Primo Cafe - Supplier Segmentation
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Feb 20, 2024
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Applying the Kraljic Matrix at Primo Café
You are the purchasing manager for Primo Café Inc. Primo Café is a small-sized manufacturer of stylish
coffee makers. The company has three distinct coffee makers that it produces.
The Bean Boiler
The Family Man
The Caffissimo
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The Bean Boiler is Primo Café’s most basic model. The main materials
used in manufacturing the Bean Boiler are aluminum and plastic. There
are lots of suppliers for these materials. At present, Primo Café’s total
cost for producing a Bean Boiler is $13 and the product is competitively
priced at $15 per unit. There are lots of other coffee makers that are
very similar to the Bean Boiler on the market. Still, sales of the Bean
Boiler are very stable. The company reliably sells 1,500-1,510 units of
this product per month.
The Family Man is Primo Café’s mid-market offering. Primo Café
manufactures most of the Family Man in-house, but buys the glass pot
and the electronics that control the on/off function and the timer. At
present, final assembly of the in-house manufactured parts and the
purchased sub-components occurs at Primo Café’s facility in Grand
Rapids. Total cost for producing a Family Man is currently $32 and each
unit is sold for $34.99. The Family Man’s sleek, artistic design and range
of unique colors helps to distinguish it from a wide selection of similar
products offered by competitors. Prices for direct competitors range
from €25 to €45. Sales of the Family Man range from 1,000-1,100 units
per month.
The Caffissimo is Primo Café’s high-end offering. Primo Café produces
the external casing for the Caffissimo in-house, but buys all of the
important sub-components from external suppliers. The most
important sub-components for the Caffissimo are the gauges that
regulate the temperature and pressure of the water as it is forced
through the coffee grounds. The proper working of these gauges ensure
that the Caffissimo produces a perfect cup of coffee at brewing. The
Caffissimo’s design is a closely held company secret. The machine has
won industry awards both in terms of its coffee making process and its
external looks. Currently, the Caffissimo costs $375 to produce and sells
for $600. Because of the relatively high price and unique design,
demand for the Caffissimo is difficult to predict. Over the past year,
demand has ranged from 400-800 units per month.
Applying the Kraljic Matrix at Primo Café
Marco wants you to review the way the company buys several key materials and sub-components. Being
an old school purchasing manager, Marco is of course entirely focused on price. But you take a more strategic view.
Plastic – Primo Café uses the same high quality, heat resistant plastic for all of its products. The
plastic must have an SPI code of 2, which means it is made of High-Density Polyethylene (HDPE).
HDPE products are very safe and they are known to not transmit any chemicals into foods or
drinks. There are numerous suppliers for this type of plastic, although it can be tricky to ensure
that suppliers actually adhere to SPI specifications.
Aluminum for the Bean Boiler – Primo Café buys lots of aluminum for its Bean Boiler units. As
Marco likes to say, aluminum is aluminum is aluminum. There are plenty of suppliers for this
product and little differentiation on cost and/or quality.
Temperature and Pressure Gauges for the Caffissimo – These gauges regulate the temperature
of the water as it is forced through the coffee grounds. Makers of these gauges are typically high
tech companies, with the potential to share innovations. At present, there are only three
available suppliers for these gauges in the world. Marco’s current approach to managing these
suppliers is to have the suppliers bid against each other on short-term contracts to achieve the
lowest cost.
Electronics for the Family Man – These electronics control the on/off function and the timer on
the Family Man. Currently, the design of the Family Man requires that the electronics be no
greater than 6.95 cm in diameter. Industry standard for these electronics is 7 cm in diameter.
Because of this one unique requirement, there is only a single supplier for this component.
Using the Kraljic Matrix:
(1)
Classify each of the key materials and sub-components into one of Kraljic’s segments (non-
critical, strategic, leverage, or bottleneck – note that more than one item can fall into a
category)
Plastic (HDPE): Strategic
Aluminum for the Bean Boiler: Leverage
Temperature and Pressure Gauges for the Caffissimo: Bottleneck
Electronics for the Family Man: Non-critical
(2)
Explain why you classified the item as you did
Plastic (HDPE): Classified as strategic because it is used in all products, and ensuring adherence to SPI specifications is crucial for safety. Although there are numerous suppliers, ensuring compliance may be challenging.
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Applying the Kraljic Matrix at Primo Café
Aluminum for the Bean Boiler: Classified as leverage because, according to Marco's approach, aluminum
is considered a commodity with little differentiation. The company has many suppliers to choose from, and the focus is on obtaining the best price.
Temperature and Pressure Gauges for the Caffissimo: Classified as bottleneck because there are only three suppliers globally, making them critical to the Caffissimo's functionality. The potential for innovation and the exclusivity of suppliers make this component a bottleneck.
Electronics for the Family Man: Classified as non-critical because it is a unique requirement for the Family Man, and there is only a single supplier. However, it doesn't significantly impact the product's overall value proposition.
(3)
Discuss the specific purchasing strategy you would use for each item. In other words, how
would you interact with the supplier(s) of this material to maximize value for Primo Café?
Plastic (HDPE): Develop a strategic partnership with multiple suppliers, focusing on quality and adherence to specifications. Regular audits and collaboration to ensure regulatory compliance and long-
term availability.
Aluminum for the Bean Boiler: Implement a cost-focused approach, negotiating for the best prices from various suppliers. Explore long-term contracts to secure stable pricing and ensure a consistent supply.
Temperature and Pressure Gauges for the Caffissimo: Establish strong relationships with the three suppliers. Consider long-term contracts with periodic renegotiation to maintain competitive pricing. Collaborate on innovation and share insights to enhance product performance.
Electronics for the Family Man: Monitor developments in the electronics market to identify potential alternative suppliers. Work closely with the existing supplier to ensure continued adherence to unique specifications and explore opportunities for cost optimization.
Relating it back to the class discussion:
The discussion emphasizes the importance of strategic thinking in procurement, considering factors beyond just price.
It aligns with the idea that the more critical an item is to delivering the value proposition, the more strategically important it becomes.
The class discussion also touches on the importance of evaluating suppliers based on various factors like breakthrough technologies, intellectual property sharing, regulatory compliance, and impact on customer retention – all of which are considered in the purchasing strategies outlined above.
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