process directly or indirectly by

providing information and criteria for evaluating alternative buying actions

Deciders-Those with authority to choose among alternative buying actions

Gatekeepers-those who control the flow of information (and materials) into the

buying centre (Webster ibid p17)

The influences of individuals characterize the industrial buying behavior. It is only the

individual as an individual or member of the group that can define and analyze buying

situations, decide and act. The individual is at the centre of the buying process, operating

within the buying centre which is bounded by the organization as well as the influences of the

environment. Webster asserts that ‘it is the specific individual who is the target for marketing

efforts not the abstract organization’ p18


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Figure 3, Major influences of organizational buying behavior

From: www.walnuthillcollege.edu/Instructors/Morrow/documents/07_Marketing.pdf

2.5.2 Buying Tasks

Buying tasks entails the specific task that must be performed to solve the buying problem.

These have been documented within many models and can be defined as eight stages in the

buying decision process. Webster identifies the tasks as (1) Identification of need; (2) Need

description; (3) establishment of specifications; (4) Identification of alternatives; (5) Proposal

solicitation; (6) selection of suppliers; (7) order specification, and (8) Performance review.

Webster further classifies the buying task into four dimensions:

The organizational purpose served, that’s whether the reason for buying is to

facilitate production or for resale or to be consumed in the performance of other

organizational functions

The nature of demand, especially whether demand for the product is generated

within the buying organization or by forces outside the organization (I.e. derived

demand)

The extent of programming, i.e. the degree of routinization at the five stages of

decision process, and

The degree of decentralization and the extent to which buying authority has been

delegated to operating levels in the organization (Webster, pg 16)

Webster believes that each of the four dimensions influences the nature of the organizational

buying process and must be considered while appraising market opportunities.

The organizational buying behavior has been defined as the decision-making processes by

which formal organizations establish the need for purchased products and services and

identify evaluate and choose among alternative brands and suppliers.” (Webster et al 1972).


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3. METHODOLOGY

This study takes an individual case study in order to analyze the chosen company. I adopt the

qualitative research method so as to deal with more complex context as I explore and get the

deep understanding of phenomenon that surround the company. The qualitative method

helped me to answer my research questions as stipulated in section 1.4 above. The method

helped me to gather information and source out more data and analysis based on

understanding and interpretation of information I managed to get through secondary sources

related to actor in a dyadic relationship. I adopted the case study approach. This helped me to

capture different situation and context that do not have any static traits as well as get

understanding of how people and their action are connected in different purchasing situations.

The case study is suitably fit to examine contemporary phenomena within real life context and

when the boundaries between phenomena and the context are not clearly evident. I intended to

gain an insight of how Kraljic purchasing portfolio model is applied in purchasing with this

company

3.1 Data collection

The company I studied does and conducts its business a thousand of miles away from

Norway. That fact hampered my ability to visit the company in person. But still I wanted

primary data for my study. I struggled and reached officials of the company in Tanzania.

Specifically I emailed my intention request to study to the company’s Procurement Director,

Mr. Olav Rost who agreed to respond on my questionnaire. Based on the discussed theories

above, I created a questionnaire with questions grouped in themes on the summary in the

theoretical framework. A semi-structured questionnaire was emailed to the company.

Although it took several weeks before I got the feedback, the filled in questionnaire was sent

back to me which served me with the primary data I wanted from the company. I could not

conduct any direct interview as this proved beyond of what I can afford in terms of financial

ability. The company website served as a valuable source of secondary data.

3.2 Selection of company

I would have rather selected a company here in Norway but the fact that the companies here

mostly use Norsk as a media of communication posed a difficult. TPCC turned out to be an

appropriate selection since I could easily approach it. After being wining the consent to study

the company, the procurement director agreed to work on my questionnaire. TPCC is also a

well established company having been in business for quite a long time (since 1960s). In

terms of procurements, TPCC purchases a big volume of magnitude of products.


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4. ANALYSIS

4.1. Introduction

TPCC produces a total of between 700, 000 and 750, 000 metric tons of cement annually. The

company serves more than 45% of the country cement market share which has three other

companies producing cement. TPCC has a growth of 30% revenue per a year. Other

information as revealed through questionnaire is that the company procures raw materials,

spare parts as well as consumables on arm’s length from Scancerm International, AN. By this

year, TPCC targets a total production of 1400,000 MT per annum serving 80% of the country

total cements consumption. Raw materials for cement production include gypsum, clinker and

limestone. The company also procures power from the government owned agency, Tanesco

and it has contracted one Chinese company CBMI, for the supply of cement producing related

equipments. The company has a purchasing department in place that is fully charged with all

commercial part with regard to company’s suppliers.

4.2 Purchasing set up

TPCC’s purchasing structure has slowly developed towards a more segment-oriented

organization with the aim of obtaining maximal effect of all possible synergies. This means

that many products are segmented in order to be procured and handled in an efficient way.

Product orientation has earlier meant that unnecessary variants have been developed with

lower volumes, reduced efficiency and higher costs as a result. The purchasing department

also strives to work accordingly to the overall mission of the firm, but there are some aspects

that worsen the ambition of doing so. For example the production department can have certain

preferences regarding which suppliers that should be called in this could differ with what the

CPP aspires. The reason for this can be that the supplier is relatively geographically close to

the production, which may overcome logistics problems and so forth but CPP could have

other factors to consider. I have learnt that this contradiction could bring about less optimal

result as the company aim at synergizing.

4.3 The organization and the purchasing department

From what I have learnt, purchasing was not on the agenda ten years ago. However, in the last

couple of years there have been dramatically changes in order to cut costs and to enable

effective routines. Furthermore, in year 2006, TPCC emerged and a lot of changes followed in

the purchasing organization in order to coordinate systems- and operational processes. Today,

the purchasing department is working with everything from ordering to strategic coaching; for

example examining quotations and making effective processes for purchase-to-pay (P-2-P).


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The choice of suppliers is a mutual decision between the user and the purchasing department

even though the latter takes a lead in decision making. The purchasing department is more

centralized and globally oriented. This meant that the daily procurement work became more

synchronized and goals and strategies of the purchasing department do correspond to the

overall mission of the firm.

Furthermore the respondent stresses the importance that the purchasing department is working

closely with other functions of the company in order to find new capable suppliers. A

coordinated procurement system is basically on progress and that will hopefully increase the

synergy effects but also issues related to measurement and reporting. TPCC has a ‘sourcing

board’ which they call procurement and tendering committee. The board strives for increased

coordination procurement endeavors.

4.4 Relationship to Kraljic Matrix

There was no admission from respondents that TPCC uses the Kraljic matrix in order to see

that the purchasing organization is working with the right things. However through my

understanding I could learn that the company implicitly follows phase one in the Kraljic

working method – the classification of commodities as a foundation for a differentiated

purchasing- and supply approach. However, they do not use Kraljic’s both dimensions (profit

impact and supply risk) and instead of profit impact the dimension cost per year is used. In

my opinion it could be easier to use a cost perspective for a commodity instead of the profit

impact, because in the latter you need both revenue and cost in order to know the profit. One

can question how easy it is to track the revenue to for example the wheel-system of a trailer

(if the aftermarket is not considered). This could be one reason why the respondent doesn’t

stress any general critique regarding measurement of the dimensions used in the used matrix.

Despite the fact that cost per year is used, I still consider the system TPCC uses as a Kraljic

matrix. In the article by Kraljic (1983) the profit impact dimension is seen as a dimension

highlighting the strategic importance of the purchasing department. Profit impact can be used,

but other dimensions can also be used, for example value added by the product line and

different measurements reflecting the cost side. Therefore I regard the dimensions cost per

year and supply risk as dimensions in the Kraljic matrix. This kind of reasoning is in line with

the findings by Gelderman and Van Weele (2003) that companies handle measurement of the

dimensions differently. One reason could be to match the prevailing conditions in the

industry. The respondent thinks that the plotting of power between the buyer and the supplier,

and by that also the power and dependence perspective in phase two of Kraljic’s working


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method is not enough to deal with the specific context of the supply market. It follows the

reasoning by previous researchers regarding Kraljic, that the supplier side is a disregarded

element.

4.5 Strategic movement

Regarding guidelines for strategic movements the Kraljic matrix is not used to create changes

in existing situations, even though from the responses I could learn and establish that the

matrix is a consequence of changes and thereby secondary driven. The respondent meant that

in order to make decisions about strategic change, the purchasing department must understand

the product and the technique behind the product. This is a fundamental element in TPCC

production climate. Besides the Kraljic matrix, different microeconomic analyses are made.

The company has meetings every week to evaluate the suppliers’ quality of the delivered

components/products, delivery status and possibilities for future product development and so

forth. This can be seen as a proactive and continuous working methodology. Quality and

delivery problems are two important factors that can affect decisions about strategic change

for critical items. The week meetings are complemented with more extensive monthly- and

quarterly based meetings. In the long-run, and also mentioned earlier, TPCC uses a market

oriented thinking regarding their purchasing strategy and strategic change are based on the

future needs of their customers.

TPCC has no power dependence as in the matrix’s analysis perspectives but rather the

company has developed its own supplier management methods. Every commodity group

leader evaluates their particular area and is thereby also responsible for their supplies. The

first change can be seen as an environmental pressure for change while the other as a

consequence of organizational reasoning to leave the single sourcing methodology. Reactive

and continuous change can also be related to changes in the conformity of law due to for

example changing emission standards.


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5. DISCUSSION AND FINDINGS

5.1 Products groups as per Kraljic matrix

Even though I could not get it right from the company that they apply the matrix in the

procurement strategies, the elements from responses admits that the portfolio analysis fits in

developing TPCC purchasing strategies. What follow now is the discussion of what I find out

from the company in line with the four categorization of products as per Kraljic purchasing

portfolio model.

5.2 Non-strategic products

The main products in non-critical category are office supplies and services. According to

Gelderman and Weele, ibid a key question with respect to these non-production orientation

purchases is whether standardization and pooling are possible option or not. These products

represent a relatively low proportion of the total purchase outlay. TPCC has a good number of

suppliers for these products as it has not yet adopted framework agreement with preferred

supplier as contractual possibility nor put in place more advanced arrangement suggested by

Kraljic such as e-procurement or electronic catalogue and ordering system. This is because

TPCC has not been able to standardize or pool the purchasing requirements. These non-

critical products are purchased on a transactional basis. With TPCC non-strategic products

includes stationeries, a variety of protective gears for workers, catering services among many

other high volume standardized products used in production process. Even though these

products have many suppliers, I found that one local supplier; Masumini Stationery dominates

the list of suppliers. With these products, the company enjoys the low level of supply risk and

bears comparatively low impacts on the cost of sale estimated at less than 8%. As a result

these products have low financial impacts. The company contracts few out of all suppliers

with whom it had established relationship such as Masumin. This sound optimal to the

company since it helps in doing away with unnecessary transaction costs.

5.3 Strategic product

Companies face difficult in establishing and maintaining successful strategic partnership as

with time partnership may become unsatisfactory. With Kraljic matrix, a position in the

strategic segment means high dependence between parties involved. According to TPCC

categorization; gypsum, clinker, limestone and power supply are strategic products. These

products have larger impact on overall TPCC Ltd profit. The fact that there are limited

suppliers for these products confirms the assertation pointed out in Kraljic. TPCC has

vertically integrated one of its suppliers of limestone and has a long term established


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relationship with suppliers of clinker as well as Tanesco which is the only local supplier of

electricity. The supply of these products is critical in the operation of the company, that’s why

TPCC has even acquired one supplier and now owns the supply of limestone. In total these

products accounts for 45% (estimates) of the company cost of goods.

5.4 Bottleneck products

Even though bottleneck are marked as having less influence on company financial result, with

TPCC is vulnerable when it comes to these products. The company runs a good number of

machines of which I categorizes spare parts, as well as electricity into these products. The

uniqueness of these products with TPCC has given the supplier a dominant influence. TPCC

relies only one Chinese company that specializes in supplying cement producing equipment

as explained above. However the overall impact on cost of goods for these products is

relatively low to an extent that they have less impact on the firm’s finances

5.5 Leverage products

Generally TPCC has a number of suppliers of a variety of products of which I consider fall in

this group. Consultancy services in the areas of staff developmental training, catering

services, fuel for cars, outsources cleaning agents, and repair services to company buildings.

My analysis shows these products fall in this category following the fact that they have a

relatively medium to low supply risk with a substantial high financial impact to the company,

a feature which Kraljic uses to classify product as leverage

5.6 Power balance

From Kraljic, we learn four different types of possible combination of dependencies, high

mutual dependence (balanced power), low mutual dependence (balanced power), high

supplier’s dependence, low buyer’s dependence (buyer dominated), and low supplier’s

dependence, high buyer’s dependence (supplier dominated). From the procurement

perspectives of TPCC’s raw materials (Clinker, and gypsum), there is a mutual dependence in

the dyadic relationship. The company critically needs the raw materials but the suppliers on

the other side have high switching cost for those supplies. This is also the case with no-critical

items as TPCC can still source out to other suppliers for these products, so the company keeps

the low mutual dependence and maintains relationship with the existing suppliers. However

the contract with one Chinese supplier places the company on the buyer dominated for the

machines and equipments. The supplier of spare parts on the other hand takes a dominant

position in the relationship due to the nature and specificity of the parts supplied. The four

types of relationship fall within the outlines of Kraljic.


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6. CONCLUSION

With TPCC, management portfolio management methods have not been endorsed by their

purchasing organization. The company is probably lagging behind both in terms of

professionalism and position of the purchasing organization in the overall company hierarchy.

The application of purchasing portfolio management seems to have prerequisites both in

terms of professionalism that needs to be present and the exposure. The application of

purchasing portfolio techniques requires skills extending beyond traditional administrative

competences. However, the purchasing strategies have a clear presence and position within

the organizational hierarchy of TPCC Ltd.

6.1 Recommendation

From the above findings, it is apparent that the Kraljic Purchasing Portfolio Matrix can be

applied to any company regardless of whether a particular firm applies it in explicit terms.

Although TPCC does not use the model in its purchasing strategies, what it does fall within

the literature suggested by Kraljic. My major recommendation is for the company to seek an

alternative supplier for electricity which critical for the production of its major product,

cement. Electricity fall within the bottleneck items in which the supplier dominates the

relationship. No mention has been made as regard with the use of IT especially on utilizing

the advantages of e-procurement. I think it is high time that the company strive to incorporate

e-procurement in its purchasing strategies. This should go in line with adapting the Kraljic

model in the procurement endeavors. Again, even though the relationship is mutual and

balanced with the leverage items, the company needs to look into more techniques of

maintaining this relationship as in case the supplies behave contrary, the company might face

difficulties in acquiring the basic raw materials. The company also needs to learn and acquire

the basic knowledge to manage its purchasing strategies by applying the portfolio techniques.

6.2 Limitation to the study

The findings are mainly based on a single questionnaire that was sent to the company situated

a thousands of miles from Norway. This was the only basis of all the primary data, a fact I

consider as a constraint as I could not do a comprehensive study on the company. Financial

limitation could not as well enable me to conduct direct telephone calls to more respondents.

Even the questionnaire was returned not fully answered. But even the information I managed

to get it was not easy for the respondent to give clear information regarding the portfolio

models. Most of the documented findings have been possible through the linkage between

what the company does and the literature highlighted in the portfolio model.


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Reference

Caniëls, M., Gelderman, C., 2005, Purchasing Strategies in the Kraljic Matrix – A power and

dependence perspective, p. 142, Journal of purchasing and supply management

C. J. Gelderman., 2000, Rethinking Kraljic: Towards a Purchasing Portfolio Model, Based on

Mutual Buyer-Supplier Dependence, Open Universiteit Nederland

Das Narayandas & V. Kasturi Rangan, 2004, Building and Sustaining Buyer-Seller

Relationship in Mature Industrial Markets. Journal of Marketing. Vol. 68 pp.63-77

Dubois, A., Pedersen, A-C., 2002, Why Relationships Do Not Fit into Purchasing Portfolio

Models – a comparison between the portfolio and industrial network approaches, p. 35,

European Journal of Purchasing and supply management

Dubois, A., 1998, Organizing Industrial Activities Across Firm Boundaries. Routledge,

London

Ellram, O., Olsen, L., 1997, A portfolio Approach to Supplier Relationships, p. 103,

Industrial Marketing Management

Gelderman and Weele, 2003, Handling Issues and Strategic Direction in Kraljic Purchasing

Portfolio. Journal of Purchasing and Supply management 9, pp.207-216

Kraljic, P 1983, ‘Purchasing Must Become Supply Management’, Harvard Business Review,

Vol. 61, September-October, pp. 109-117

Markowitz, H., 1952, ‘Portfolio Selection’, Journal of Finance, Vol. 7, March pp77-91)

Richardson, G.B., 1972. ‘The Organization of Industry’. The Economic Journal, September,

883–896

Webster, Frederick E., 1972, ‘A General Model for Understanding Organizational Buying

Behavior’ Journal of Marketing. April, 36, 000002 pp.12-19

Wedin, T., 2000. ‘Networks and Demand’. The use of electricity in an industrial process.

Ph.D. Dissertation. Department of Business Studies, Uppsala University


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Website sources

Company Annual report 2007:

www.heidelbergcement.com/sfrica/en/twigacement/investor_relations/annual_report.htm

Influences of organizational buyer behavior:

www.walnuthillcollege.edu/Instructors/Morrow/documents/07_Marketing.pdf

http://www.heidelbergcement.com/sfrica/en/twigacement/investor_relations/annual_report.htm

http://www.walnuthillcollege.edu/Instructors/Morrow/documents/07_Marketing.pdf

purchasing portfolio model

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