Sie sind auf Seite 1von 12

Journal of Purchasing and Supply Management 24 (2018) 192–203

Contents lists available at ScienceDirect

Journal of Purchasing and Supply Management


journal homepage: www.elsevier.com/locate/pursup

A quantified Kraljic Portfolio Matrix: Using decision analysis for strategic T


purchasing

Robert T. Montgomerya, Jeffrey A. Ogdenb, Bradley C. Boehmkec,
a
Department of Mathematical Sciences, United States Air Force Academy, United States
b
Department of Marketing and Logistics, University of North Texas, United States
c
Department of Operational Sciences, Air Force Institute of Technology, United States

A R T I C L E I N F O A B S T R A C T

Keywords: Since its inception, the Kraljic Portfolio Matrix (KPM) has been widely used as a diagnostic and prescriptive
Purchasing portfolio purchasing tool. One of the primary weaknesses of the KPM is the qualitative nature of the model, which results
Kraljic Portfolio Matrix in a subjective method for weighting and positioning suppliers or commodities in the various quadrants. In an
Multi-objective decision analysis effort to help overcome this widely cited weakness, this research proposes an objective, quantitative decision
analysis approach to position products and services within the KPM. Single attribute value functions are used to
quantify the strategic purchasing attributes of the KPM. A multi attribute value function is then used to quantify
and rank-order products and services within the KPM based on the two strategic purchasing objectives. We
empirically demonstrate this approach using data from an organization with a $10 billion purchasing portfolio.
Furthermore, we illustrate how a cost-benefit view of the results help decision makers quickly and easily identify
the products and services most conducive to the implementation of commercial best practice purchasing stra-
tegies. A sensitivity analysis advocates the robustness of our approach.

1. Introduction to a range of internal, product, profit and operational factors along with
external, supply market conditions (Gelderman and Semeijn, 2006).
Purchasing strategies are a significant contributing factor to the The general idea behind the KPM is to minimize supply vulnerability
overall performance of a firm (Padhi et al., 2012). Not only has it been and maximize buying power while at the same time “matching external
argued that transitioning purchasing from a tactical to a strategic role resources provided by suppliers with the internal needs of the buying
provides sustainable competitive advantage (Ellram and Carr, 1994; firm” (Dubois and Pedersen, 2002, p. 36). Moreover, the KPM has been
Carter and Narasimhan, 1996; Chen et al., 2004), compelling evidence found to provide additional benefits such as improving internal cross-
supports the relationship between strategic purchasing and supplier functional coordination (Gelderman and Semeijn, 2006), visualizing
integration (Eltantawy et al., 2009), performance (Carr and Smeltzer, and illustrating the purchasing strategy (Gelderman and Van Weele,
2000; Carr et al., 2000; Cousins et al., 2006), power (Pazirandeh and 2005), and diversifying supplier power dependencies (Caniels and
Norrman, 2014; Touboulic et al., 2014), and total cost of ownership Gelderman, 2007). Thus, the KPM approach has been argued to re-
(Weber et al., 2010) among other benefits (Jennings, 2002). Conse- present the single most diagnostic and prescriptive tool available to
quently, it has become widely accepted that establishing a strategic purchasing organizations (Wagner et al., 2013).
purchasing approach is imperative for today's firm (Talluri et al., 2013). However, the Kraljic model is not without its critics. One of the
Towards this goal, employing a purchasing portfolio approach has primary weaknesses of the KPM is the qualitative nature of the model,
become prevalent in both academia and within organizations to im- which results in a subjective method for weighting and positioning
prove strategic purchasing (Knight et al., 2014; Gelderman and Van suppliers or commodities in the quadrants (Knight et al., 2014;
Weele, 2003; Gelderman and Weele, 2002; Wynstra and Ten Pierick, Mohammad et al., 2011). In fact, Olsen and Ellram (1997) emphasized
2000). The most established portfolio model in literature and practice is that the weighting of each factor, which helps to determine the posi-
Kraljic's (1983) model known as the Kraljic Portfolio Matrix (KPM) tioning, is the most important part of the implementation process, but
(Caniels and Gelderman, 2005). The KPM employs a 2 × 2 matrix at the same time is one of the most subjective elements of the KPM
comprised of four portfolio quadrants to categorize purchases according model and decision-makers must come to an agreement on these inputs.


Corresponding author.
E-mail addresses: bradley.boehmke@afit.edu, bradleyboehmke@gmail.com (B.C. Boehmke).

http://dx.doi.org/10.1016/j.pursup.2017.10.002
Received 2 December 2016; Received in revised form 4 October 2017; Accepted 9 October 2017
Available online 31 October 2017
1478-4092/ Published by Elsevier Ltd.
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

To address this Padhi et al. (2012) argue for less subjective methods for 2. Literature review
positioning purchases on the matrix; however, advancements with this
concern have been slow. Other concerns with the KPM exist such as 2.1. Modern purchasing portfolio approaches
weakness in the measurement of dimensions and variables (Olsen and
Ellram, 1997; Nellore and Soderquist, 2000), lack of prescriptive sug- Modern portfolio theory dates back to 1952 when Markowitz (1952)
gestions for proactively changing the existing power dependence (Cox, introduced a framework for assembling a portfolio of assets to balance
1997; Gelderman and Weele, 2002), disregard for the supplier side expected return for a given level of risk. The concept of portfolio models
(Lilliecreutz and Ydreskog, 2001; Kamann, 2000), and the failure to subsequently diffused into the strategic management (i.e. Pethia and
account for interdependencies between products (Olsen and Ellram, Saias, 1978), marketing (i.e. Wind and Claycamp, 1976), and produc-
1997; Ritter, 2000) and between agent relationships (Dubois and tion (i.e. Wagner, 1980) literature followed by the purchasing domain
Pedersen, 2002). Nevertheless, even among these critics, there is wide (i.e. Kraljic, 1983; Turnbull, 1990).
consensus that the KPM model provides a useful tool for describing and Purchasing portfolio models provide an approach for differentiating
differentiating purchasing situations and developing appropriate sour- suppliers (Padhi et al., 2012; Mota and de Castro, 2005; Buvik and
cing strategies (Knight et al., 2014). Reve, 2001) and commodities (Olsen and Ellram, 1997; Nellore and
The purpose of this paper is to address some of these concerns. We Soderquist, 2000). Purchasing portfolio models have received con-
propose the use of decision analysis to provide a systematic quantitative siderable attention from academia and within organizations
approach to making better decisions (Keefer et al., 2004). By in- (Gelderman and Van Weele, 2003). This attention is driven by the re-
corporating decision analysis, we advance the KPM model to become cognition that the ability of the firm to manage supplier relations has
more objective in nature. Specifically, we propose the use of multi- been empirically linked to obtaining and sustaining a competitive ad-
objective decision analysis (MODA) as a quantitative framework to vantage (e.g. Chen et al., 2004; Dyer, 1996). Moreover, suppliers have
objectively position purchases in the KPM matrix along with identifying played an increasingly significant role in the success of firms (Wagner
which products and services to begin strategic sourcing efforts with. We and Johnson, 2004). However, all suppliers cannot be dealt with in the
demonstrate our approach by positioning major products and services same way and the literature supports the need to differentiate supplier
procured by an organization which sources over $10 billion per year for relationships through differentiation schemes offered by purchasing
products and services across 79 locations. Consequently, this paper portfolio models (Gelderman and Mac Donald, 2008; Lilliecreutz and
contributes to the literature in two ways: Ydreskog, 2001).
Kraljic (1983) introduced the first comprehensive portfolio ap-
1. Providing a novel approach to objectively and quantitatively posi- proach for purchasing and supply management (Gelderman and Van
tion products and services within the KPM. Weele, 2003). Although other models have been developed (i.e.
2. Providing decision makers an approach to identify those products Tryggvason and Johansen, 1996; Dubois and Pedersen, 2002; Kamann,
and services that are optimal candidates to begin strategic sourcing 2007), Kraljic's KPM approach has become the dominant methodology
initiatives. built upon in literature and the foundation for purchasing strategies for
many organizations (Lamming and Harrison, 2001; Gelderman and Van
The outline of this paper follows. First, we provide a succinct Weele, 2003). Kraljic's approach leverages a portfolio matrix that
overview of purchasing portfolio models and the current gap in the classifies products on the basis of two dimensions: the external di-
literature for quantitatively positioning items within the KPM. We then mension (‘Supply Risk/Complexity’) concerns the factors regarding
outline our proposed methodology along with the use-case application suppliers and supply market, while the internal dimension (‘Importance
of our approach to a subset of the organization's products and services. of Purchase’) relates to the importance and value impact of a given
We then discuss the results and insights garnered from our analysis and product (Dubois and Pedersen, 2002). Each dimension needs to be as-
end the paper with a short discussion of recommendations, future work sessed against a number of variables where an overall classification
and concluding statements. score (‘low’ and ‘high’) is established. The result is a 2 × 2 matrix and a
classification in four categories: non-critical, leverage, bottleneck, and
strategic items as illustrated in Fig. 1. This categorization allows com-
modities to be classified in a way that minimizes the supply risk while
maximizing purchasing power and value to the firm (Padhi et al.,
2012).
There are several variants to the KPM; however, most alternatives
build on and extend the KPM by focusing on the factors and variables to
be measured. Table 1 illustrates only a few variants published in the
purchasing literature.
Positioning commodities in this matrix form not only enables
managers to visually see trade-offs between items, but the classification
also allows firms to develop distinctive management approaches for
each category. In fact, Gelderman and Semeijn (2006) and Gelderman
and Van Weele (2003) identified three generalized supplier strategies to
associate with the purchasing strength versus supply market strength
power positions:

1. Exploit: leverage buying power; whether through aggressive or


collaborative means1
2. Balance: implement neither aggressive nor conservative purchasing

1
It is important to note that extant supplier relationship management research has
shown that collaborative approaches are sometimes more effective than adversarial ap-
Fig. 1. Kraljic Portfolio Matrix. proaches in generating lower procurement prices (see Henke et al., 2009, 2014).

193
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

Table 1
Example variants in purchasing portfolio classification dimensions.

Classification dimensions

Internal factors External factors

Kraljic (1983) Importance of purchase Complexity of supply market


Volume, purchased, percentage of total purchase cost, impact on Availability, number of suppliers, competitive demand, make-or-buy
product quality and business growth opportunities, storage risks and substitution possibilities
Olsen and Ellram (1997) Strategic importance of the purchase Difficulty of the purchasing situation
Competence factors Product characteristics
– purchase influences the firm's core competencies – novelty
– purchase improves knowledge of buying organization – complexity
– purchase improves technological strength of buying organization Supply market characteristics
– suppliers' power
Economic factors – suppliers' technical/commercial competence
– volume/monetary value of purchases Environmental characteristics
– value added of purchase – risk
– criticality and leverage purchases gains with suppliers – uncertainty
Image factors
– supplier image/brand name
– environmental/safety impact of purchase
Bensaou (1999) Buyer's specific investments Supplier's specific investments
Tangible investments Tangible investments
– buildings, tooling, equipment – plant/warehouse location/layout, specialized facilities
Intangible investments Intangible investments
– people, time, effort, best practice, knowledge – sending guest engineers, developing info. systems
Gelderman and Mac Profit impact Supply risk
Donald (2008) Volume purchased, expected growth in demand, percent of total Market conditions, availability/scarcity, number of suppliers, competitive
purchase cost, impact on product quality, business growth demand, make-or-buy opportunities, storage risks, substitution possibilities,
on-time delivery, cultural differences, lack of logistical knowledge, supply
interruptions, duty/customs regulations, shortage of qualified personnel,
import complexity, payment conditions
Lee and Drake (2010) Competitive priority Risk in the supply market
Quality Component risks
– component durability, reliability, innovation – evaluator assessed risk scores for each component
Availability
– flexibility of volume & modification, technological capability
Cost
– cost of purchasing, inventory, quality
Time
– delivery speed & reliability, development speed
Padhi et al. (2012) Profit impact Supply risk
Impact on profitability, criticality of purchase, value/cost of purchase Market risk, performance risk, complexity risk

* Modification of Lee and Drake's (2010) classification dimension table.

approach 2.2. Quantitative approaches for positioning


3. Diversify: search for new suppliers or substitutes
However, one of the KPM's main critiques revolves around the
In addition to the variations in what determines the positioning of question: How does a purchasing manager position a product or service
products, the KPM has also been used to shift products within the within the matrix? Most of the research regarding the KPM involves the
matrix. For example, Gelderman and VanWeele (2005) illustrated how framework itself (Olsen and Ellram, 1997; Dubois and Pedersen, 2002),
practitioners have used the matrix to encourage new market entrants, movement within the framework (Gelderman and Van Weele, 2003;
which moves an item from strategic to leverage status, and to set goals Caniels and Gelderman, 2007; Nudurupati et al., 2015), application of
for sourcing improvements. the framework to industry (Syson, 1992; De Haan et al., 2003;
The simplicity and flexibility of the KPM design has been a sig- Gelderman and Semeijn, 2006; Gelderman and Mac Donald, 2008; Liu
nificant contributing factor to its popularity. Moreover, empirical stu- and Xu, 2008; Lee and Drake, 2010; Ferreira and Kharlamov, 2012;
dies have corroborated the usefulness and validity of KPM and pur- Nudurupati et al., 2015), strategies for the matrix categories (Caniels
chasing portfolio analysis in practice. Caniels and Gelderman (2007, and Gelderman, 2007), and buyer-supplier relationships that underpin
2005) assessed the credibility of the KPM and the factors applied to management decisions prior to or after placement (Olsen and Ellram,
measure supply risk and value impact. Leveraging data from Dutch 1997; Nellore and Soderquist, 2000; Caniels and Gelderman, 2007; Cox,
purchasing professionals, they found theoretical and real situations that 2001). In fact, Padhi et al. (2012), state that “positioning commodities
largely satisfy the purchasing strategies while assigning different com- in the KPM suggested in the literature are mainly based on subjective
modities to the KPM (Padhi et al., 2012). Wagner and Johnson (2004) judgment of the decision makers to position the commodities in the
used interview and archival data for multinational companies and different quadrants…They lack analytical rigor, where subjective po-
found a strong relationship between the portfolio approach and com- sitioning of commodities may lead to erroneous outcomes”. Wagner and
petitive advantages obtained. Bensaou (1999) and Lilliecreutz and Johnson (2004) add that “Despite the abundance of research on re-
Ydreskog (2001) found that firms benefit from entering into a variety of lationship patterns and their impact on company performance, the
relationships with different suppliers as directed by a KPM porfolio ‘how-to’ question has been widely neglected”. Ramsay (1994) identifies
approach. Ipso facto, purchasing porfolio analysis has been found to be an “absence of a conceptual framework to facilitate an analytical ap-
one of the top purchasing and supply tools used in industry, second only proach”. Padhi et al. (2012) add that “positioning of the items in the
to vendor rating (Cox and Watson, 2004). portfolio matrix by the purchasing managers are subjective and makes

194
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

the portfolio models imprecise”. Knight et al. (2014) reiterate the lack The discussion above highlights what can be considered a gap in
of analytical rigor, the difficulty in measuring the matrix dimensions, literature to date. The necessity to identify and apply a quantitative
and the argument “for less subjective methods for positioning purchases method to position items within the KPM is therefore a pressing need,
on the matrix”. Lee and Drake (2010) argue that lack of “the synthe- prior to undertaking subsequent analysis.
sizing of qualitative and quantitative measures” promote arbitrary
classification of purchases. Olsen and Ellram (1997) emphasize that 3. Methodology
categorizing of “purchases in a portfolio model…is very subjective, and
perhaps the most important part” of the implementation process and 3.1. Context
urge the use of quantitative methodologies.
Although not exhaustive, a review of literature identified only five The data used for this research comes from a large organization's
attempts to use quantitative techniques to position items with the KPM. procurement function whose primary goal is to leverage its enterprise
Three of the five techniques (Olsen and Ellram, 1997; Liu and Xu, 2008; reach in order to capitalize on strategic sourcing opportunities that will
Padhi et al., 2012) rely on the concept of importance weights or im- maximize value and savings to the organization and stakeholders. From
portance scoring. A review of the decision analysis literature reveals 2010 to 2014, this organization's procurement function spent nearly
there may be a better approach. The problem with importance weights $43 Billion in support of its operations. This figure represents nearly
is that they may not take into account the range between the least- and 11% of the total 2010–2014 budget of this organization. As the orga-
most-preferred options on each attribute (see Von Winterfeldt and nization continues to face ongoing operations in multiple locations, the
Edwards, 1993). Rather, swing weighting has become a common ap- increased scrutiny by senior leadership to improve strategic sourcing,
proach to more accurately capture the importance trade-space of given and the looming threat of an overburdened economy, the need to un-
attributes (Parnell et al., 2013). There is a unique difference between cover areas ripe for value maximization and reduced supply chain risk
importance weighting and swing weighting. “Importance weights are cannot be overstated. Thus, this research was guided by the desire to
used to reflect the general importance of one attribute over another… apply the KPM strategic sourcing model to this organizational context
without regard to…the difference between the worst and the best value to allow the enterprise to develop distinctive management approaches
points of each attribute” (Watson and Buede, 1987, p. 200). Watson and for its sourcing activities. To accomplish this the organization required
Buede further state that “when this difference from worst to best is not an objective and quantitative approach to position items within the
explicitly referenced in assessing weights, we obtain some general no- KPM and identify the products and services offering the highest po-
tion of importance, which is subject to great variation and argument tential for value maximization while minimizing supply chain risk
among decision-makers” (Watson and Buede, 1987, p. 200). Dillon- through strategic sourcing. Consequently, the methodology employed is
Merrill et al. (2008) argue that “importance weights do not take into for the purpose of positioning items within the matrix and identifying
account the range between the lowest and the highest levels of the optimal candidates to begin strategic sourcing initiatives.
value measures” resulting in the potential for important measures to not
be important to the decision. Keeney (2009) adds that “when we 3.2. Multi-objective decision analysis
quantify objectives by simply asking for their relative importance,
considerable misinformation about values is produced and a substantial The KPM is, in essence, a multi-objective decision model. Kraljic
opportunity to understand values is lost”. However, the use of swing indicates that a trade-off exists between two factors: supply risk and
weighting ensures we capture the full value preference structure rather value impact. The location of a commodity or service within the KPM
than simply an arbitrary score or at best a hierarchy of importance. represents this trade-off. Kraljic argues that an organization can fully
Swing weighting also protects against the potential for loss of in- exploit its buying power and achieve greater value gains when supply
formation, misunderstanding of decision-maker belief, and even loss of risk is minimized and value measures are maximized (Kraljic, 1983).
trade-offs between values. This occurs when items fall within the Leverage quadrant of the KPM.
Zhenfeng et al. (2007) apply factor analysis techniques to the di- On the other hand, items that fall outside of the Leverage quadrant offer
mensions of the KPM. However, the model lacks sufficient detail in less value impact or increased supply chain risk exposure to the firm
derivation of variable scoring and positioning of items. In all, the ability and require a different approach, or strategy, for purchasing. The
to extend this model for practical use is limited and its ease of im- general idea behind the KPM is to minimize supply vulnerability and
plementation is inadequate. maximize value impact while at the same time “matching external re-
The remaining quantitative method used to position items with the sources provided by suppliers with the internal needs of the buying
KPM is the Analytical Hierarchy Process (AHP) (Lee and Drake, 2010). firm” (Dubois and Pedersen, 2002, p. 36). Thus, an assumption is made
This approach is not without its flaws. From a general methodological regarding an overall direction of preference towards the Leverage
viewpoint concerning AHP, Watson and Buede (1987) argue that al- quadrant since it is in this quadrant that a purchasing organization is
though definitions for levels of importance are articulated, incon- most likely to achieve maximum value improvements while minimizing
sistencies between importance pairings are common and additional risk exposure.
methods must be used to resolve differences. They add that “instead of Relative to the exemplar organization, the objective to minimize
getting a decision-maker to wrestle with his values, the AHP tells him supply risk was interpreted as minimizing supply market complexity.
what they ought to be” (Watson and Buede, 1987). They further Risk, according to literature, is restricted to situations in which both the
highlight that AHP fails to provide clarity between attributes by using set of possibilities and the probability distribution over this set are
“a somewhat arbitrary representation of words by numbers which may known whereas decisions under uncertainty are usually made on
be implying an underlying judgment structure which the decision- grounds other than logical calculation (Loasby, 2001). Kraljic uses the
maker is unaware of and may disagree with” (Watson and Buede, term risk to identify a supply market that is comprised of many factors
1987). Dyer (1990) remarks that “the AHP, as it is traditionally applied that affect its complexity rather than outcomes with an associated
to the evaluation of alternatives, generates rank orderings that are not probability and consequence. Parnell et al. (2013) add that risk neu-
meaningful with respect to the underlying preferences of the decision trality is often seen in Government and non-profit decision making.
maker”. Kirkwood (1996) adds that “the [AHP] approach seems overly Therefore, we narrow our focus to a risk-less model with a fundamental
complex with its need for sometimes extensive pairwise comparisons of objective to Minimize Supply Market Complexity. This also serves to
alternatives and extensive mathematical calculations to determine simplify the model by eliminating the requirement to incorporate risk
rankings. These characteristics seem to obscure, rather than illuminate, attitude. Furthermore, for the objective to maximize value, the ex-
the trade-offs involved in making decisions with multiple objectives”. emplar organization sought to Maximize Strategic Impact. The ability of

195
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

an organization to carry out its particular operations and processes is Elicitation sessions determined the exponential SAVF to best represent
critical to the success of the organizations strategy and the centralized value preference. Thus, let A be the set of PSCs and x i be the IBISWorld
purchasing function of the organization providing the data for this re- Buyer Power Score for PSC i ∈ A . Let x 0 and x* be the lowest and
search is pivotal to the strategic success of its various locations. highest preferred value of attribute X respectively. The corresponding
Thus, for the exemplar organization the fundamental objectives values represent anchor points whereby vx (x ) is scaled from 0 to 1 such
decision-makers were focused on included: that vx (x 0) = 0 and vx (x *) = 1. Consequently, let vx (x i ) be the SAVF of
exponential form whereby each x i is an input and ρx be the exponential
• Objective 1: Minimize Supply Market Complexity constant for vx (x i ) :
• Objective 2: Maximize Strategic Impact 1−e[−(xi − x
0)/ ρ ]
x
vx (x i ) = 0
∀i∈A
1−e[−(x * − x )/ ρx ] (1)
Within the exemplar organization, individual products and services
acquired are referred to as Product and Service Codes (PSCs). Given the
two fundamental objectives and their respective direction of pre- 3.3.2. Strategic impact attribute
ference, Multi-Objective Decision Analysis (MODA) is implemented as a The Resource-based view posits that organizations achieve strategic
framework to quantitatively position PSCs within the KPM. impact through their resources (Barney, 1991). However, it has been
We recall that the terms minimize and maximize connotes the di- recognized that tangible and intangible assets cannot provide compe-
rection of preference of the decision maker for a particular objective. In titive advantages by themselves (Mahoney and Pandian, 1992). Hansen
our case, a less complex supply market is preferred over a more com- et al. (2004) argue that it is not simply the possession of valuable and
plex supply market and higher strategic impact is preferred over less inimitable resources, but how leadership manages these resources is
strategic impact. No manipulation of the market or the organization's just as important. Thus, the ability of a manager to “orchestrate” its
strategy is required or intended when positioning a PSC. However, the resources is fundamental to executing the organization's strategic ob-
direction of preference is a requirement when using MODA and is vital jectives and achieving competitive advantage (Sirmon et al., 2011).
to our methodology as will be seen in the following sections. Unfortunately, in many large bureaucratic enterprises, government
entities, and non-profit organizations, forced budget reductions remove
3.3. Measuring attributes managers’ control of resource orchestration (Scheidt, 1978; Furlong,
2012; Boehmke, 2015). In fact, “peanut butter spread” reductions are
The alternatives for this research are simply the set of PSCs, or often made where all units and functions experience a common re-
procurement items, that the organization desires to position within the duction (Boehmke et al., 2016a, 2016b). Yet in times of budget in-
KPM. Although there are 1702 PSCs involved in contracts, the organi- creases, managers across the organizational hierarchies are free, to an
zation supplied a subset of PSCs for this analysis that accounts for 80% extent, to exercise judgment in purchasing decisions to align resources
of 2010–2014 spend. Specifically, we seek to position 138 PSCs selected with strategic objectives. Thus, in times of normal or increasing budget
by the organization. activities, managers will direct their spend activities towards those re-
sources they believe will have the largest strategic impact to their
3.3.1. Supply market complexity attribute specific mission.
Supply market complexity can be measured by various attributes In conversations with senior leadership from our exemplar organi-
such as market structure, concentration, risk, and price trends (i.e. zation, which is a large bureaucratic enterprise, this practice was con-
Zsidisin, 2003; Bozarth et al., 2009; Bode and Wagner, 2015). To cap- sidered the norm. Furthermore, in our conversations with senior lea-
ture these characteristics of a market, organizations can develop in- dership and management at various levels within the organization, it
ternal algorithms to measure and aggregate this information (i.e. Olsen was commonly discussed that managers applied budget increases first
and Ellram, 1997; Lee and Drake, 2010) or leverage external ap- to the organization's most strategically critical goods and services.
proaches (i.e. Blome et al., 2014; Heckmann et al., 2015). The IBIS- Thus, in coordination with management, we leverage this assumption/
World Buyer Power Score is one such external resource. IBISWorld is a finding to deduce which PSCs were most critical to the organization by
research organization whose reports delve into supply markets for a identifying those PSCs that experienced the largest post-budget-cut re-
particular good or service. The IBISWorld Buyer Power Score is com- bound in spend. To do so, we targeted the change in spend from 2013 to
prised of three components: price trends, market structure, and market 2014. Spend data from the organization shows that 2013 included
risk (IBISWorld, 2015). Each consists of factors such as availability of significant budget cuts of approximately 13%. However, the 2014
substitutes, market share concentration, and product specialization. budgets for spend increased by nearly 6%. This trend was visible at the
Switching costs are also considered. These factors are weighted, scored, most aggregate levels (total organization and total department spend)
and aggregated to produce an overall buyer power score, which ranges down to the most disaggregated levels (sub-unit level spend).
between 1.00 and 5.00 with increments of 0.01. A higher score in- Consequently, as 2014 budgets increased, we identified those PSCs that
dicates greater buyer strength and a less complex market. The current experienced the largest post-budget-cut rebound in spend. To do so, we
organization has used the IBISWorld Buyer Power Score metric for calculate the percent change of spend for each PSC from 2013 to 2014.
several years to monitor the complexity of its supply market. The or- We also calculate overall organization spend over the same period,
ganization obtains IBISWorld reports for each PSC as part of their compute the deviation between the two, and scaled from 0 to 1.
market research efforts. Therefore, let X be the IBISWorld Buyer Power Therefore, let Y be the delta between the overall organization spend
Score, which represents our measure of supply market complexity. slope and PSC spend slope from 2013 to 2014. Those PSCs with values
A value function for this attribute provides a value score such that closer to one represent spend that aims to maximize strategic impact.
0≤vx (x ) ≤ 1. A single attribute value function (SAVF) is all that is re- A value function for this attribute provides a value score such that
quired since a single attribute was identified to measure this funda- 0≤vy (y ) ≤ 1. Due to the single attribute measured a SAVF is sufficient to
mental objective. Kirkwood (1996) identified two possible SAVFs: measure this fundamental objective as well. Elicitation also determined
piecewise linear and exponential. To select the appropriate function, the exponential SAVF to best represent the value preference. Thus, let pi
interviews were conducted with members of the purchasing function of be the percent change of PSC i ∈ A spend from 2013 to 2014 and let I
the organization who are experts in strategic sourcing and have ex- be the percent change of total organizational spend from 2013 to 2014.
perience using the KPM. The goal of the interviews was to identify and Therefore, yi is the delta between total organizational and individual
build a value preference structure for each attribute by eliciting values PSC spend slopes such that yi = pi −I ∀ i ∈ A . Furthermore, let y 0 and y*
using the fractile method as explained by Howard and Abbas (2015). be the lowest and highest preferred value of attribute Y respectively.

196
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

Fig. 2. The organization's modified KPM.

The corresponding values represent anchor points whereby vy (y ) is value. The results are the swing weight values for wx and wy , which
scaled from 0 to 1 such that vy (y 0 ) = 0 and vy (y *) = 1. Consequently, allows us to calculate the interaction swing weight wxy = 1−wx − wy .
vy (yi ) is the SAVF of exponential form whereby each yi is an input and ρy Thus we can calculate the multi-attribute value function (MAVF) as
be the exponential constant for vy (yi ) : outlined by Keeney and Raiffa (1993):
0 )/ ρ ]
1−e[−(yi − y y V (x , y ) = wx vx (x ) + wy vy (y ) + wxy vx (x ) vy (y ) (3)
vY (yi ) = 0
∀i∈A
1−e[−(y * − y )/ ρy ] (2)

4. Results and analysis


3.4. The KPM
4.1. Single attribute value functions
After solving each single attribute value function, we obtain a
[vx (x i ), vy (yi )] ordered pair for each PSC. This ordered pair allows us to The range of the IBISWorld Buyer Power Score is from 1.00 to 5.00
plot each PSC on the organization's modified KMP shown in Fig. 2. The in 0.01 increments. Thus, to build the value preference structure for the
coordinate plane is also divided into 4 equal quadrants. Partitions occur supply market complexity attribute we anchored the IBISWorld Buyer
at vx (x ) = 0.5 and vy (y ) = 0.5 under the assumption that vx (x ) < 0.5 Power Score attribute measure at a Low of x 0 = 1.00 and a High of
minimizes supply market complexity and vy (y ) > 0.5 maximizes stra- x* = 5.00 representing a value preference score of vx (x 0) = 0 and
tegic impact. These partitions divide the coordinate plane into the four vx (x *) = 1 respectively. The organization representatives stated they
quadrants that represent the four quadrants of the KPM. Plotting each prefer to operate in a market where companies score a 4.00. A series of
[vx (x i ), vy (yi )] score, that is each PSC, using Fig. 2 will help the orga- questions revealed this score represents 90% of the overall value.
nization identify the full trade space among PSCs, allow comparisons Therefore, let vx (4.00) = 0.90 . Consequently, the fitted exponential
between current contracting strategies with KPM-suggested strategies, curve for the supply market complexity attribute (Eq. (1)) formed the
and provide key information as to which PSC and its associated con- curve displayed in Fig. 3 where the IBISWorld Buyer Power Score (x-
tracting strategy requires further analysis. axis) relates to the computed value score (y-axis).
This curve was used to calculate the supply market complexity at-
3.5. Multi-attribute value function analysis tribute score for each PSC. Table 2 provides summary statistics for this
attribute across all assessed PSCs. The higher-than-average attribute
Last, we identify the weights associated with the two fundamental score is a result of relatively high IBISWorld Buyer Power Scores which
objectives. Given that Kraljic identifies a unique relationship between indicate a stronger than average buyer's market.
both axes of the matrix, a multilinear function must be created rather
than a simple additive value model, which has been the subject of the
extant literature. This allows us to capture the preference structure and
relative importance between the two objectives (Goodwin and Wright,
2001). This is also critical in helping to understand the relative im-
portance of each measure and its dependency on the difference between
the worst and the best value points of each measure (Dillon-Merrill
et al., 2008; Parnell et al., 2013). Furthermore, as will be illustrated in
Section 4.4, we can perform sensitivity analysis on these swing weights
to gain even further robustness in our preference structure trade-space.
Weights associated with each attribute and their interactions are
determined following Keeney and Raiffa (1993). First, we identify
[vx (x 0), vy (y 0 )] = 0 as the worst possible value and [vx (x *), vy (y *)] = 100
as the best possible value. Next, we determine which attribute the or-
ganization prefers to swing to its best case while keeping the other
attribute at its worst case and elicit its value. We then determine the
value of the opposing situation, swinging the other attribute to its best
Fig. 3. SAVF used to measure supply market complexity.
case while keeping the first attribute at its worst case and elicit this

197
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

Table 2 Table 4
Supply market complexity SAVF summary sta- PSCs scoring 1.00 for the strategic impact attribute.
tistics.
PSC PSC description FY10–14 spend
Type Value
Z111 Z111 (MAINT-REP-ALT/OFFICE BLDGS) $ 1,076,718,071
Min 0.496 5999 5999 (MISCELLANEOUS ELECTRICAL AND $ 581,355,705
Max 0.980 ELECTRONIC COMPONENTS)
Average 0.811 7025 7025 (ADP INPUT/OUTPUT AND STORAGE DEVICES) $ 463,261,524
Std Dev 0.089 7050 7050 (ADP COMPONENTS) $ 360,901,960
Modea 0.894 Z2LB Z2LB (REPAIR OR ALTERATION OF HIGHWAYS/ $ 295,950,703
ROADS/STREETS/BRIDGES/RAILWAYS)
a 7021 7021 (ADP CENTRAL PROCESSING UNIT (CPU, $ 288,628,522
Mode count = 11.
COMPUTER), DIGITAL)
6350 6350 (MISCELLANEOUS ALARM, SIGNAL, AND $ 195,729,063
SECURITY DETECTION SYSTEMS)
5410 5410 (PREFABRICATED AND PORTABLE BUILDINGS) $ 99,097,618
2590 2590 (MISCELLANEOUS VEHICULAR COMPONENTS) $ 70,531,561
7020 7020 (ADP CENTRAL PROCESSING UNIT (CPU, $ 52,812,639
COMPUTER), ANALOG)
7045 7045 (ADP SUPPLIES) $ 50,673,186
7195 7195 (MISCELLANEOUS FURNITURE AND FIXTURES) $ 48,489,014
4910 4910 (MOTOR VEHICLE MAINTENANCE AND REPAIR $ 36,842,295
SHOP SPECIALIZED EQUIPMENT)
7220 7220 (FLOOR COVERINGS) $ 34,467,701
4210 4210 (FIRE FIGHTING EQUIPMENT) $ 34,300,942
7290 7290 (MISCELLANEOUS HOUSEHOLD AND $ 31,732,507
COMMERCIAL FURNISHINGS AND APPLIANCES)
7490 7490 (MISCELLANEOUS OFFICE MACHINES) $ 18,721,944
4120 4120 (AIR CONDITIONING EQUIPMENT) $ 16,654,569
3590 3590 (MISCELLANEOUS SERVICE AND TRADE $ 9,465,937
EQUIPMENT)

Fig. 4. SAVF used to measure strategic impact. another way, 19 PSCs are considered 100% critical to the organization's
strategy. Table 4 identifies the 19 PSCs and their associated total spend
To build the value preference structure for the second attribute, for 2010–2014. Although this small subset of PSCs represents only 2.5%
fractiles of the distribution were elicited. We anchored the spend slope of total spend for the organization, their combined total spend from
delta at a Low of y 0 = −2.00 and a High of y* = +1.00 representing a 2010 to 2014 is over $3.7 billion.
value preference score of vy (y 0 ) = 0.00 and vy (y *) = 1.00 respectively. To further examine attribute results, the top 50 scores for each SAVF
The organization representatives agreed that a match between PSC were examined to determine if PSCs were present in both sets of scores.
spending and organizational spending, a spend slope delta of yi = 0 , 15 PSCs were identified and their attribute scores along with
generated 90% of the overall value. Therefore, let vy (0.00) = 0.90 . In 2010–2014 total spend are given in Table 5. This list can be considered
other words, PSC spending that followed overall organizational spend a good starting point for the organization to compare current pur-
was indicative of a PSC that was very important to the organization chasing strategies versus commercial best practice since this set of PSCs
given that budget cuts to that particular PSC were not implemented. is both important to the organization's strategy and in a strong buyer's
Consequently, the fitted exponential curve for the strategic impact at- market. Additionally, we expect to see this set of PSCs in a position
tribute (Eq. (2)) formed the curve displayed in Fig. 4 where the spend within the KPM that connotes the potential for leverage supplier stra-
slope delta (x-axis) relates to the computed value score (y-axis). tegies.
This curve was used to calculate the strategic impact attribute score
for each PSC.
The high average attribute score (Table 3) indicates that this set of 4.2. Prioritized PSCs and the KPM
PSCs represents items considered critical to the organization's strategic
mission and should be reflected in position on the KPM. Given that the Using MODA as a framework provides a unique analytical method
organization performed a thorough analysis to create this prioritized to score the attributes associated with each axis of the KPM. Combining
list of PSCs most conducive for cost reduction, 62.3% of PSCs scoring the SAVF scores for each attribute, each [vx (x i ), vy (yi )] – pair re-
higher than 0.900 along with a mode of 1.000 is both sensible and presenting each PSC is positioned within the KPM as shown in Fig. 5.
valid. Of note, 19 of the 138 PSCs analyzed scored a 1.000. To state this Positioning the PSCs in the KPM illustrates that 137 of the 138 PSCs
are positioned in the Leverage quadrant. Additional analysis revealed
that 106 PSCs scored 0.75 or higher for both attributes, which is out-
Table 3
Installation mission impact SAVF summary statistics.
lined in Table 6. Further investigation regarding this phenomenon
discovered that the organization's selection of PSCs for analysis was
Type Value based on a specific set of key performance indicators (KPIs) that iden-
tified what the organization considered to be the best opportunity for
Min 0.587
Max 1.000
strategic impact. The combination of KPI score and annual spend was
Average 0.912 used to produce the prioritized list of 138 PSCs. Thus, we should expect
Std Dev 0.074 to see them in the Leverage quadrant. Further investigation into this set
Modea 1.000 of PSCs revealed that items procured to run the organization's various
Nr. PSC's 138
locations are more often than not common goods and services of which
N.r > 0.90 86
% PSC's > 0.90 62% markets exist beyond the organization's needs. Thus, we should expect
to see a bulk of PSCs congregating to the left and even to the upper left
a
Mode count = 19. of the matrix. Moreover, in Kraljic's (1983) seminal work, he used an

198
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

Table 5
PSCs with top 50 scores for both SAVFs.

PSC PSC description SAVF 1 score SAVF 2 score Grand total

J059 J059 (MAINT/REPAIR/REBUILD OF EQUIPMENT-ELECTRICAL AND ELECTRONIC EQUIPMENT COMPONENTS) 0.94 0.87 $ 1,779,285,662.29
7030 7030 (ADP SOFTWARE) 0.97 0.87 $ 1,703,974,283.28
5840 5840 (RADAR EQUIPMENT, EXCEPT AIRBORNE) 0.97 0.87 $ 776,035,548.60
7035 7035 (ADP SUPPORT EQUIPMENT) 0.95 0.86 $ 640,005,251.47
5999 5999 (MISCELLANEOUS ELECTRICAL AND ELECTRONIC COMPONENTS) 1.00 0.86 $ 581,355,704.54
7025 7025 (ADP INPUT/OUTPUT AND STORAGE DEVICES) 1.00 0.94 $ 463,261,524.44
J066 J066 (MAINT/REPAIR/REBUILD OF EQUIPMENT-INSTRUMENTS AND LABORATORY EQUIPMENT) 0.96 0.86 $ 418,840,837.44
7050 7050 (ADP COMPONENTS) 1.00 0.86 $ 360,901,960.23
7021 7021 (ADP CENTRAL PROCESSING UNIT( CPU, COMPTER), DIGITAL) 1.00 0.92 $ 288,628,521.76
8415 8415 (CLOTHING, SPECIAL PURPOSE) 1.00 0.90 $ 162,601,633.63
J049 J049 (MAINT/REPAIR/REBUILD OF EQUIPMENT-MAINTENANCE AND REPAIR SHOP EQUIPMENT) 0.97 0.86 $ 115,220,071.38
7020 7020 (ADP CENTRAL PROCESSING UNIT (CPU, COMPUTER), ANALOG) 1.00 0.92 $ 52,812,638.83
7045 7045 (ADP SUPPLIES) 1.00 0.92 $ 50,673,185.57
AC56 AC56 (R & D-DEFENSE SYSTEM: WEAPONS (MANAGEMENT/SUPPORT)) 0.96 0.89 $ 50,299,696.91
7490 7490 (MISCELLANEOUS OFFICE MACHINES) 1.00 0.98 $ 18,721,943.72

Fig. 5. The organization's PSCs positioned in the KPM. Fig. 6. Revised KPM based on median attribute scores.

Table 6 leadership perceives the x and y attributes as equally weighted.


Further assessment of leverage quadrant breakdown.
To address this concern, weights are elicited for both single attribute
Partition nr. SAVF 1 range SAVF 2 range Count value functions by using the process outlined in Section 3.5. Recall that
[vx (x 0), vy (y 0 )] = 0 and [vx (x *), vy (y *)] = 100 . These two points re-
1 (0.75, 1.00) (0.75, 1.00) 106 present opposing ends of the KPM in the Bottleneck and Leverage
2 (0.75, 1.00) (0.50, 0.75) 25
quadrants respectively. To determine weights, values are elicited for the
3 (0.50, 0.75) (0.50, 0.75) 2
4 (0.75, 1.00) (0.75, 1.00) 4 following scenarios: [vx (x *), vy (y 0 )] and [vx (x 0), vy (y *)], which also re-
present opposing ends of the KPM in the Noncritical and Strategic
quadrants respectively. The weight associated with the Strategic quad-
example of a company that positioned 5000 items. Only 75, or 1.5% rant represents a scenario where an item is extremely important to the
were positioned on the right side of the matrix (the strategic or bot- mission but is only found in a very complex market. The weight asso-
tleneck quadrants). However, this initial assessment helped to confirm ciated with the Noncritical item represents an item not important to the
that the objective quantitative approach applied aligned with the or- mission yet abides in a non-complex, buyer-empowered market. Either
ganization's internal analytic processes to identify strategically im- scenario is not preferred by the organization's representatives. Value
portant PSCs. Furthermore, that the bulk (106 of 138) of the PSCs are in preference elicitation sessions revealed they preferred to swing attri-
the upper left of the Leverage quadrant, the organization should be able bute Y (Strategic Impact) to its best while holding attribute X (Supply
to leverage its buying power to maximize strategic impact while Market Complexity) at its worst over the opposing situation. The value
minimizing supply chain risk with these PSCs. However, the question they assigned to this swing was 52%, thus wy = 0.52 . The same held for
remains – of these PSCs, which should the organization focus on first to the opposing situation. Swinging attribute X to its best while holding
maximize strategic impact while minimizing supply chain risk? attribute Y represented a value of 48% to the team, thus wx = 0.48. Ipso
facto, wxy = 0.00 .
4.3. Identifying the cost-benefit trade space Therefore, these weights are used per Eq. (3) to produce a rank-
order list of PSCs with regard to the hierarchical set of evaluation
One approach to address this concern is to let the cutoff points be measures. The PSCs with the highest MAVF score indicates products
produced by the data rather than using the arbitrary 0.50 cutoff value. and services that have the highest impact to mission and is in the “best”
In Fig. 6 we adjust the cutoff values to the median attribute score values buyer's market. Table 7 identifies the top 25 PSCs with the highest
such that vx (x ) = 0.82 and vy (y ) = 0.92 . As a result 33 PSCs fall into the MAVF score. These PSCs can be considered the most likely candidates
upper left quadrant, which could be considered the leverage quadrant for the organization to start applying commercial best practice strate-
of the leverage quadrant. This may provide the organization with a gies to reduce costs.
reduced set of PSCs to focus on; however, this still assumes that We can obtain further insight by examining the cost-benefit trade

199
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

Table 7
Top 25 PSCs with highest MAVF scores.

PSC PSC description FY10–14 spend MAVF score

7490 7490 (MISCELLANEOUS OFFICE MACHINES) $ 18.72 0.991


7025 7025 (ADP INPUT/OUTPUT AND STORAGE DEVICES) $ 463.26 0.973
5836 5836 (VIDEO RECORDING AND REPRODUCING EQUIPMENT) $ 54.37 0.965
7045 7045 (ADP SUPPLIES) $ 50.67 0.963
7020 7020 (ADP CENTRAL PROCESSING UNIT (CPU, COMPUTER), ANALOG) $ 52.81 0.960
7021 7021 (ADP CENTRAL PROCESSING UNIT (CPU, COMPUTER), DIGITAL) $ 288.63 0.960
7520 7520 (OFFICE DEVICES AND ACCESSORIES) $ 24.17 0.955
8415 8415 (CLOTHING, SPECIAL PURPOSE) $ 162.60 0.949
5810 5810 (COMMUNICATIONS SECURITY EQUIPMENT AND COMPONENTS) $ 594.46 0.937
5985 5985 (ANTENNAS, WAVEGUIDES, AND RELATED EQUIPMENT) $ 628.88 0.936
5999 5999 (MISCELLANEOUS ELECTRICAL AND ELECTRONIC COMPONENTS) $ 581.36 0.935
7050 7050 (ADP COMPONENTS) $ 360.90 0.934
7010 7010 (ADPE SYSTEM CONFIGURATION) $ 666.54 0.932
AC56 AC56 (R & D- DEFENSE SYSTEM: WEAPONS (MANAGEMENT/SUPPORT)) $ 50.30 0.927
5805 5805 (TELEPHONE AND TELEGRAPH EQUIPMENT) $ 363.59 0.923
5840 5840 (RADAR EQUIPMENT, EXCEPT AIRBORNE) $ 776.04 0.922
V126 V126 (TRANSPORTATION/TRAVEL/RELOCATION-TRANSPORTATION: SPACE TRANSPORTATION/LAUNCH) $ 3745.18 0.921
7030 7030 (ADP SOFTWARE) $ 1703.97 0.920
J049 J049 (MAINT/REPAIR/REBUILD OF EQUIPMENT-MAINTENANCE AND REPAIR SHOP EQUIPMENT) $ 115.22 0.914
R706 R706 (SUPPORT-MANAGEMENT: LOGISTICS SUPPORT) $ 5572.89 0.912
D316 D316 (IT AND TELECOM-TELECOMMUNICATIONS NETWORK MANAGEMENT) $ 716.58 0.912
J066 J066 (MAINT/REPAIR/REBUILD OF EQUIPMENT-INSTRUMENTS AND LABORATORY EQUIPMENT) $ 418.84 0.911
R497 R497 (SUPPORT-PROFESSIONAL: PERSONAL SERVICES CONTRACTS) $ 391.60 0.911
AJ16 AJ16 (R & D-GENERAL SCIENCE/TECHNOLOGY: PHYSICAL SCIENCES (MANAGEMENT/SUPPORT)) $ 126.75 0.910
J059 J059 (MAINT/REPAIR/REBUILD OF EQUIPMENT-ELECTRICAL AND ELECTRONIC EQUIPMENT COMPONENTS) $ 1779.29 0.909

space. Fig. 7 plots these most-likely candidate PSCs based on total cost “Pareto Optimal Set”. When considering value preferences and overall
and MAVF score. The non-dominated PSCs are marked accordingly with spend, this set of seven represents the optimal set of PSCs for the or-
the assumption that the organization prefers to maximize the “benefit” ganization to begin strategy comparisons and implement commercial
(MAVF score) of those PSCs with the largest cost impact to the orga- best practice purchasing strategies.
nization. The non-dominated PSCs form the Pareto optimal set, or ef-
ficient frontier, of PSCs. Seven non-dominated PSCs are identified as the

Fig. 7. Non-dominated PSCs within the cost-benefit trade space.

200
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

4.4. Assessing robustness with sensitivity analysis quadrant. Again, by not considering KPM position first and only relying
on the combination of KPI score and overall spend, the organization
To assess the robustness of our results we performed sensitivity may not be able to identify PSCs that should require further in-
analysis on the swing weights assigned to each single attribute value vestigation as a result of its divergence from the Leverage quadrant.
function. Sensitivity analysis allows us to see the impact on the MAVF Finally, after calculating the MAVF scores for these non-prioritized
score when adjusting the weights within a given range and provides PSCs and including them in the Cost–Benefit Trade Space plot, we find
feedback regarding biases in the modeling and elicitation procedures that the Pareto Optimal Set does not change. Again, this is due to the
(Hamalainen, 2004). Consequently, we assessed results when wx ranged low FY10-14 spend of the non-prioritized PSCs. We noted that although
between 0.38–0.58 and wy ranged between 0.42 and 0.62. For every non-prioritized PSCs may not land in the Pareto Optimal Set, the ag-
combination of weight adjustments, we consistently identified 12 of the gregate spend of non-prioritized PSCs within the Leverage quadrant
138 PSCs with the highest MAVF score indicating them as most likely should not be overlooked. We emphasize that the Leverage Quadrant is
candidates for initial strategy comparisons. In fact, four PSCs never the starting point for finding PSCs with high potential for maximizing
changed position. These results strengthen the case that the underlying value impact while minimizing risk exposure. The KPM helps identify
MODA framework is robust and that we have adequately captured the such PSCs. The Pareto Optimal set simply identifies which of those PSCs
value preferences for procured goods and services. Past research sup- to select first for implementing strategic sourcing efforts.
ports the argument that multi-attribute utility modeling typically yields
valid mathematical representations of the preferences of decision-ma- 5. Discussion and summary
kers (Fischer, 1979).
Strategic purchasing is a critical element of success for today's or-
ganization and applying a purchasing portfolio approach has become
4.5. Assessing non-prioritized PSCs one of the dominant purchasing strategies. Moreover, Kraljic's portfolio
matrix has become the fundamental structure that most purchasing
Lastly, to further examine our MODA framework, we assessed portfolio strategies rely upon. However, within the extant literature,
eleven PSCs that were not part of the organization's originally prior- positioning products and services within the different quadrants of the
itized set of 138. Fig. 8 plots these PSCs based on their respective SAVF KPM is primarily based on subjective judgment of the decision makers.
scores. We observe two PSCs (6635 and R704) that are positioned in the This has left two important questions unresolved:
Leverage quadrant. They represent a combined annual spend of nearly
$25M. However, these two PSCs were not originally prioritized by the 1. How does a purchasing manager quantitatively and objectively position a
organization's internal approach to be considered for strategic sourcing product or service within the matrix?
initiatives. This was due to the fact that the organization's internal 2. Which products and services should the organization focus on first when
analysis used overall spend with their KPI scoring criteria as a means to implementing a strategic sourcing initiative?
prioritize PSCs. Although we understand the organization's desire to
focus its efforts on PSCs that have large impacts on its overall budget, 5.1. Contributions
our analysis highlights that these prioritization criteria may result in
potential missed opportunities for strategic sourcing. In fact, this dis- The proposed approach helps to address the current gap in the KPM
cussion promotes positioning PSCs within the KPM using the MODA- literature regarding the necessity to identify and apply a quantitative
framework as an effective starting point a priori to implementing the method to position items within the KPM. With limited applications of
organization's usual internal analysis. quantitative techniques to position items within the KPM, our method
We also identify PSC G002, positioned in the Strategic quadrant. A expands the objective and quantitative rigor that can accompany a KPM
score of 0.00 was assigned for the supply market complexity SAVF due application. Furthermore, our approach goes beyond the quantitative
to IBISWorld not providing any market research for this type of service. positioning of product and services in the KPM, but also provides a
This seems to indicate that a “buyer's market” may not exist. Therefore, rigorous approach to quantitatively and objectively rank-order products
according to our scoring criteria, we assumed this is a complex market and services for strategic sourcing initiatives.
in which to operate and the organization confirmed this assumption. Specifically, we introduce the use of MODA into the KPM literature
This, along with the fact that spending remained steady from 2010 to base to capture the value preferences of decision makers. First, we
2014, resulted in G002 being positioned in the Strategic quadrant. applied a SAVF to objectively quantify the dimensions and attributes of
Although G002 is only responsible for an average of $3.6M of annual the products and services. We then leverage swing weights and a MAVF
spend for 2010–2014, the KPM appropriately positions it in the Strategic to rank-order the products and services to identify those, which re-
present the most likely candidates for strategic sourcing opportunities.
A cost-benefit comparison further refined this list by identifying the
Pareto optimal set of products and services most conducive to strategic
sourcing opportunities. A sensitivity analysis and validation set as-
sessment was performed to ratify the robustness of our methodology.
Our approach is managerial relevant since it not only improves the
objectiveness, quality, and confidence of positioning products and ser-
vices within the KPM matrix, but it also helps decision makers identify
those products and services that are optimal candidates to begin stra-
tegic sourcing initiatives. Due to the ease of implementation, organi-
zations can quickly implement our solution. Furthermore, by leveraging
the swing weights and sensitivity analysis, procurement managers will
understand how the solution space changes based on managerial pre-
ferences. This allows managers to identify those products and services
that consistently appear optimal for strategic sourcing initiatives re-
gardless of preference structure.
The organization whose data was used for this research acknowl-
Fig. 8. KPM for non-prioritized PSCs.
edged that the objective and quantitative approach proposed and

201
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

demonstrated by this research represents a simpler and faster approach References


than the subjective approaches advocated in the literature. The lea-
dership also acknowledged that this approach led to higher quality and Barney, J., 1991. Firm resources and sustained competitive advantage. J. Manag. 17 (1),
more insightful results than the approaches they had used in the past. 99–120.
Bensaou, M., 1999. Portfolios of buyer-supplier relationships. MIT Sloan Manag. Rev. 40
The management team is excited about the time and effort savings that (4), 35.
this new approach represents. They also view this approach as a way of Blome, C., Schoenherr, T., Eckstein, D., 2014. The impact of knowledge transfer and
providing objective continuity across leadership changes and between complexity on supply chain flexibility: a knowledge-based view. Int. J. Prod. Econ.
147, 307–316.
the various levels of leadership within their organization. Bode, C., Wagner, S.M., 2015. Structural drivers of upstream supply chain complexity and
the frequency of supply chain disruptions. J. Oper. Manag. 36, 215–228.
5.2. Limitations and future research Boehmke, B.C., 2015. Grabbing the Air Force by the Tail: Applying Strategic Cost
Analytics to Understand and Manage Indirect Cost Behavior. Air Force Institute of
Technology, Wright-Patterson AFB.
Despite the rigor of our analysis, we accept that certain limitations Boehmke, B.C., Johnson, A.W., White, E.D., Weir, J.D., Gallagher, M.A., 2016a. The in-
exist that might entice further research. First, our analysis leverages a fluence of operational resources and activities on indirect personnel costs: a multi-
level modeling approach. Eng. Econ. 61 (4), 289–312.
SAVF for each of the attributes (value impact and supply complexity)
Boehmke, B.C., Johnson, A.W., White, E.D., Weir, J.D., Gallagher, M.A., 2016b. Tooth-to-
assessed. Future research can expand this approach by incorporating tail impact analysis: combining econometric modeling and Bayesian networks to
MAVFs so that multiple measures could be used to value a given at- assess support cost consequences due to changes in force structure. J. Cost Anal.
tribute. Moreover, future research can strive to incorporate new attri- Parametr. 9 (1), 2–31.
Bozarth, C.C., Warsing, D.P., Flynn, B.B., Flynn, E.J., 2009. The impact of supply chain
butes that potentially contribute to the two dimensions. Furthermore, complexity on manufacturing plant performance. J. Oper. Manag. 27 (1), 78–93.
our research focuses on quantifying the attributes of procured products Buvik, A., Reve, T., 2001. Asymmetrical deployment of specific assets and contractual
and services and indicating where strategic sourcing efforts should safeguarding in industrial purchasing relationships. J. Bus. Res. 51 (2), 101–113.
Caniels, M.C., Gelderman, C.J., 2007. Power and interdependence in buyer supplier re-
focus first. However, our research does not identify the appropriate lationships: a purchasing portfolio approach. Ind. Mark. Manag. 36 (2), 219–229.
procurement strategy techniques that should be applied to these iden- Caniels, M.C., Gelderman, C.J., 2005. Purchasing strategies in the Kraljic matrix – a power
tified opportunities. Future research should seek to link the results of and dependence perspective. J. Purch. Supply Manag. 11 (2), 141–155.
Carr, A.S., Smeltzer, L.R., 2000. An empirical study of the relationships among purchasing
our quantified approach to specific procurement strategies to provide skills and strategic purchasing, financial performance, and supplier responsiveness. J.
decision makers with a complete purchasing portfolio framework. Supply Chain Manag. 36 (3), 40.
An additional limitation of this analysis is the lack of support for the Carr, A.S., Keong Leong, G., Sheu, C., 2000. A study of purchasing practices in Taiwan.
Int. J. Oper. Prod. Manag. 20 (12), 1427–1446.
cutoff values that produce the four KPM quadrants. Future research Carter, J.R., Narasimhan, R., 1996. Is purchasing really strategic? Int. J. Purch. Mater.
should analyze possible cutoff value approaches, whether they are de- Manag. 32 (4), 20–28.
termined from statistical properties of the data such as median, mean, Chen, I.J., Paulraj, A., Lado, A.A., 2004. Strategic purchasing, supply management, and
firm performance. J. Oper. Manag. 22 (5), 505–523.
standard deviations, or quantiles, and see how these change the inter-
Cousins, P.D., Lawson, B., Squire, B., 2006. An empirical taxonomy of purchasing func-
pretation of the results or perspective. This may provide significant tions. Int. J. Oper. Prod. Manag. 26 (7), 775–794.
insight into whether the current arbitrary 0.50 cutoff is reasonable or if Cox, A., 2001. Understanding buyer and supplier power: a framework for procurement
alternative approaches are more appropriate depending on the business and supply competence. J. Supply Chain Manag. 37 (1), 8–15.
Cox, A.W., 1997. Business Success: A Way of Thinking About Strategy, Critical Supply,
context. Lastly, this analysis relies on the data from a single organiza- Chain Assets and Operational Best Practice. Earlsgate Press.
tion. Future research should strive to replicate the approach advocated Cox, A., Watson, G., 2004. Top tools: one hit wonders or lasting classics? Supply Manag. 9
here using data from other organizations to perhaps strengthen the (22), 20–24.
De Haan, J., de Groot, G., Loo, E., Ypendburg, M., 2003. Flows of goods or supply chains;
overall generalizability of the approach, to verify whether or not the lessons from the natural rubber industry in Kerala, India. Int. J. Prod. Econ. 81,
assumptions made hold true in other contexts, and to determine whe- 185–194.
ther or not the cutoff values utilized are equally applicable to other Dillon-Merrill, R.L., Parnell, G.S., Buckshaw, D.L., Hensley, W.R., Caswell, D.J., 2008.
Avoiding common pitfalls in decision support frameworks for department of defense
organizations. analyses. Mil. Oper. Res. 13 (2), 19–31.
Dubois, A., Pedersen, A.-C., 2002. Why relationships do not fit into purchasing portfolio
5.3. Concluding remarks models – a comparison between the portfolio and industrial network approaches. Eur.
J. Purch. Supply Manag. 8 (1), 35–42.
Dyer, J.H., 1996. Specialized supplier networks as a source of competitive advantage:
Many organizations only leverage a fraction of what could poten- evidence from the auto industry. Strateg. Manag. J. 271–291.
tially be managed and saved through strategic sourcing. Strategic Dyer, J.S., 1990. Remarks on the analytic hierarchy process. Manag. Sci. 36 (3), 249–258.
Ellram, L.M., Carr, A., 1994. Strategic purchasing: a history and review of the literature.
sourcing even one additional percent of the spend of large organizations
Int. J. Purch. Mater. Manag. 30 (1), 9–19.
could equate to billions of dollars of value improvement. Implementing Eltantawy, R.A., Giunipero, L., Fox, G.L., 2009. A strategic skill based model of supplier
strategic sourcing via a purchasing portfolio framework, organizations integration and its effect on supply management performance. Ind. Mark. Manag. 38
have the opportunity to more aggressively leverage their buying power (8), 925–936.
Ferreira, L.M., Kharlamov, A.A., 2012. Application of Kraljic's purchasing portfolio matrix
and select appropriate sourcing strategies and tactics. With Kraljic's in construction industry – a case study. In: Proceedings of the International
portfolio matrix being the most widely used diagnostic and prescriptive Conference on Industrial Engineering and Operations Management. IEOM, Istanbul,
purchasing portfolio framework, this research greatly contributes to pp. 111.1–111.11.
Fischer, G.W., 1979. Utility models for multiple objective decisions: do they accurately
this framework by providing a more quantitative and rigorously represent human preferences? Decis. Sci. 10 (3), 451–479.
grounded matrix. This provides purchasing managers an objective, Furlong, K., 2012. Good water governance without good urban governance? Regulation,
quantitative approach to identify products and services ripe for stra- service delivery models, and local government. Environ. Plan. A 44 (11), 2721–2741.
Gelderman, C.J., Mac Donald, D.R., 2008. Application of Kraljic's purchasing portfolio
tegic sourcing initiatives. matrix in an undeveloped logistics infrastructure: the Staatsolie Suriname case. J.
Transnatl. Manag. 13 (1), 77–92.
Appendix A. List of abbreviations Gelderman, C.J., Semeijn, J., 2006. Managing the global supply base through purchasing
portfolio management. J. Purch. Supply Manag. 12 (4), 209–217.
Gelderman, C.J., Van Weele, A.J., 2003. Handling measurement issues and strategic di-
AHP Analytical Hierarchy Process rections in Kraljic's purchasing portfolio model. J. Purch. Supply Manag. 9 (5),
KPI Key Performance Indicator 207–216.
Gelderman, C.J., Van Weele, A.J., 2005. Purchasing portfolio models: a critique and
KPM Kraljic Portfolio Matrix
update. J. Supply Chain Manag. 41 (3), 19–28.
MAVF Multi-Attribute Value Function Gelderman, C.J., Weele, A.J., 2002. Strategic direction through purchasing portfolio
MODA Multi-Objective Decision Analysis management: a case study. J. Supply Chain Manag. 38 (1), 30–37.
PSC Product and Service Code Goodwin, P., Wright, G., 2001. Enhancing strategy evaluation in scenario planning: a role
for decision analysis. J. Manag. Stud. 38 (1), 1–16.
SAVF Single-Attribute Value Function

202
R.T. Montgomery et al. Journal of Purchasing and Supply Management 24 (2018) 192–203

Hamalainen, R.P., 2004. Reversing the perspective on the applications of decision ana- missing link to specifications. Long Range Plan. 33 (2), 245–267.
lysis. Decis. Anal. 1 (1), 26–31. Nudurupati, S., Bhattacharya, A., Lascelles, D., Caton, N., 2015. Strategic sourcing with
Hansen, M.H., Perry, L.T., Reese, C.S., 2004. A Bayesian operationalization of the re- multi-stakeholders through value co-creation: an evidence from global health care
source-based view. Strateg. Manag. J. 25 (13), 1279–1295. company. Int. J. Prod. Econ. 166, 248–257.
Heckmann, I., Comes, T., Nickel, S., 2015. A critical review on supply chain risk – defi- Olsen, R.F., Ellram, L.M., 1997. A portfolio approach to supplier relationships. Ind. Mark.
nition, measure and modeling. Omega 52, 119–132. Manag. 26 (2), 101–113.
Henke, J.W., Stallkamp, T.T., Yeniyurt, S., 2014. Lost supplier trust, lost profits: –how Padhi, S.S., Wagner, S.M., Aggarwal, V., 2012. Positioning of commodities using the
Chrysler missed out on $24 billion profits over the past 12 years. Supply Chain Kraljic Portfolio Matrix. J. Purch. Supply Manag. 18 (1), 1–8.
Manag. Rev. 18 (3). Parnell, G.S., Bresnick, T., Tani, S.N., Johnson, E.R., 2013. Handbook of Decision Analysis
Henke, J.W., Yeniyurt, S., Zhang, C., 2009. Supplier price concessions: a longitudinal 6 John Wiley & Sons.
empirical study. Mark. Lett. 20 (1), 61–74. Pazirandeh, A., Norrman, A., 2014. An interrelation model of power and purchasing
Howard, R.A., Abbas, A.E., 2015. Foundations of Decision Analysis. Prentice Hall. strategies: a study of vaccine purchase for developing countries. J. Purch. Supply
IBISWorld, 2015. IBISWorld. Retrieved December 2015, from 〈https://www.ibisworld. Manag. 20 (1), 41–53.
com〉. Pethia, R.F., Saias, M., 1978. Metalevel product-portfolio analysis: an enrichment of
Jennings, D., 2002. Strategic sourcing: benefits, problems and a contextual model. Manag. strategic planning suggested by organization theory. Int. Stud. Manag. Organ. 8 (4),
Decis. 40 (1), 26–34. 35–66.
Kamann, D.J., 2000. Matrices, cubes and triangles in purchasing. In: Proceedings of the Ramsay, J., 1994. Purchasing power. Eur. J. Purch. Supply Manag. 1 (3), 125–138.
9th International IPSERA Conference. London, Canada. Ritter, T., 2000. A framework for analyzing interconnectedness of relationships. Ind.
Kamann, D.J., 2007. Organizational design in public procurement: a stakeholder ap- Mark. Manag. 29 (4), 317–326.
proach. J. Purch. Supply Manag. 13 (2), 127–136. Scheidt, O.H., 1978. Institutional Responses to Forced Budget Reductions.
Keefer, D.L., Kirkwood, C.W., Corner, J.L., 2004. Perspective on decision analysis appli- Sirmon, D.G., Hitt, M.A., Ireland, R.D., Gilbert, B.A., 2011. Resource orchestration to
cations. Decis. Anal. 1 (1), 4–22. create competitive advantage: breadth, depth, and life cycle effects. J. Manag. 37 (5),
Keeney, R.L., 2009. Value-focused Thinking: A Path to Creative Decision-making. Harvard 1390–1412.
University Press, Cambridge. Syson, R., 1992. Improving Purchase Performance. Pitman, London.
Keeney, R., Raiffa, H., 1993. Decisions with Multiple Objectives: Preferences and Value Talluri, S., DeCampos, H.A., Hult, G.M., 2013. Supplier rationalization: a sourcing deci-
Trade-offs. Cambridge University Press. sion model. Dec. Sci. 44 (1), 57–86.
Kirkwood, C.W., 1996. Strategic Decision Making. Wadsworth Publishing Company. Touboulic, A., Chicksand, D., Walker, H., 2014. Managing imbalanced supply chain re-
Knight, L., Tu, Y.-H., Preston, J., 2014. Integrating skills profiling and purchasing port- lationships for sustainability: a power perspective. Decis. Sci. 45 (4), 577–619.
folio management: an opportunity for building purchasing capability. Int. J. Prod. Tryggvason, E., Johansen, J., 1996. The ‘double matrix’ business process model and a
Econ. 147, 271–283. framework model for analysis and design of logistic systems. Eur. J. Purch. Supply
Kraljic, P., 1983. Purchasing must become supply management. Harv. Bus. Rev. 61 (5), Manag. 2 (4), 203–209.
109–117. Turnbull, P.W., 1990. A review of portfolio planning models for industrial marketing and
Lamming, R.C., Harrison, D., 2001. Smaller customers and larger suppliers: the potential purchasing management. Eur. J. Mark. 24 (3), 7–22.
for strategic purchasing approach: a case study. In: Proceedings of the 10th Von Winterfeldt, D., Edwards, W., 1993. Decision Analysis and Behavioral Research.
International IPSERA Conference. pp. 596–610. Cambridge University Press.
Lee, D.M., Drake, P.R., 2010. A portfolio model for component purchasing strategy and Wagner, H.M., 1980. Research portfolio for inventory management and production
the case study of two South Korean elevator manufacturers. Int. J. Prod. Res. 48 (22), planning systems. Oper. Res. 28 (3i), 445–475.
6651–6682. Wagner, S.M., Johnson, J.L., 2004. Configuring and managing strategic supplier portfo-
Lilliecreutz, J., Ydreskog, L., 2001. Supplier classification as an enabler for a differ- lios. Ind. Mark. Manag. 33 (8), 717–730.
entiated purchasing strategy. Best Pract. Procure.: Public Priv. Sect. Perspect. 8, Wagner, S., Padhi, S., Bode, C., 2013. The procurement process: refining inputs for Kraljic
73–81. matrix yields objective purchasing portfolios and strategies. Ind. Eng. 45, 34–39.
Liu, X., Xu, J., 2008. Research on the purchasing portfolio approach for steel industry. In: Watson, S.R., Buede, D.M., 1987. Decisions Synthesis: The Principles and Practice of
Proceedings of the 7th World Congress on Intelligent Control and Automation, 2008. Decision Analysis. Cambridge University Press, Cambridge.
WCICA2008. IEEE, pp. 4911–4916. Weber, M., Hiete, M., Lauer, L., Rentz, O., 2010. Low cost country sourcing and its effects
Loasby, B.J., 2001. Making sense of making artefacts: reflections on John Ziman (Ed.), on the total cost of ownership structure for a medical devices manufacturer. J. Purch.
Technological innovation as an evolutionary process. Evolutionary Theories in the Supply Manag. 16 (1), 4–16.
Social Sciences. Wind, Y., Claycamp, H.J., 1976. Planning product line strategy: a matrix approach. J.
Mahoney, J.T., Pandian, J.R., 1992. The resourced-based view within the conversation of Mark. 40 (1), 2–9.
strategic management. Strateg. Manag. J. 13 (5), 363–380. Wynstra, F., Ten Pierick, E., 2000. Managing supplier involvement in new product de-
Markowitz, H., 1952. Portfolio selection. J. Financ. 7 (1), 77–91. velopment: a portfolio approach. Eur. J. Purch. Supply Manag. 6 (1), 49–57.
Mohammad, A.S., Razmi, J., Ghorbani, M., 2011. Classify purchasing items based on risk Zhenfeng, Z., Danxia, G., Liuming, D., 2007. Positioning model of purchasing based on
and profitability attributes; using MCDM and FMEA techniques. Res. J. Int. Stud. 1 Kraljic's purchasing portfolio matrix and factor analysis. Glob. Chall. Manag.
(21), 80–85. Transform. 289.
Mota, J., de Castro, L.M., 2005. Relationship portfolios and capability development: cases Zsidisin, G.A., 2003. A grounded definition of supply risk. J. Purch. Supply Manag. 9 (5),
from the moulds industry. J. Purch. Supply Manag. 11 (1), 42–54. 217–224.
Nellore, R., Soderquist, K., 2000. Portfolio approaches to procurement: analysing the

203