Discussion and Evaluation of Supplier Segmentation
Supplier segmentation is the process of categorizing the supply base into distinct groups based on defined criteria to apply differentiated management strategies. This approach moves away from a "one-size-fits-all" model, recognising that not all suppliers have the same impact on an organisation's objectives.
Evaluation:
Benefits: The primary benefit is the efficient allocation of resources. By identifying strategic suppliers, a firm can invest in collaborative relationships, joint innovation, and long-term partnerships. For less critical suppliers, resources can be saved by automating transactional processes. Segmentation enhances risk management by highlighting suppliers in high-risk markets (bottlenecks) that require contingency planning. It also enables procurement to align its activities more closely with overall corporate strategy, focusing effort where it delivers the most value.
Challenges: Implementation can be complex and resource-intensive, requiring significant data collection and analytical capability. There is a risk of misclassifying suppliers, which could lead to inappropriate strategies, such as neglecting a potentially innovative supplier or investing too heavily in a transactional one. Furthermore, suppliers placed in lower-priority segments may feel alienated, potentially reducing their performance or willingness to support the buying organisation.
Method of Supplier Segmentation: The Kraljic Matrix
A widely used method for supplier segmentation is the Kraljic Matrix, developed by Peter Kraljic in 1983. This portfolio model segments suppliers based on two key dimensions:
1. Profit Impact: The strategic importance of the purchased item in terms of its value added to the product line, its percentage of total purchase cost, or its impact on profitability.
2. Supply Risk: The complexity of the supply market, assessed by factors such as supply scarcity, pace of technology change, entry barriers, logistics complexity, and the number of available suppliers.
These two dimensions form a 2x2 matrix with four quadrants, each suggesting a different procurement strategy:
Strategic Items (High Profit Impact, High Supply Risk): These are critical for the business. The recommended strategy is to form long-term strategic partnerships and foster collaboration.
Leverage Items (High Profit Impact, Low Supply Risk): These items are important but sourced from a competitive market. The strategy is to exploit purchasing power through competitive bidding and negotiation.
Bottleneck Items (Low Profit Impact, High Supply Risk): Supply continuity is the main concern. The strategy is to ensure supply, seek alternative suppliers, and hold safety stock.
Non-critical Items (Low Profit Impact, Low Supply Risk): These are routine purchases. The strategy is to automate and simplify the procurement process to reduce administrative costs.
References
1. Kraljic, P. (1983). Purchasing Must Become Supply Management. Harvard Business Review, 61(5), pp. 109-117. (This is the original article that introduced the Kraljic Matrix, defining its dimensions and strategic implications for each quadrant).
2. Gelderman, C. J., & Van Weele, A. J. (2003). Handling measurement issues and strategic directions in Kraljic's purchasing portfolio model. Journal of Purchasing and Supply Management, 9(5-6), pp. 207-216. https://doi.org/10.1016/j.pursup.2003.07.001 (This academic paper evaluates the practical application and challenges of the Kraljic model, supporting the discussion on its benefits and complexities).
3. Monczka, R. M., Handfield, R. B., Giunipero, L. C., & Patterson, J. L. (2015). Purchasing and Supply Management (6th ed.). McGraw-Hill Education. (Chapter 7, "Supplier Evaluation and Selection," discusses supplier segmentation and portfolio analysis models like the Kraljic Matrix as a core tool for strategic sourcing).
4. Lysons, K., & Farrington, B. (2020). Procurement and Supply Chain Management (10th ed.). Pearson. (Chapter 10, "Sourcing," details portfolio analysis techniques, explaining how models like Kraljic's are used to segment the supply base and develop appropriate sourcing strategies).
