What Is Supplier Segmentation?
Supplier segmentation is the process of categorising suppliers based on their strategic importance, risk, spend, and relationship value to the organisation.
It helps determine how much attention, management effort, and governance each supplier should receive.
In Contract and Supplier Management (CSM), supplier segmentation ensures that resources are allocated appropriately — high-value or high-risk suppliers receive more oversight and collaboration, while low-value suppliers are managed more efficiently.
Why Supplier Segmentation Matters in Contract Management
| Benefit | Description |
|---|---|
| Improved Governance | Helps prioritise contract performance reviews, audits, and renewals. |
| Risk Mitigation | Identifies critical suppliers where failures could disrupt operations. |
| Performance Management | Enables differentiated Key Performance Indicators (KPIs) and Service Level Agreements (SLAs), based on supplier tier. |
| Relationship Management | Supports collaboration and innovation with strategic suppliers. |
| Efficiency | Prevents over-managing low-value suppliers. |
Supplier Segmentation Model - Kraljic Matrix
A Kraljic Matrix is a tool commonly used in procurement teams to segment suppliers based on supply risk and profit impact:
| Quadrant | Example | Contract Management Approach |
|---|---|---|
| Strategic (High risk / High impact) | Critical IT | Partnership model, detailed performance reviews, joint development |
| Leverage (Low risk / High impact) | Major office supplies | Competitive sourcing, standardised SLAs |
| Bottleneck (High risk / Minimal impact) | Specialised maintenance supplier | Risk mitigation, dual sourcing, contingency planning |
| Routine (Low risk / Low impact) | Cleaning services | Simplified contracts, efficiency focus |
There is a Kraljic Matrix tool available for you to use which can be found at the bottom of this page.
How to Implement Supplier Segmentation in Contract Management
Step 1: Gather Data
- Spend analysis (annual spend per supplier)
- Risk assessment (financial, operational, reputational)
- Business dependency and strategic relevance
- Contract complexity and length
Step 2: Define Segmentation Criteria
There are tools to support you when performing contract and supplier segmentation e.g. Kraljic Matrix , risk assessment, spend analysis etc.
When defining segmentation criteria, Organisations should consider a combination of financial, operational, risk, and policy-related factors:
Contract Value and Spend Profile
- Total contract value (annual and whole-life cost)
- Spend concentration (single supplier vs multiple suppliers)
- Impact on budget if costs increase or savings are not achieved
Purpose: Supports prioritisation of high-value contracts for enhanced oversight and benchmarking.
Criticality of the Goods or Services
- Impact on statutory duties and public service delivery
- Consequences of service failure or interruption
- Degree of substitutability or availability of alternative suppliers
Purpose: Identifies contracts requiring robust performance and continuity management.
Risk Profile
- Financial stability of the supplier
- Complexity of delivery or reliance on subcontractors
- Health, safety, information security, or safeguarding risks
- Reputational risk to the contracting authority
Purpose: Aligns with risk-based governance and internal control requirements.
Market Conditions and Supply Chain Resilience
- Level of market competition
- Supplier dependency or monopoly positions
- Supply chain fragility or geopolitical risk
Purpose: Informs engagement strategy and contingency planning.
Performance and Compliance History
- Delivery against KPIs and service levels
- Contractual compliance and issue frequency
- Responsiveness to improvement actions
Purpose: Enables differentiation between stable suppliers and those requiring closer management.
Policy and Strategic Importance
- Contribution to National Outcomes
- Community Benefits delivery
- Fair Work First compliance
- Climate change, sustainability, and net zero commitments
Purpose: Ensures alignment with Scottish Government policy priorities and Scottish Procurement Policy Notes (SPPNs).
Contract Complexity
- Degree of specification flexibility
- Change frequency and variation levels
- Contract duration and extension options
Purpose: Identifies contracts requiring specialist commercial or legal oversight.
Example dimensions:
- Annual spend
- Business criticality
- Risk exposure
- Performance history
- Innovation potential
Step 3: Classify Suppliers
Use the Kraljic Matrix to assign each supplier to a category (e.g. Strategic, Leverage, Bottleneck and Routine)
Step 4: Tailor Contract Management Activities
Align contract management intensity to supplier category:
- Strategic: Ensure effective contract delivery and supplier performance, risk management and maximisation of supplier and market development opportunities.
- Leverage: Ensure continuity of supply, value for money, risk management and supplier performance. Seek supplier development where possible. Retain/gain market knowledge
- Bottleneck: Ensure continuity of supply, value for money, risk management and supplier performance. Seek supplier development where possible. Retain/gain market knowledge
- Routine: Ensure continuity of supply and risk awareness
Step 5: Monitor and Review
- Reassess segmentation twice a year or when major changes occur
- Track supplier performance KPIs and risk indicators
The Kraljic Matrix – Supply Management Positions Template, which can be found at the bottom of the page, allows you to record all CSM activities for each segment. There are some examples pre-populated in this document which can be deleted/amended as required and to suit your organisation.
The output from the Resource Planning Tool can be input into this tool. This document helps you segment your contract portfolio into four categories (Leverage, Strategic, Bottleneck, Routine). This will allow your organisation to record the extent of work involved in managing each category. This includes frequency of performance review meetings and frequency of Management Information, etc.
There is a natural tendency to over-estimate the work required and it is important to avoid this by being as pragmatic as possible. It is worthwhile comparing/collaborating with a similar organisation which has a more mature CSM operation. Especially where an organisation lacks the experienced managerial staff required to make informed judgements. This collaboration will allow your organisation to benefit from the mature organisation’s experience You should factor in distortions such as the learning curve they experienced on the journey towards maturity.
Checklist
Supplier Segmentation Key Considerations
- Involve stakeholders (finance, operations, risk) in segmentation decisions
- Keep segmentation dynamic — update as business strategy or as markets evolve
- Use segmentation to inform contract renewal decisions
- Avoid segmentation based solely on contract value
- Ensure segmentation does not disadvantage SMEs unfairly
- Use segmentation to inform management activity, not to alter contract terms
- Ensure escalation routes are clear for higher-segment contracts
Any documents you need are listed below
Kraljic Matrix Tool
(file type: xlsx)
Kraljic Matrix - Supply Positions Template
(file type: docx)