Category Segmentation

In addition to spend data and contracts addressable spend categories should be classified according to strategic importance. This will help us in the future to prioritize strategic sourcing activities based on suppliers/category criticality to the company.

The Kraljic Portfolio Model is a commonly used method for this purpose though there are many other models and almost all of them mimic the Kraljic model this or that way. Those other models just change the x and y axis criteria mainly based on the priorities of the categorization exercise.

The Kraljic portfolio model helps map out category segmentation in two dimensions:

Profit Impact: volume or value purchased, impact on supply chain “value-add”, business growth potential or dependency

Supply Risk/Criticality: product availability, number of suppliers, ease of switching a supplier, availability of substitutes

Determine profit impact by answering the questions below:
Is the category total value important in the company’s total spending?
Do the client’s end customers perceive that this category adds significant value?
Does the category differentiate the end product significantly?
Would a category failure affect the client’s end customer satisfaction?

Determine supply risk by answering the questions below:
What is the market internal competition?
Can you easily switch to another category?
What is your buying power for this category?
What is the bargaining power of sellers?
Can new entrants be easily found and invited to tender?

In the end category segmentation is all about the approach we will take in supplier relationship management and understanding the type of value category/supplier provides. Hence we can also determine which and how many resources to allocate for supplier segments.

After the segmentation is done we have a strategic direction for each category:
1. Leverage products
Leverage products allow the company to exploit its full purchasing power through tendering, target pricing and product substitution

2. Strategic products
The company should be maintaining good relationships with strategic partners

3. Bottleneck products
Bottleneck products should be handled by volume insurance, vendor control, security of inventories and backup plans.

4. Routine products
Routine and non-critical products require efficient processing, product standardization, order volume and inventory optimization

Another approach to take after the segmentation is complete is to shift categories to neighbour segments. It is called Moving in the Matrix:

- Leverage products -> Strategic products
Develop a strategic partnership
Exploit buying power

- Strategic products -> Leverage products
Accept the locked-in partnership
Maintain strategic partnership
Terminate undesirable partnership, find new supplier

- Bottleneck products -> Routine products
Reduce dependence and risk, find other solution
Accept the dependence, reduce the negative consequences

- Routine products -> Leverage products
Pooling of requirements
Individual ordering, pursue efficient processing

2 thoughts on “Category Segmentation

  1. Hi, I read all the pages written by you on strategic sourcing, really good stuff. Very precise and to the point. Neat!

    Thanks You!!!!

    Cheers
    Anu

  2. Hi,
    I found the first matrix very accurate and helpful in analyzing how a firm should apply strategic sourcing to the various functions within the firm. With regard to functions such as IT, payroll, or manufacturing, the following question should be asked: “Is this function something we should engage in internally or should it be outsourced to an external party?” Similar to what the matrix suggests, what is important to the sourcing decision is whether or not the function is a strategic or transactional activity to the firm in question. The answer to the question posed depends on the nature of the company. When a function with low criticality and low profit impact is in question, like payroll for most companies, it seems that the answer is to always outsource. Given its nature of transactional focus (as your matrix suggests), it comes as no surprise that nearly all sizable companies choose to outsource their payroll function to specialists such as ADP or Intuit.

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