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
See category segmentation example here:
Category Segmentation Example