Purchasing price assessment of leverage items: A Data Envelopment Analysis approach

In the Kraljic Portfolio Matrix (KPM), ‘leverage’ items are purchases with a strong financial impact but limited associated risk. For these items, the priority for the buyer is to exploit the full purchasing potential, purchasing the items with the lowest price compared to their value attributes, i.e. the features appreciated by the customer. Despite the financial importance of such purchases, practical approaches able to support buyers in assessing their purchasing prices in a value-based perspective are still lacking. Therefore, this paper develops a three-step Data Envelopment Analysis-based approach (PPA-DEA) to assess the purchasing price of ‘leverage’ items according to their value attributes. The approach is then tested on two supply categories of an Italian mechanical company. The results show that PPA-DEA is capable of providing focused insights and supporting effective managerial actions. At the same time, the most relevant issues in implementing the approach are pointed out. From the theoretical point of view the study provides a contribution to the literature on supplier selection and assessment applied to purchasing portfolio models by developing an innovative approach to taking tactical decisions on ‘leverage’ products and services. From the practical point of view, PPA-DEA, albeit with a single case study, proves to be a “parsimonious” approach, easy to apply and able to provide concrete results.