In defence of Kraljic… a procurement guru writes

We published our monthly newsletter this week - if you're not getting a copy, you can subscribe via the link in the bottom right corner of this page.

We featured some discussion of how the Kraljic matrix can contribute to poor procurement decisions - for example, where organisations decide a category is 'leverage' and then assume it's possible to handle it through pretty unsubtle tactics. The case of Southern Cross and how local authorities have handled the residential social care category is a possible case in point.

Having published the piece, we had an email from Chris Lonsdale, Senior Lecturer and Head of the Procurement & Ops Management Group at Birmingham University - he runs perhaps the most respected procurement MBA course in the UK.  Here's his informal but very interesting view on Kraljic and Southern Cross view, which he has kindly let me publish here.

It is hard to be too critical of the Kraljic matrix. The guy put something out there in 1983, has presumably added to his views since then (but is forever stuck with the words he wrote in 1983) and could not include everything in an article that had to be no more than 5000 words or whatever. So his response to some of the criticisms of the 1983 article will presumably be 'I know, but ...'

Also, it is not his fault that most firms don't go beyond his step 1 and step 2 (the initial four box classification and implications) and ignore steps 3 and 4.

It is also true that he says 'Leverage' not 'Mindless Leverage'.

Having said that, it is true that he does not really discuss the costs of switching suppliers (and the implications thereof) in his article, which is a significant gap - and one that I point out to my long-suffering students. There are a few other mistakes in the 1983 article too, IMHO.

It seems to me, however, that the biggest crime here was the failure to appreciate the potential risks of the Southern Cross business model. The various tendencies of private equity had been in the newspapers in relation to many businesses - their ways were hardly a secret.

Of course, banning such devices could have been done at a national level (rather than authority by authority). However, our 'political masters were too uncritical of the Private Equity industry and the financial sector in general.

Voices (3)

  1. flog:

    One of the ‘challenges’, I’ve found, when getting people to use Kraljic-type/based matricies to analyse their procurement is that, while on paper the matix is presented as 4 equal segments in reality, the horizontal and vertical dividing lines need, respetctively, to be closer to the bottom and left.

    If I modify the measurement parameters tp create a similar matrix eg putting value on the x axis, depending upon the nature of the organisation’s business, I want the line between acquisition and leverage to be at a value point at somethere between 2% and, maybe, 10% of its spend not at 50% as assumed by some when using the traditional 4-equal segments matrix presentation.

  2. Rob:

    Picking up on this particular point…”Of course, banning such devices could have been done at a national level (rather than authority by authority).”

    You can only guess where each individual council (and PCT) would have placed Southern Cross (SC) on the matrix ie: ciritical, leverage etc, based upon their level of maturity in procurement development (basic spend analysis versus supply chain risk etc). However, folk in the Department of Health’s CSED programme would have been aware for some time that SC were one of largest suppliers within Social Care in the UK. They would have been aware too, that no-one is responsible at a National level for managing them. Nor does anyone manage the relationship to any other major supplier within the Social Care system. Before one gets too excited, you will see this gap reflected in the Health system (no critical suppliers there then…) apart from pharma, the DHL contract, flu vaccines and Connecting for Health (let’s not go there…).

    You could see if coming, because, taking your other point…”However, our ‘political masters were too uncritical of the Private Equity industry and the financial sector in general.” there are numerous examples of where Cabinet Office has been exposed to the players from the Private Equity industry who have stripped assets (with ease) and walked away with millions in their back pockets – largely due to a lack of strategic commercialism within the public sector, but particularly within Central Government.

    Private Equity isn’t a bad thing. But simply handing over the silverware, on a silver plate, is. In respect of Southern Cross, ‘greed’ was always going to be a difficult supply chain risk to identify or predict, no matter how good you are in procurement.

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