Chapter 30. Portfolio theory

Portfolio theory was originally developed for investment purposes, providing guidelines for the assembly of a portfolio of assets. The theory focusses on the efficient allocation of limited resources by reducing risks and optimizing returns. Nowadays, portfolio approaches are used in other management disciplines. Purchasing portfolio models proved to be very useful for the development of differentiated commodity and supplier strategies. The Kraljic portfolio approach is considered the dominant approach in the profession, classifying products on the basis of two dimensions: profit impact and supply risk. The result is a 2x2 matrix and a classification in four categories for which distinctive recommendations are provided. This chapter discusses the critiques and support of the Kraljic approach, and we will take a closer look at the assumptions and theoretical foundations. This contribution is completed with an overview of the use of purchasing portfolio models in academic research and an outlook on future research opportunities.