No procurement team has the time or resources to build meaningful relationships with every single supplier. But rather than thinly spreading their attention across the entire supply base, many organisations practice supplier segmentation.
Supplier segmentation sees procurement professionals divide their supply base into distinct groups dependant on their needs, characteristics, criticality, risks, and impact. If you can determine which suppliers are the most indispensable to your organisation, you’ll be able to effectively manage your team’s SRM activities.
What are the benefits of supplier segmentation?
Supplier segmentation enables procurement teams to:
- Prioritise critical suppliers – Your most-valued suppliers require additional engagement to ensure they continue to deliver a high level of service.
- Gain new insights – The process of segmenting your supply base could expose risks or weaknesses in your supply chain. For example, you’ll identify where your organisation is dependent on a single-source supplier.
- Improve visibility across the supply chain – building relationships with your most critical suppliers, who likely provide services and products across multiple business categories, will improve supply chain visibility and transparency.
- Better manage their time and allocate resources – there’s little to be gained by nurturing meaningful relationships with suppliers that are both low risk and have minimal impact on your organisation.
- Align procurement with business objectives – Assessing which suppliers contribute the most value means taking the time to consider your organisation’s values and priorities.
- Drive innovation – When you spend more time with your most important suppliers, you’re more likely to establish a collaborative and creative working relationship.
How to perform supplier segmentation using the Kraljic matrix
Procurement teams often use the Kraljic Matrix, a concept developed by Peter Kraljic in 1983, to carry out supplier segmentation. Here’s how it works.
Step One – Assign your suppliers a score
Firstly, you’ll need to define what risk and impact look like for your organisation.
Risks could include the supplier’s financial stability, their performance to date, compliance record, the likelihood of disruption, and whether or not they are a single-source supplier.
Impact could include the amount you spend with the supplier, the innovation they drive for your organisation, the breadth of the supply base, and the volume of supplied services and products.
Once you’ve assigned a weighting to each of these factors, you’ll be able to calculate a score for each supplier.
Step Two – Plot your suppliers onto the Kraljic matrix
Your suppliers will fall into one of four quadrants of the Kraljic matrix
1. Non-critical items
Suppliers that fall into this quadrant are low-risk and low-impact. You’d expect vendors who supply your office stationery to fall into this bracket.
2. Leverage items
Suppliers that fall into this quadrant are low risk but high impact. For example, you might source a critical product component or a large volume of supplies from these vendors but if something went wrong, you’d quickly and easily find an alternate source.
3. Bottleneck items
Suppliers that fall into this quadrant are high risk and low impact, which puts the power in the hands of your suppliers. This quadrant will largely comprise your tail-end suppliers and is a good place to start if you’re looking to consolidate your supply base.
4. Strategic items
Suppliers that fall into this quadrant are high risk and high impact. These suppliers provide critical products and services to your organisation and their high-risk nature means they should receive the bulk of your SRM activities.
Join PASA Connect today
On 18th May, PASA Connect is hosting a virtual roundtable, “Gauging supply-side risk: segmenting your supplier base in 4 easy steps” facilitated by Craig Johnstone.
To learn more about PASA Connect, including pricing information and how to join, please contact Jonathan Dutton via:
T: 0404 452861