The organisation of the purchasing function: learnings from the
purchasing practice in nine multinationals
(Full paper for the 10th WICaNeM Conference – Wageningen – 23-25 May 2012)
Bert van der Stouwe
PhD candidate
Windesheim University of Applied Sciences
bj.vander.stouwe@windesheim.nl
Onno Omta
Chaired Professor in Management Studies
Wageningen University and Research Centre (WUR)
onno.omta@wur.nl
Jacques Reijniers
Professor of Purchasing Management
Nyenrode Business Universiteit
j.reijniers@nyenrode.nl
Geoffrey Hagelaar
Assistent Professor in Management Studies
Wageningen University and Research Centre (WUR)
Professor Purchasing and Supply Management
(Windesheim University of Applied Sciences)
geoffrey.hagelaar@wur.nl
Corresponding address:
Windesheim University of Applied Sciences
Bert van der Stouwe
Campus 2-6
PO Box 10090
8000 GB ZWOLLE, The Netherlands
Telephone: +31 (0)88 469 86 18 or +31 (0)6 52 06 75 82
e-mail: bj.vander.stouwe@windesheim.nl
0
The organisation of the purchasing function: learnings from the
purchasing practice in nine multinationals
ABSTRACT
Purchasing is increasingly important for companies. The essence of this research is the question whether this
growing importance is reflected in a different way of controlling the purchasing function. Is purchasing in
companies with large purchasing interest managed in a different way than in companies where purchasing is of
less importance? As a business function is becoming increasingly important, management will increase
controlling the performance of that function. In an exploratory study, this assumption is examined in the light of
the extent and manner in which the use of purchasing tools will be prescribed by management. In this study,
governance is linked to differences in purchasing interests. Controlling the use of purchasing tools is thus
considered as a form of governance. The purchasing portfolio model is selected as a research object. This model
is one of the few normative purchasing tools linking analysis to supplier strategies. The study was conducted at
nine Netherlands-based multinationals. In the results we conclude that in companies with higher Relative
Purchase Volume (RPV), the use of the purchasing portfolio model is controlled more tight by management than
in companies with lower RPV. For companies with a higher RPV a clear positive relationship is observed
between the prescribed use of the model and business returns.
___________________________________________________________________________
Key words: Governance; Relative Purchase Volume; Purchasing portfolio; Kraljic.
1. Introduction
1.1. The increasing importance of purchasing
The purchasing function within companies has become increasingly important in recent
decades. The main causes are globalization, information technology and changing approaches
to production and management and the emphasis on core competencies (Lysons and
Ferrington, 2006).
The increase in the importance of purchasing is mainly because companies have come to
concentrate on their core functions, which initiated a trend towards outsourcing. A classic
example is the automotive industry, from production pur sang (almost everything was inhouse produced) it is expanded into an assembly industry, where approximately 80% of the
cost consists of purchasing value and 20% is value added by labor. Because of the highly
increased purchasing part in the cost price, the purchasing function of a company exerts a
stronger influence on the business returns. This is not only because of price control (direct
influence). There are also other factors (indirect effects) that contribute to an increase in the
importance of the purchasing function of companies. By need for increasingly shorter time-tomarket times and shorter product life cycles, companies are becoming less capable of keeping
product development within their own walls. Innovation in partnership with direct suppliers,
but increasingly also to subsequent links in the chain, is expanding (co-makership and coR&D). In this collaboration with suppliers, the purchasing function plays a major, and often
leading or coordinating role.
Also the increasing pressure on corporate social responsibility, where not only the
company’s own actions and its processes are important, but also that of organisations
upstream and downstream in the chain, requires a significant contribution of the purchasing
function in companies related to supply chain transparency and supply chain control. This as
well with regard to environmental and social factors such as child labor, fair trade and the
1
like. These combined factors cause a sharp increase in the importance of purchasing for the
company as a whole.
Because of this increase in importance, the management will increase the control of the
operation of the purchasing function. After all, the greater the importance of this function for
the company, the greater the risk of failure in case of malfunction. Without proper use of
procurement tools companies with a high purchasing volume run serious risk with regard to
their return. This increase in purchase importance thus is expected to involve a commensurate
increase in attention of top management and a strong need for control regarding the purchase
instruments. A good grip on this usage reduces risk of failure.
1.2. Variation in the importance of purchasing
Besides the increasing significance of purchasing in the course of time, the significance
also varies by sector. The manufacturing industry, with a high relative purchasing volume and
complex logistical processes, is much more dependent on a good purchasing performance
than, for example, the business services industry, which purchasing share in the cost price is
on average much lower. In the latter sector human capital, as an important cost driver, just
plays a big(ger) role. In practice, differences in buying interest are found between companies,
among others caused by differences in:
(1) the relative purchasing volume: in this study the relative purchasing volume (RPV) is
defined as the sum of the purchasing value (the spend) divided by the turnover of the
company. The RPV is seen as an significant indicator of the importance of the purchasing
function for an organisation (see also section Literature review; Lysons and Ferrington,
2006). Companies with a high relative purchasing volume have great need for cost reduction
and control of the spend. In these cases, procurement savings have significant impact on the
cost price and the financial results of the organisation. Improper use of procurement models
and tools has major adverse consequences for these companies because in these cases the
purchasing performance is strongly correlated to the cost price and therefore to the company's
profitability.
(2) Final product: where the quality of the final product is strongly dependent on the
quality of incoming goods and services (this is particularly the case in the industrial sector), a
well-functioning procurement department will largely determine the product quality, hence
providing an important contribution to the business results.
(3) Number of purchase transactions and suppliers: a high purchasing part in the cost price
is often accompanied by large numbers of transactions and suppliers, in which cases the
coordination of transactions (just in time delivery) may be crucial. Both aspects are at the
interface between purchasing and logistics, where a good supplier management, including the
use of vendor rating systems, strongly requires the attention of the purchasing function. Large
numbers of suppliers and purchase transactions complicate keeping the overview and create
therefore a need for coordination and control instruments.
(4) Connection between purchasing and the primary process: in organisations where the
primary process is heavily dependent on the flow of incoming goods is greater need for
guidance of purchasing processes than in organisations where this dependence is considerably
less. In the latter case, the primary process is not in immediate danger if there are
imperfections in this flow.
(5) Complexity of procurement: this means the degree to which the various purchases are
interrelated with respect to the logistical business process (multiple dependency). As
transactions with various suppliers and with respect to various products influence each other,
2
as is the case in complex industrial processes, the need for coordination and control of
procurement processes will increase.
(6) Maturity level of the purchasing function. For companies with a longer and more
intensive purchasing history, the development level of the procurement function is on average
higher than for companies with a shorter purchasing history. During this development,
procurement procedures and procurement models, such as the Kraljic matrix, have had a
greater chance to embed in the organisation.
1.3. Governance
This study provides a link between the level of governance and the difference in
purchasing interest. Governance in this context means ensuring consistency and transparency
in the management and oversight of an organisation, to ensure an efficient and effective
achievement of corporate objectives (Williamson, 2002). The question here is whether firms
with high purchasing interest have, from a governance perspective, a strong focus on the
control of the purchasing function and in line with that, the use of purchasing tools.
1.4. The purchasing portfolio model
In this study, the purchasing portfolio model has been selected as a research object. The
purchasing portfolio model, with the Kraljic matrix as the most important exponent, belongs
to the few normative tools in purchasing practice to determine operational purchasing
strategies. This tool not only enables an analysis, but also provides guidance for strategic
action (Cox et al., 2005; Gelderman, 2003; Gelderman and Van Weele, 2005; Lysons and
Farrington, 2006). For that reason, the purchasing portfolio model has been selected as
research object in this study. The (differences in) use of this purchasing tool has been studied
in nine Netherlands-based multinationals.
1.5. Research questions and paper outline
This study investigated whether there are differences in control of the purchasing function
between companies with a higher and companies with a lower purchasing interest. The
following question is answered: is the difference in purchasing interest as observed in sectors
reflected in the level of control of the purchasing function as executed by the management?
The article is further structured as follows: section 2 contains the literature review, divided
into the themes ‘Importance of purchasing’, ’Governance’, and ‘The purchasing portfolio
model’. Section 3 describes the applied methodology, which considers the selection of
companies and data collection. Section 4 discusses the results, divided into ‘Control and use
of purchasing tools at three RPV levels’ and ‘Usage effects of the matrix’. Section 5,
‘Discussion and conclusions’, elaborates on ‘The use of the purchasing portfolio model in
practice’ and ‘The purchasing portfolio matrix as a governance tool’. The article concludes
with section 6, ‘Limitations and future research’, followed by the ‘References'.
2. Literature review
2.1. The importance of purchasing
The purchasing function within companies is developing strongly. “Despite its long
history, it was only in the latter half of the twentieth century that the importance of efficient
purchasing was widely recognized and even later when its strategic aim – as opposed to
3
operational
significance
–
was
acknowledged with an emphasis on
purchasing processes, relationships and
performance rather than on products.”
(Lysons and Ferrington, 2006, pp. 9-10).
Dubois and Pederson (2002, p. 35) state:
“Suppliers
have
also
become
increasingly
important
as
they
account
1979
2004
for a large part of the value creation
Fig. 1. Increasing Relative Purchase Volume of a
manufacturing company
related to the buying firm’s products and
services (as an effect of increasing
specialisation). Thus, managing the firm’s supplier base is becoming an essential strategic
purchasing issue, and consequently the need for differentiated approaches to purchasing
behaviour increases. The variety in purchasing needs, and thus the need to purchase in
different ways, is also increasing, which confronts firms with new challenges.” Several
authors describe the development of purchasing by means of various phases (Stannack &
Jones, 1996; Reck and Long, 1998; Syson, 1992; Morris and Calantone,1992). At least three
drivers are influencing changes in purchasing philosophies, processes and procedures, i.e.
globalization, information technology and changing approaches to production and
management and the emphasis on core competencies (Lysons and Ferrington, 2006). The
status of purchasing and supply management (PSM) differs from company to company.
Within a particular organisation the PSM status is influenced by leverage, focus and
professionalism (Lysons and Ferrington, 2006). In this context, leverage may be defined as
the power of purchasing to enhance profitability. Especially in the manufacturing sector the
purchasing part in the total costs increased significantly. Figure 1 shows an example (Lysons
and Ferrington, 2006) of a manufacturing company, where between 1979 and 2004 the
purchasing part has increased from 38% to 62%, which in practice is seen as a normal
phenomenon in the manufacturing sector.
2.2. Governance
Corporate governance is “the system by which companies are directed and controlled”
(Cadbury Committee, 1992). Section 1.1. describes general purchasing-related changes in the
business that impact on the governance needs of the individual company.
Because of the influence of environmental dynamics on the
environment
control requirements in the company it makes sense to
connect corporate governance to the sytems theory. A
simplified representation of a control situation is found in
Figure 2. The concept of control in this sense goes beyond
CS
the narrow context of the financial control and budget
control.The systems theory of control originates from a much
broader paradigm: ‘any way of (goal)-directed influence’ (De
TS
Leeuw, 1990; Omta, 1995). In Figure 2 a controlling system
(CS) exerts goal oriented influence on a target system (TS).
Fig. 2. control situation
Both subsystems are also influenced by the environment.
source: De Leeuw (1990); Omta (1995)
Also in the opposite direction there is influencing (dotted
lines). These forces are disregarded here however. Applying this general model in this study,
the control system can be seen as (top) management of a company and the target system as
the purchasing function. Positions (e.g. supplier monopolies, partnerships between
4
organisations) and developments in the environment of the company (such as technological
developments or developments in the purchase markets) affect the target system (TS) directly.
These positions and events (co) determine the adoption and implementation of sourcing
strategies by the purchasing function (purchasing manager and staff) of a company. The
strongly increasing importance of purchasing (paragraph 1.1.) is an influencing factor for the
control system. This factor leads to increased attention from top management for the
purchasing function (Environment  CS) resulting in a tighter control of the purchasing
function by top management (CS  TS). The more important the purchasing function for the
performance and the results of an organisation, the tighter this function will be controlled by
(top) management.
According to Syson (1992), the position of purchasing within a particular organisation
depends on whether the focus on the function is transactional, commercial or strategic. “The
more purchasing becomes involved in commercial and strategic areas, the greater will be its
effectiveness and consequent standing within the organisation”. With a changing position of
purchasing within an organisation, the assumption is that the organisation of the purchasing
function changes. Schiele points out different approaches to the subject of organizing the
purchasing function such as organisational visibility, ideal organisational form or the maturity
grid (Schiele, 2007). We want to adopt the governance approach which links the environment
to a manner of steering an organisation. Following the motto structure follows strategy, we
propose that when effectuating a changing position of the purchasing function, the
governance of the purchasing function changes as well. A governance structure safeguards
investments and reduces uncertainty in a company in order to realize certain targets in a cost
efficient manner (Williamson, 1981; see as well Buvik, 2002). For instance when building up
a purchasing department, the management of a company wants to control the behaviour of the
purchasers and their relations with other departments. Organisational measures are taken to
realize this control. Within Transaction Cost Economics control is classified into different
governance structures; hierarchical, relational and market based arm’s length (Williamson,
1981). The more investments and the higher uncertainty, the more control increasing up to
hierarchical control, is needed.
2.3. The purchasing portfolio model
Gelderman (2003) did extensive research on (purchase) portfolio models, which are central in
our research as a purchasing tool. He stated inter alia that the portfolio concept originated in
the fifties of the past century and has its roots in financial investment (Markowitz model,
1952). In general, a portfolio model is defined as: “a tool that combines two or more
dimensions into a set of heterogeneous categories for which different (strategic)
recommendations are provided” (Gelderman, 2003, p. 21). Three other related disciplines had
already developed portfolio models before the purchasing portfolio model: (a) Investment
theory, (b) strategic management theory and (c) marketing management theory. Gelderman
(2003) distinguishes three categories within the marketing portfolio models: (1) new product
portfolio models (Cooper et al., 1998); (2) product classifying models (Kotler, 1971). Marvin
(1972) introduced the topic ‘dynamic product portfolio management’; (3) customer
classifying models (Fiocca, 1982; Cunningham and Homse, 1982; Campbell and
Cunningham, 1983; Dubinsky and Ingram, 1984; Turnbull and Valla, 1986; Shapiro et al.,
1987; Krapfel et al., 1991; Dick and Basu, 1994; Storbacka, 1994; Strandvik and Liljander,
1994; Homburg and Daum, 1997; Schijns, 1998).
In his comprehensive study Gelderman (2003, p. 94) concludes: “Kraljic (1983) provided
the first comprehensive portfolio approach for purchasing and supply management. Many
5
profit impact
years after the introduction there is a reasonable amount of evidence that Kraljic’s basic
ideas and concepts represent the dominant approach in the profession. On a large scale
purchasing professionals and academics have adopted Kraljic’s basic ideas and
methodology. The (first) Kraljic-matrix has become the standard in the field of purchasing
portfolio models. Kraljic’s terminology is generally accepted and has become the standard
for scientists and practitioners. This however does not apply for the other portfolio models,
which are hardly known and used in practice.” Other models listed by Gelderman include:
Elliot-Shircore and Steel (1985), Olsen and Ellram (1997) and Bensaou (1999). In his seminal
article Kraljic (1983) states that a firm’s purchasing strategy of a product basically depends on
two factors: (1) the strategic importance of the product to the firm in terms of the added value
of a product, the percentage of raw
high
materials in total costs and the impact
on profitability and (2) the complexity
Leverage
Strategic
of the supply market in terms of
items
items
scarcity, speed of technology and
material substitution, import barriers,
Strategic
Exploit power
logistics
costs
and
logistical
partnership
complexity and monopolistic or
oligopolistic conditions (see also
Gelderman, 2003; Dubois, 2003).
Gelderman (2003) summarizes the
Non-critical
Bottleneck
two factors or dimensions with the
items
items
terms profit impact and supply risk.
By investigating the business situation
Efficient
Volume
processing
insurance
in terms of these two dimensions,
management can determine the
optimal supply strategy that combines
low
purchasing power with risk reduction.
low
high
The ultimate objective for the use
supply risk
of the matrix is a positive contribution
to the business return through better
Fig. 3. The Kraljic-matrix: categories and strategic recommendations
Source: Kraljic (1983), Gelderman & Van Weele (2005) (adapted)
purchasing performance. A derived
general objective is to obtain the best
possible ratio in the total purchasing
portfolio. A more specific objective is: to derive the appropriate purchasing strategy for a
product, product group or supplier, based on the position within the matrix (Gelderman 2003).
Although the Kraljic matrix is known as a common purchasing tool (Turnbull, 1990; Cox,
1997; Nellore and Söderquist, 2000; Lamming and Harrison, 2001; Dubois and Pedersen,
2002; Gelderman, 2003; Wagner and Johnson, 2004), there is little known about the actual
composition and application (Telgen, 2010). Gelderman says: “Although other models have
been developed, Kraljic’s approach subsequently became the dominant approach in the
profession.” (Gelderman, 2003, p. 257). Furthermore, he mentions: “The research project
began with the contention that little is known about the actual process of using purchasing
portfolio models. The literature study identified a number of problems and unanswered
questions, referring to the measurement of variables, the disregard for the supplier’s side, the
selection of strategies based on two dimensions, the limited and deterministic character of the
strategic recommendations, and the absence of explicit movements within the matrix.”
(Gelderman, 2003, p. 261)
H S
R K
6
3. Methodology
This study, as an exploratory research in preparation for designing a broader survey, is the
first phase of the research project 'Connecting Supply Network and Portfolio Strategy’. The
research in this first phase aims to deepen understanding of the relationship between
governance of purchasing tools and the importance of purchasing in companies. Nine
companies are examined concerning the governance of the Kraljic matrix and characteristics
of the matrix itself. The outcomes of the cases are compared to each other. The classification
by RPV has been leading thereto.
3.1. Selection of companies
Companies are selected which could be expected to have a well-developed purchasing
function and actually make use of the purchasing portfolio matrix. A spread in sectors was
preferred because of the expected variation in RPV. The request for participation in this
research project was submitted to the Dutch SIGB (‘Stuurgroep Inkoop Grote Bedrijven´;
Steering Group Purchasing in Big Companies). Twelve CPO’s (Chief Procurement Officers)
have responded positively to this. In three of the companies it was ultimately not possible
during the interview to obtain sufficient data on the actual use of the matrix. These companies
are therefore not included in the data processing. The nine remaining companies showed a
good sector spread, from manufacturing to business services. Two of the nine companies are
in the manufacturing sector, an electronics company and a machine manufacturing company.
Four companies can be characterized as
Table 1
capital-intensive service providers. These
Baseline description of the participating companies, range and average
(between parentheses)
companies are by nature service providers, but
they make use of capital-intensive investment
Sales volume
2 - 66 €B (24 €B)
goods: an airline, a telecom company, a
14 - 100% (5 comp.) (57%);
railway company and an energy company. The
International sales %
unknown (4 comp.)
other three companies are in the financial
Purchase volume
0.6 - 16 €B (4,2 €B)
sector: an insurance company and two banks.
Number of employees
6,500 - 126,000 (53,000)
For the baseline description, see table 1.
Number of purchasers
11 - 350 (112)
3.2. Data collection
At the office of the companies, semi-open voice recorded interviews were conducted with
the CPO or his deputy, in the presence of an observer-time guard. The interviews lasted on
average two hours.
For the subject Purchasing Portfolio tool the questionnaire included 21 closed questions:
9 two-choice questions, 2 of these with an open explanation question; 8 multiple choice
questions, 4 of these with an open explanation question; 4 multiple-choice questions, each
with an average of six sub-questions to be answered on a 7-point Likert scale ranging from 1
= not applicable to 7 = fully applicable, plus an open explanation question. In addition, an
open question regarding the learning effect of using the purchasing portfolio matrix.
Question topics included: whether or not using the Kraljic matrix, prescribed or free use of
the instrument, by whom prescribed, occasional or continuous use, the shape and composition
of the matrix free or prescribed, usage goals and effects of use, use by product, product group,
suppliers, definition and interpretation of the two axes, applying to all or certain products or
product groups.
7
Due to the limited number of (nine) companies, the numerical results in section 4 - Results
- have to be regarded as indicative only. In the analysis, on the basis of a first numeric
impression, the focus was on finding pattern in the usage of the purchasing portfolio matrix in
different settings.
4. Results
4.1. Control and use of purchasing tools at three RPV levels
From the hypothesis that the relative purchasing volume affects the use of purchasing tools
(in this case the purchasing portfolio - Kraljic matrix), the companies are ranked on an ordinal
scale from high to low RPV (Table 2).
4.1.1. Control and use of the matrix
As expected, the study shows that companies deal with the purchasing tool in different
ways, both in terms of usage prescriptions by the management and in terms of user types
(functions).
Formal and informal use
In the RPV high and medium segments, the use of the matrix is formalized (prescribed) by
top management whereas in the RPV low segment use is released to the lower purchasing
managers and purchasing staff (informal use). Quote from the Electronics Company with
respect to formalized use: "The use is prescribed, we must all work with it, up to the level of
sourcing assistant. Use is prescribed by the CPO. Since 2003 we have been working with the
matrix structurally.” Quote from Bank 2 regarding free use: "Yes, the Kraljic matrix is used,
but is not the only tool, it's in the toolbox, it is one of the models, often a variant of the
(original) Kraljic matrix. One of the axes sometimes be adjusted. Use is completely free."
Quote from Bank 1: "The usage is free, but as domains mature, it is expected that other
domains follow. Eventually all domains will be expected to have it well organized."
Centralized and decentralized use
This study shows two user types: direct users (tactical and operational purchasers) and
indirect users (internal purchase advisors). Within the RPV-high companies and two of the
four RPV-medium companies the purchasing instruments are mainly used by the procurement
officials who should independently establish procurement strategies for purchasing products
in their procurement set; direct
Table 2
Companies ranked by level of Relative Purchasing Volume on there levels
users in the primary purchasing
process (centralized use). This
means
that
purchasing
RPV LEVEL
RPV %
COMPANY
professionals use the instrument for
HIGH
70%
Electronics
determining the purchase position
> 50%
60%
Machine manufacturing
of the product or service to be
purchased, based on which they
MEDIUM
46%
Airline
determine how they should
10 - 50%
28%
Telecom
approach the supplier market. Here
26%
Railway
are the basic strategies that belong
11%
Energy
to the respective quadrant (Kraljic,
1983) the directive for the final
LOW
8%
Insurance
strategy.
Quote
from
the
<10%
4%
Bank 1
Electronics
Company:
"(The
2%
Bank 2
matrix) is not filled (as portfolio),
8
but used by the buyer as a conceptual model, commonly used in every opportunity. Depending
on the commodity, the matrix is revised and updated annually or every two years. The matrix
is differentiated applied, "cleverly used”. The reason for the differentiated use is the
difference in complexity of the purchasing situation. We always plot both the products and
suppliers, because these methods can lead to different insights that may lead to different
choices.” In one of the four RPV-medium companies and all three RPV-low companies users
of the instrument are procurement professionals who act as advisors for the primary process
(the business). In this sense, the matrix is used as a communication tool to provide the
business a picture of the specific buying situation and, according to the matrix, to offer an
appropriate purchasing strategy (indirect use). Quote from Bank 2: "The procurement advisers
have no budget responsibility, but purely advise line managers. These professionals have a
whole range of instruments in their backpack and depending on the situation there is
something brought out. We are very concerned with knowledge development and focus on
new insights, so we fill that backpack ever. We have been working for more than ten years
with the Kraljic matrix, which is not updated (as portfolio), but on an ad hoc basis applied.
Sometimes, the matrix is used for one of the domains as input for an annual plan, but also
then as a mind frame in which the axes may also be modified because it is more convenient in
that case." Quote from Bank 1: "At first, the matrix is used to start the dialogue with the
business and from that conversation we try to keep the matrix as updated as possible. The
matrix will be successively filled and developed along with the development of the
organisation.” In one of the four RPV-medium companies, the matrix is used in both ways,
i.e. centralized and decentralized use. The above clearly shows difference in prescription of
use and difference in types of users.
Table 3
Rating Scores on the effects of use of the Kraljic matrix – by level of Relative
Purchasing Volume – on 7-point Likert scale
HIGH
MEDIUM
LOW
IMPROVED PURCHASING GOALS
IMPROVED PURCHASING STRATEGIES
EFFECTS OF USE
IMPROVED SUPPLIER MANAGEMENT
COMPANY
IMPROVED BUSINESS RETURNS
RPV LEVEL
4.2. Usage effects of the matrix
Electronics
5
5
7
5
Machine manufacturing
6
1
1
1
Median score
6
3
4
3
Airline
Telecom
Railway
6
3
4
6
2
5
5
6
7
6
6
7
Energy
7
5
6
6
Median score
5
5
6
6
Insurance
Bank 1
2
4
4
7
5
6
6
5
Bank 2
1
5
7
6
Median score
2
5
6
6
The respondents also stated their
findings regarding four possible
effects of using the matrix:
improved
business
returns,
improved supplier management,
improved purchasing strategies,
improved purchasing goals (see
Table 3). Improved business returns
scores particularly high in the
manufacturing sector. By contrast
the financial companies score low
on this item. Improved supplier
management shows the opposite
picture. With regard to improved
purchasing strategies, we see both
at the capital intensive services and
the financial companies a high
score. The same goes for improved
purchasing goals. Again, difference
was found between the different
levels of RPV.
9
5. Discussion and conclusions
Because of the limited number of companies, although they are large, the following
conclusions are tentative and refer to this sample.
By a closer examination of Table 2, we see three different types of businesses (sectors):
from top to bottom: two manufacturing companies, four companies we can characterize as
‘capital-intensive service companies’ and three finance related companies. The importance of
purchasing in the manufacturing companies is significantly higher (big difference in RPV)
than in the finance related companies. According to the hypothesis, this should be reflected in
the way procurement tools are used.
5.1. The use of the purchasing portfolio matrix in practice
As an overall conclusion from the interviews
with the CPO’s, we can state that the use of the
purchasing portfolio instrument is valued
positively. Despite the criticism from the theory
(Dubois and Pedersen, 2002; Dubois, 2003) and
practice.
Table 3 shows, as expected, a significant
difference between the manufacturing and
financial companies with respect to the effect
that use of the instrument has on the business
returns: the respective scores are 6 and 2. The
CPO’s in the manufacturing sector herewith
indicate that use of the matrix has significant
influence on the business returns, while their
colleagues in the financial sector strongly
relativize the contribution to the returns. The
score difference can be directly attributed to the
height of the RPV. At a high RPV, improving
the purchasing performance has great impact on
the business returns. The CPO’s in the financial
companies are apparently aware that, although
their purchasing function should perform at a
high level, the core business of their companies
is not highly dependent on this function.
Nevertheless they apparently get good results
with this instrument regarding improvements in
supplier management (5), purchasing strategies
(6) and purchasing goals (6).
 "Because of the structured nature (methodology), the
purchasing processes rise to a higher level."
(Electronics Company).
 "This tool provided focus, resulting in a significantly
improved information exchange." (Airline Company).
 "Kraljic is no exact mathematics, you should not try to
quantify everything, it's a good way to get a good
purchasing strategy, it is a tool." (Telecom Company).
 "Good starting point for a first analysis, and creating
other starting points, even for non-buyers. This model is
well known and therefore easily manageable." (Railway
Company).
 "One of the lessons is that Kraljic must be better applied
at both strategic and operational levels. In order to
measure compliance and to make adjustments there, we
are making good progress therein. Kraljic is a model of
thought." (Energy Company).
 "The instrument is very suitable to use for coordination
with the (internal) stakeholders." (Insurance Company).
 "We are commanded to realize savings, but the matrix
makes clear that in some cases you can do nothing at
all. With this instrument we can demonstrate that
procurement targets should be adjusted. Because of the
matrix, we are much earlier involved in the decisionmaking process. This adds significant value to the
purchasing performance. That early involvement makes
that our purchasing performance has improved. "(Bank
1).
 "An important communication tool, especially in
conjunction with the Windmill matrix, not to use as a
law, but as a frame of mind, a discussion tool." (Bank
2).
Box 1 - Quotes of CPO’s with respect to the Kraljic matrix
5.2. The purchasing portfolio matrix as a governance tool
Regarding the governance perspective, from the results in the previous section is
concluded that top management wants to exert a strong grip on the purchasing function in
cases where purchasing exercises significant influence over the company’s results.
10
Purchasing volume in % of sales
The use of purchasing tools in the companies may by its nature be divided into ‘light’
(informal-decentralized) use and ‘heavy’ (formal-centralized) use. This division is applied to
the horizontal axis in Figure 4, together with the classification of RPV on the vertical axis.
Along the vertical axis the relative purchasing volume (RPV) is plotted. This is expressed in
the share of purchases in the total turnover of the organisation. We find that dealing with
purchasing instruments of an organisation changes as the purchasing significance increases.
The left side of the horizontal axis has as a characteristic ‘light’ use and the right side is
characterized by ‘heavy’ use. In the figure an oblique line is drawn that shows a shift in centre
of gravity from bottom left (‘light’ use) to top right (‘heavy’ use). The middle layer (10-50%
RPV) shows a hybrid character in terms of decentralized and centralized use. Both application
forms can be found here. Purchasing instruments (i.e. the purchasing portfolio tool) in
companies with a large
purchasing interest are
anchored in the primary
informal
formal
purchasing process and
> 50%
are
used
by
top
decentralized
centralized
management to control
the purchasing function in
a powerful way. Here the
importance of instrument
informal
formal
10-50%
usage is thought great. No
decentralized
centralized
or incorrect use directly
affects
the
financial
results. For companies
with
low
RPV,
informal
formal
< 10%
purchasing instruments
decentralized
centralized
are certainly used, but
primarily as a tool for
advising the business.
‘light’ users
‘heavy’ users
The use is not required in
these cases. As such, the
Fig. 4. Increasing purchasing volume related to changing use of purchasing instruments (Kraljic)
instruments in this cluster
from non-prescribed-indirect use to prescribed-direct use
are considered as tactical
advice instruments, as opposed to the highest level, where the use is considered of strategic
importance. The use of the purchasing portfolio tool, and in particular the Kraljic matrix, does
not appear to be free, but is seen as an indicator of the importance of purchasing within an
organisation and is considered by top management as an opportunity to get a better grip on the
important business activity purchasing. The often heard utterance that ‘purchasing belongs in
the boardroom' does not appear to be a trendy comment, but a natural consequence of
developments within the business that impact on (changes in) the interest of business
processes.
The relatively low purchasing volume in the financial sector is a plausible explanation for
the positioning of these three companies on the left side on the X axis of Figure 4. Unlike the
managerial sector, is the purchasing function in this sector, according to the nature of the
business, at a greater distance from the primary process. Both product and process are less
dependent on a good purchasing performance than in the case of the manufacturing sector.
That purchasing in the financial sector is much less direct business-related (core closeness)
than in the industrial sector, is an explanation for the fact that purchasing here operates as an
advisory staff function to support the business. This explains the greater permissiveness for
the use of instruments such as the Kraljic matrix.
11
The companies that by their nature are service provider, but in their primary process also
depend on large quantities of goods (capital intensive service companies), are in terms of
percentages of purchasing volume situated between the manufacturing sector (RPV-high) and
the financial sector (RPV-low). This explains the higher control level of the instrument usage
in comparison with the finance related companies. On the other hand we also see a greater
distance between purchasing and the primary process in comparison to the manufacturing
sector. Purchasing functions within the capital intensive services sector, as in the financial
sector, more as an advisor than as operating purchaser.
Relative Purchasing Volume is an important factor and indicator of the importance of
purchasing in a company. Other factors mentioned in the introduction play in the
manufacturing sector a greater role than in the capital intensive services sector and a much
greater role than in the financial sector. The manufacturing sector is characterized by a high
degree of diversity and complexity in relation to the overall purchasing package. Compared to
other sectors, this sector depends in terms of the primary process strongly on the purchase
market. Therefore purchasing performance plays here a greater role than in other sectors. In
order to properly coordinate the purchasing processes, the need for proper use of instruments
is great in this sector. The more complex the logistical process, the greater the risk of failure.
In case of enlarging purchasing importance, the organisation becomes more dependent on
suppliers and within the organisation there are more contacts between purchasing and the
internal customers. An increasing purchasing volume therefore means the development of
multiple internal and external relationships. With a low purchase volume, a company usually
has less purchasing related external and internal relations. With an increasing number of
internal and external relationships to manage (with an increasing purchasing volume), the
coordination pressure will also increase. In turn, the need for management tools will increase.
Finally, this exploratory research has shown differences in the application of purchasing
instruments, particularly the Kraljic matrix. The research has resulted in a threefold division
to RPV level: low-medium-high. On the one hand, the results of this study are interpreted as a
finding of the usage differences: as the RPV increases, both the direct use of the matrix, as
well as the control pressure by management increase too. This may indicate a rational or
intuitive action by management. On the other hand, these results lead to a recommendation.
Companies in which application of the matrix is required by management, indicate clearly
that the matrix has influence on company return. In addition, all companies claim, albeit with
different scores, that application of the matrix leads to improved supplier management,
improved purchasing strategies and improved purchasing goals. Companies that use this
instrument without obligation, may consider to control the use of the matrix more tightly.
Our overall conclusion is that relating purchasing to governance is a promising line of
research to better understand the execution of purchasing activities within companies.
6. Limitations and future research
This exploratory study took place at a small number of large Netherlands-based
companies. This indicates the limitation of the results of this research. The study however
provided a number of clear clues and insights. The concepts need to be further clarified and
developed and the research can be prosecuted in a significantly larger number of companies,
possibly of different size and in a larger (possibly international) context.
References
12
Bensaou, M, 1999. Portfolios of Buyer-Supplier Relationships. Sloan Management Review,
Vol. 40, No. 4, Summer, pp 35-44.
Buvik, A. (2002). Hybrid governance and governance performance in industrial purchasing
relationships. Scandinavian Journal of Management, 18, 567–587.
Campbell, N.C.G., M.T. Cunningham, 1983. Customer Analysis for Strategy Development in
Industrial Markets. Strategic Management Journal, Vol. 4, No. 4, pp 369-380.
Cooper, R.G., S.J. Edgett, E.J. Kleinschmidt, 1998. Portfolio Management for New Products.
Addison-Wesley Longman, Inc.
Cox, A., 1997. Business Success – a way of thinking about strategic, critical supply chain
assets and operational best practice. Earlsgate Press, Great Britain.
Cox, A, Chr. Londale, J. Sanderson, G. Watson, 2005. The Right Tools for the Job. Palgrave
MacMillan, New York.
Cunningham, M.T., E. Homse, 1982. An Interaction Approach to Marketing Strategy, in
Hakansson, H. (ed.), 1982. International Marketing and Purchasing of Industrial Goods: an
Interaction Approach. Wiley, Chichester, pp 328-345.
De Leeuw, A.C.J., 1990. Organisaties: Management, Analyse, Ontwerp en Verandering, een
Systeemvisie, 4th ed., Van Gorcum, Assen (in Dutch)
Dick, A.S., K. Basu, 1994. Customer Loyalty : Toward an Integrated Conceptual Framework.
Journal of the Academy of Marketing Science, Vol. 22, No. 2, pp 99-113.
Dubinsky, A.J., T.N. Ingram, 1984. A Portfolio Approach to Account Profitability. Industrial
Marketing Management, Vol. 13, pp 33-41.
Dubois, A., 2003. Strategic cost management across bounderies of firms. Industrial
Marketing Management, Vol. 32, pp 365-374.
Dubois, A., A.-C. Pedersen, 2002. Why Relationships do Not Fit into Purchasing Portfolio
Models – A Comparison Between the Portfolio and Industrial Network Approaches.
European Journal of Purchasing & Supply Management, Vol. 8, No. 1, pp 35-42.
Elliot-Shircore, T.I., P.T. Steele, 1985. Procurement Positioning Overview. Purchasing and
Supply Management, December, pp 23-26.
Farmer, D., 1990. Organisation for purchasing. Purchasing and Supply Management,
Fubruary, pp 23-27
Fiocca, R., 1982. Account Portfolio Analysis for Strategy Development. Industrial Marketing
Management, Vol. 11, pp 53-62.
Gelderman, C.J., 2003. A Portfolio Approach to the Development of Differentiated
Purchasing Strategies. Technische Universiteit Eindhoven, Eindhoven.
Gelderman, C.J., A.J. van Weele, 2003. Handling measurement issues and strategic
directions in Kraljic’s purchasing portfolio model. The Journal of Supply Chain
Management, Volume 9, Issues 5-6, September-November, pp 207-216.
Gelderman, C.J., A.J. van Weele, 2005. Purchasing Portfolio Models: A Critique and
Update. The Journal of Supply Chain Management, (Summer), pp 19- 28.
Homburg, Chr., D. Daum, 1997. Die Kundenstruktur als Controlling Herausforderung.
Controlling, Heft 6, November/Dezember, pp 394-404 (German text).
Kamann, D.J.F., 2000. Matrices, Cubes and Triangles in Purchasing. Poster Presentation at
the 9th International IPSERA Conference, London, Canada, pp 1-6.
Kottler, Ph., 1971. Marketing Decision Making: A Model Building Approach. Holt, Rinehart
and Winston, Inc., New York.
Kraljic, P., 1983. Purchasing Must Become Supply Management. Harvard Business
Review, Vol. 61, No. 5, September-October, pp 109-117.
Krapfel, R.E., D. Salmond, R.E. Spekman, 1991. A Strategic Approach to Managing BuyerSeller Relationships. European Journal of Marketing, Vol. 25, No. 9, pp 22-37.
13
Lamming, R.C., D. Harrison, 2001. Smaller Customers and Larger Suppliers : The Potential
for Strategic Purchasing Approach : A Case Study. Presented at the 10th International
IPSERA Conference, Jönköping, Sweden.
Lysons, K., B. Farrington, 2006. Purchasing and Supply Chain Management. Pearson,
Harlow.
Markowitz, H, 1952. Portfolio Selection. Journal of Finance, 7, March, pp 77-91.
Marvin, Ph., 1972. Product Planning Simplified. American Management Association, New
York.
Morris, N., R.J. Calantone, 1992. Redefining the purchasing function. International Journal
of Purchasing and Materials Management, Fall.
Nellore, R., K. Söderquist, 2000. Portfolio Approaches to Procurement – Analysing the
Missing Link to Specifications. Long Range Planning, Vol. 33, No. 2, pp 245-267.
Olsen, R.F., L.M. Ellram, 1997. A Portfolio Approach to Supplier Relationships. Industrial
Marketing Management, Vol. 26, No. 2, pp 101-113.
Omta, S.W.F., 1995. Critical Succes Factors in Biomedical Research and Pharmaceutical
Innovation. Kluwer, Dordrecht.
Reck, R.F., B. Long, 1998. Purchasing a competitive weapon. Journal of Purchasing and
Materials Management, Vol. 24, No. 3, p 4.
Schiele, H. (2007). Supply-management maturity, cost savings and purchasing absorptive
capacity: Testing the procurement–performance link. Journal of Purchasing & Supply
Management, 13, 274–293.
Schijns, J.M.C., 1998. Het meten en managen van klant-organisatie relaties. Dissertation, the
University of Maastricht (Dutch text).
Shapiro, B.P., V.K. Rangan, R.T. Moriarty, E.B. Ross, 1987. Manage Customers for Profits
(not just sales). Harvard Business Review, September/October, 101-108.
Stannack, P., M. Jones, 1996. The Death of Purchasing Procedures. PSERA.
Storbacka, K., 1994. Customer Relationship Profitability – Propositions for Analysis of
Relationships and Customer Bases, in: Sheth, J.N. and A. Parvatiyar (ed.). Relationship
Marketing: Theory, Methods and Applications, 1994 Research conference proceedings,
Emory University, Atlanta.
Strandvik, T., V. Liljander, 1994. Relationship Strength in Bank Services, in: J.N. and A.
Parvatiyar (ed.). Relationship Marketing: Theory, Methods and Applications, 1994
Research conference proceedings, Emory University, Atlanta.
Syson, R., 1992. Improving Purchasing Performance. Pitman Publishing, London.
Telgen, J., 2010. De juridificering is ver doorgeslagen. Deal, Vol. 5, May, pp 14-17 (in
Dutch)
Turnbull, P.W., J. Valla, 1986. Strategies for International and Industrial Marketing: The
Management of Customer Relationships in European Industrial Markets. Croom Helm,
London.
Turnbull, P.W., 1990. A Review of Portfolio Planning Models for Industrial Marketing and
Purchasing Management. European Journal of Marketing, Vol. 24, pp 7-22.
Van Weele, A.J., 2005. Purchasing and Supply Chain Management. Fourth edition.
Wagner, S.M., J.L. Johnson, 2004. Configuring and managing strategic supplier portfolios.
Industrial Marketing Management, Vol. 33, pp 717-730.
Williamson, O. E. (1981). The economics of organisation: The transaction cost approach.
American Journal of Sociology, 87, 548–577.
14