Week 3 | Session 5: Kraljic Matrix — Example Application (Bottling Plant)

Course: Supply Chain Digitization

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Example Context — The Bottling Plant

Note

Firm: A soft drink bottling plant reviewing its procurement strategy.

Scope: Plant-level analysis — not organisation-level. This distinction matters: the number and types of items will differ significantly depending on which level the matrix is applied at.

Data available: Purchase quantity (packs), cost per pack, total purchase value, number of suppliers, and average distance to supplier.

Data period: Last financial year. If no procurement history exists — use market price estimates and planned quantities.

Items: 8 representative items chosen for illustration. A real bottling plant would procure many more.

Tip

★ Exam Tip: Always state whether the Kraljic Matrix is applied at plant level or organisation level — the scope determines which items are in scope and how risk and cost thresholds are set.

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The 8 Procured Items — Overview

Item categories:

Category	Items
Production	Plastic Bottle, Syrup, Label A, Label B, Cartons
Office / Admin	A4 Paper, Ink Cartridge A (labelling), Ink Cartridge B (office)

Note

Ink Cartridge A vs. B — why both exist:

Variable information — batch number, bottling date, and plant location — cannot be pre-printed by the label supplier because these change per production run. The plant prints this information in-house using Ink Cartridge A. Ink Cartridge B is for routine office printing and carries no production criticality.

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Procurement Data — 8 Items at a Glance

Item-wise procurement data and preliminary quadrant classification:

Item	Pack Size	Packs Bought	Cost/Pack (₹)	Total Value	No. of Suppliers	Avg. Distance	Quadrant
Plastic Bottle	500 units	2,000	₹3,000	High	1,000	Very close	Leverage
Syrup	1 barrel	1,000	₹6,300	High	2	Very far (intl.)	Strategic
Label A	2,500 labels	500 packs	₹15,000	₹75 lakh	4	Far	Strategic
Label B	2,500 labels	100 packs	₹15,000	Low	4	Far	Bottleneck
Carton	1 carton	30,000	₹20	Moderate	Many	Moderate	Bottleneck
Paper (A4)	10 reams	30	₹4,000	Low	Many	Moderate	Non-Critical
Ink Cartridge A (labelling)	1 unit	20	₹2,000	Low	1	Very far	Bottleneck
Ink Cartridge B (office)	1 unit	2	₹500	~₹1,000	Many	Close	Non-Critical

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Key Observations from the Data

Profit Impact (Purchase Value)

Item	Observation
Label A	Highest total value at ₹75 lakh — the pack size (2,500 labels) makes this look expensive per unit, but the volume is what drives total cost
Plastic Bottle & Syrup	Also high total value — syrup at ₹6,300/barrel is expensive per unit
Office supplies	Very low total value — Paper and Ink Cartridge B together total only ~₹1,000
Carton	30,000 units purchased but at ₹20 each — moderate total value despite high volume

Supply Risk

Risk Level	Items	Reason
High risk — few suppliers	Syrup (2), Labels A & B (4 each), Ink Cartridge A (1 supplier only)	Limited sourcing options
Low risk — many suppliers	Plastic Bottle (1,000), Carton, Paper, Ink Cartridge B	Abundant options
High risk — far distance	Syrup (international), Ink Cartridge A (very far)	Long replenishment lead times
Low risk — close distance	Plastic Bottle (very close)	Quick replenishment possible

Note

★ Why ABC Analysis Alone is NOT Enough:

ABC analysis classifies items by purchase value — useful for setting internal inventory policy (review frequency, material handling priority). But it says nothing about supply-side risk and therefore cannot define a procurement strategy.

Kraljic Matrix = ABC-style value analysis + supply risk dimension → richer, actionable procurement strategy.

ABC → internal inventory policy. Kraljic → external procurement strategy. Both are needed, but for different purposes.

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Building a Composite Supply Risk Metric

The Problem with Two Sub-Metrics

The two available supply risk sub-metrics operate in opposite directions — they cannot be combined without normalisation:

Sub-metric	Direction	Interpretation
Number of suppliers	More suppliers → lower risk	Inverse relationship
Average distance	Greater distance → higher risk	Direct relationship

Scaling Approach

All metrics are converted to comparable scales before combining:

Metric	Scale	Logic
Profit Impact	0–10	0 = lowest value item, 10 = highest value item
No. of Suppliers	1–10	1 = fewest suppliers = highest risk; 10 = most suppliers = lowest risk
Avg. Distance	1–10	1 = farthest = highest risk; 10 = closest = lowest risk

Note

The professor uses 0–10 for Profit Impact and 1–10 for supply risk sub-metrics — a minor scaling inconsistency that does not materially affect the analysis. In practice, prefer consistent scales throughout (either all 0–10 or all 1–10).

Weighted Supply Risk Formula

Note

Weighted Supply Risk = 0.8 × (No. of Suppliers Score) + 0.2 × (Distance Score)

Why these weights?

• Weight 0.8 on number of suppliers → the company judges that supplier availability is the more dominant driver of supply risk
• Weight 0.2 on distance → distance is manageable in most contexts, but should be increased significantly in poor terrain or remote operating environments

Critical principle: Weights are judgement-based — the company decides based on its specific operating context. There is no universal rule for weighting. Always justify the weights chosen based on context when answering an exam question.

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Weighted Supply Risk Results

Weighted supply risk ranking — key results:

Item	Supply Risk Level	Primary Driver
Syrup	Highest (~9.996)	Only 2 suppliers + international distance
Ink Cartridge A (labelling)	High	Only 1 supplier + very far location
Label A & B	Moderate-high	Only 4 suppliers + far location
Ink Cartridge B (office)	Low	Many suppliers + close location
Paper (A4)	Low	Many suppliers + moderate distance
Plastic Bottle	Low	1,000 suppliers + very close location

Tip

★ Exam Tip: Know the formula. Know why the weights are subjective. In any exam answer involving Kraljic, always justify the weights chosen by referencing the company’s operating context — this shows analytical maturity, not just formula recall.

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Plotting & Classification on the Kraljic Matrix

• X-axis: Profit Impact (0–10)
• Y-axis: Weighted Supply Risk (1–10)
• Cutoff applied: Score > 6 on either axis = classified into the “high” side of that dimension

Resulting Quadrant Classification

Quadrant	Items
Strategic (High PI + High Risk)	Syrup, Label A
Bottleneck (Low PI + High Risk)	Label B, Carton, Ink Cartridge A (labelling)
Leverage (High PI + Low Risk)	Plastic Bottle
Non-Critical (Low PI + Low Risk)	Paper (A4), Ink Cartridge B (office)

Note

★ Exam Tip — The cutoff caveat: The cutoff value (here: 6 out of 10) is a management judgement call — it is not a universal fixed threshold. Changing the cutoff can reclassify items. Always mention this when explaining the classification in an exam answer. The cutoff should be set based on the firm’s risk appetite and strategic priorities.

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Current Procurement State — Review

Before recommending changes, the current practice for each item is assessed against its quadrant:

Item	Quadrant	Current Practice	Issue Identified
Plastic Bottle	Leverage	Same supplier for 5 years	Not using buyer power — 1,000 suppliers available
Syrup	Strategic	Same supplier 10 years; yearly contract renegotiation	High dependency; only 2 suppliers; international distance adds risk
Label A	Strategic	Supplier chosen yearly by cost negotiation	Price volatile year to year; only 4 suppliers
Label B	Bottleneck	Supplier chosen yearly	Low value but supply risk still present — few suppliers, far location
Carton	Bottleneck	Yearly selection	Risk exists despite moderate supplier numbers
Paper (A4)	Non-Critical	Spot purchases as needed ✓	Possibly over-spending; worth reviewing digital alternatives
Ink Cartridge A	Bottleneck	3-year contract then new supplier	1 supplier, very far — high production disruption risk
Ink Cartridge B	Non-Critical	Spot purchases as needed ✓	Minimal issue

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Recommended Procurement Strategies

Full recommendations — current practice vs. action:

Item	Quadrant	Current Practice	Issue	Recommended Action
Plastic Bottle	Leverage	Same supplier for 5 years	Not leveraging buyer power despite 1,000 suppliers	Open competitive tendering → invite bids → drive down procurement cost
Syrup	Strategic	Same supplier 10 years; yearly renegotiation	High dependency; only 2 suppliers; international distance	Explore JV; negotiate long-term rates; evaluate substitutes if formulation flexibility exists
Label A	Strategic	Supplier chosen yearly by cost negotiation	Price volatile year to year; only 4 suppliers	Offer multi-year contracts to 2–3 suppliers; distribute procurement to reduce single-source risk and stabilise cost
Label B	Bottleneck	Supplier chosen yearly	Low value but supply risk present — few suppliers, far location	Multi-year contract to reduce supply disruption risk
Carton	Bottleneck	Yearly selection	Supply risk still present despite moderate supplier count	Empanel multiple suppliers → reduce single-point-of-failure risk
Paper (A4)	Non-Critical	Spot purchases as needed	Possibly over-spending; worth reviewing	Explore paperless / digital processes; continue spot purchasing in the interim
Ink Cartridge A	Bottleneck	3-year contract then new supplier	1 supplier, very far — production labelling halts if supply disrupted	Explore supplier takeover OR switch to standard compatible ink from a nearby supplier (substitute strategy)
Ink Cartridge B	Non-Critical	Spot purchases as needed	Minimal issue	Explore paperless office; continue spot purchasing

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Logic Behind Key Recommendations

Plastic Bottle → Competitive Bidding

With 1,000 suppliers located nearby, the buyer holds maximum negotiating power. Remaining with one supplier for five years is a missed cost-reduction opportunity. Opening competitive tendering will drive procurement cost down significantly.

Syrup → JV / Long-Term Negotiation / Substitutes

Only 2 suppliers globally, with international distance — the textbook definition of a Strategic item challenge. Yearly renegotiation produces cost instability and relationship fragility.

Tip

Decision tree for Syrup:

• If the syrup formulation defines the product’s identity → substitutes are not feasible → focus on JV or a long-term lock-in deal
• If some flexibility exists on formulation → explore alternative syrups to broaden the supplier base and reduce supply risk

Label A & B → Long-Term Contracts + Distribute Across Suppliers

Both labels have very few suppliers (4 each) at far locations. Yearly selection creates price instability and fragile relationships.

Fix: Multi-year contract with 2–3 suppliers simultaneously — stabilises cost (Label A, Strategic) and reduces disruption risk (Label B, Bottleneck). Distributing procurement across multiple suppliers eliminates single-point-of-failure exposure.

Ink Cartridge A (Labelling) → Substitute / Nearby Supplier

This is the most dangerous bottleneck item in the portfolio — one supplier located very far away. A supply disruption stops in-house label printing, which halts production batching entirely.

Two options:

1. Explore supplier takeover if volumes justify it
2. Switch to a standard compatible ink from a local or nearby supplier — a substitute strategy that immediately lowers supply risk

Non-Critical Items (Paper, Ink Cartridge B) → Paperless / Spot Purchase

Low value and low risk — no strategic oversight required. Continue spot purchasing and explore going paperless or digital to eventually eliminate the procurement need altogether.

Note

★ Match the intervention to the quadrant. Do not apply JV logic to Non-Critical items or spot-purchase logic to Strategic items. The quadrant drives the intervention — not cost or quantity alone.

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Continuous Improvement — Keeping the Matrix Relevant

Note

The Kraljic Matrix is not a one-time exercise. Markets, supplier landscapes, and costs change continuously. The matrix must be revisited and refined regularly to remain actionable.

Key ongoing actions:

• Review metrics regularly — revisit metric selection, scaling approach, and weights as context evolves
• Build team consensus — involve the full procurement team; others may flag additional risk dimensions not yet captured
• Benchmark against peers — look at best practices from other plants or industry peers in the same sector
• Validate outcomes — confirm that strategies assigned per segment actually produce the intended results in practice
• Adjust weights by context — in poor terrain or remote operating regions, the distance weight should be significantly higher than 0.2

Tip

★ Exam Tip: Mentioning continuous improvement and context-specific weighting signals to the examiner that you understand the Kraljic Matrix as a living management tool, not a fixed formula applied once and filed away.

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Session Summary — 6-Step Kraljic Application Process

1. Collect data — purchase value, number of suppliers, average supplier distance for all items in scope
2. Scale and weight — normalise sub-metrics to a consistent scale; compute weighted composite supply risk score
3. Plot and classify — apply a management-defined cutoff (e.g. 6/10) to assign each item to one of the four quadrants
4. Review current state — compare actual procurement practice against the ideal strategy for each quadrant
5. Recommend — define targeted strategy per item: competitive bidding / JV / long-term contract / substitution / spot purchase
6. Iterate — revisit the matrix regularly; refine weights, metrics, and cutoffs as market conditions evolve

Note

★ The Kraljic Matrix turns raw procurement data into a strategic action plan. The quadrant drives the intervention — not just cost or quantity considered in isolation. Classification is always the first step; strategy follows from it.