Supplier Segmentation: How to Do It Right and Why It Matters
- Robert
- Sep 16, 2025
- 6 min read
Updated: Sep 18, 2025
Table of contents
Here's a podcast summary to go along with the article if you don't have time to read it all:
Introduction
Correct supplier segmentation can help drive and deliver increased value for your supply chain. Some suppliers are critical partners driving your company’s growth, while others thers provide office supplies you could easily replace tomorrow. Treating all suppliers the same way, however, leads to wasted time, higher risks, and missed opportunities.
Supplier segmentation helps procurement teams focus their energy where it really matters. By grouping suppliers based on spend, risk, performance, or strategic value, you can decide who deserves deep collaboration and who needs basic oversight.
In this article, we’ll walk through what supplier segmentation is, why it’s crucial, the most popular models (including the Kraljic Matrix), and how you can perform segmentation step by step.
What is supplier segmentation?
Supplier segmentation is the process of classifying suppliers into distinct groups so you can manage them differently based on their importance to your business.
Think of it this way: you don’t treat every customer exactly the same, right? A long-term loyal client gets more attention than someone who only buys once. The same logic applies to suppliers. Segmentation makes sure your limited resources go toward managing the suppliers that matter most.
Supplier segmentation is the process of dividing suppliers into distinct groups based on needs, characteristics, or behavior. This process incorporates:
differentiating suppliers;
preparing supplier segmentation teams;
reviewing supplier segments;
identifying opportunities with suppliers;
developing product/service agreements;
implementing agreements;
measuring performance;
generating supplier/cost profitability reports.
Why Supplier Segmentation is Important
Done right, segmentation transforms procurement from “keeping costs low” into a strategic driver of business value.
Some key benefits:
Better resource allocation: Don’t spend hours on a low-value supplier while ignoring the one who supplies mission-critical parts.
Reduced risk: Spot suppliers that could disrupt your operations if they fail, and create contingency plans.
Improved collaboration: Invest in partnerships with strategic suppliers who can bring innovation, not just lower prices.
Cost optimization: Differentiate negotiation tactics between commodity suppliers vs. strategic ones.
Example: A strategic supplier might be providing 70% of your core raw materials. They need close partnership, joint planning, and performance reviews. Meanwhile, a stationery supplier doesn’t. Segmentation helps you draw that line.
Main Approaches to Supplier Segmentation
Based on the product/service supplied, suppliers can be classified into one of four quadrants (also known as the Kraljic Matrix):
commodity;
strategic;
standard;
key.
However, the classification can also depend on:
money spent;
product/service complexity;
the breadth of supply base;
volume of supplied goods and/or services.
Taking into account these attributes, you could segment your suppliers by:
Spend-based segmentation: Focus on how much you’re spending with each supplier.
Risk-based segmentation: Group by how risky a disruption would be.
Performance-based segmentation: Group based on quality, delivery, and innovation.
Strategic value segmentation: Identify which suppliers are mission-critical vs. easily replaceable.
Here’s a quick comparison:
Approach | Focus | Best For | Limitations |
Spend-based | Total spend per supplier | Quick prioritization | Misses non-financial risks |
Risk-based | Supply disruption & dependency | Critical goods/services | Needs strong data & analysis |
Performance-based | Delivery, quality, innovation | Continuous improvement | Time-consuming to track |
Strategic value | Contribution to business goals | Long-term partnerships | Can feel subjective |
Popular Supplier Segmentation Models
The Kraljic Matrix
The Kraljic Matrix is the most widely used supplier segmentation model. It groups suppliers into four quadrants based on two criteria: profit impact (how important the supplier is to your business success) and supply risk (how easily you can replace them if things go wrong).
It splits suppliers into four quadrants:
Strategic – High value, high risk (e.g., unique components for production).
Leverage – High value, low risk (e.g., large-volume but competitive goods).
Bottleneck – Low value, high risk (e.g., niche spare parts).
Routine – Low value, low risk (e.g., office supplies).
Here’s how it works in practice:
Strategic suppliers (High value, High risk). These are the suppliers you can’t afford to lose. They often provide unique, high-value components or services critical to your business continuity.
Example: A car manufacturer’s supplier for custom-designed batteries. Losing them could stop production entirely.
Management approach: Long-term partnerships, joint planning, continuous performance reviews, and close collaboration on innovation.
Leverage suppliers (High value, Low risk). These suppliers deliver significant value, but you also have multiple options in the market. Because competition exists, you can negotiate favorable terms.
Example: Bulk steel or paper suppliers where several vendors can meet your needs.
Management approach: Use competitive bidding and reverse auctions to optimize costs while maintaining solid quality.
Bottleneck suppliers (Low value, High risk). These provide low-spend items, but with few alternatives available. The risk lies in supply disruption rather than cost.
Example: A specialized spare part for a production line machine, sourced from a single small supplier.
Management approach: Secure supply through contracts, keep buffer stock, and consider developing alternative sources.
Routine suppliers (Low value, Low risk). These are your transactional suppliers -providing standard goods or services that are easy to replace.
Example: Office stationery or cleaning services.
Management approach: Keep processes efficient and costs under control with standardized contracts and minimal administrative overhead.
How to Perform Supplier Segmentation (Step-by-Step)
Small and medium-sized organizations have successfully implemented supplier segmentation based on business criticality, like in the example below:
Collect supplier data: Spend levels, performance metrics, risk factors, and dependency.
Define segmentation criteria: What matters most to your business - cost, risk, innovation, ESG factors?
Group suppliers: Apply the chosen model (Kraljic, Pareto, hybrid).
Validate with stakeholders: Align segmentation with finance, operations, and leadership.
Develop tailored strategies:
Strategic suppliers → partnerships, joint innovation, long-term contracts.
Routine suppliers → efficiency and cost focus.
Review and adjust regularly: Markets change, so segmentation should evolve with them.
A Practical Example of Supplier Priorities
Segmentation isn’t just about charts - it’s about what you do with them. Here’s a simple way to think about supplier priorities:
Priority 1 (Strategic suppliers): This should include a small number of suppliers who provide high-value, low-volume goods or services that are vital to your operations. They’re often investing in technology, innovation, or product development that directly supports your growth. Because they carry high risk, they require close monitoring, regular reviews, and strong partnership management.
Priority 2 (Important suppliers): A larger set of suppliers that you rely on every day to run your business. If one fails, you can switch to alternatives, but it would be inconvenient or disruptive. Risks here relate to quality, service, and reputation—so your focus should be on managing contractual obligations and monitoring performance consistently.
Priority 3 (Transactional suppliers): These are the rest of your supply base. They usually provide low-value but high-volume goods and services, often easily replaceable. The risk is low, so your main goal is simply to keep them compliant with agreed pricing and service levels without over-investing in relationship management.
For larger organizations with complex supply bases, the Kraljic Matrix provides an even more sophisticated way of mapping these priorities into strategic, leverage, bottleneck, and routine categories.
Common Mistakes in Supplier Segmentation
Treating all suppliers the same → wastes resources and ignores strategic relationships.
Relying only on spend → misses suppliers with high risk but low spend.
Forgetting to update → segmentation must evolve with markets, technology, and business needs.
Overcomplicating the model → if nobody uses it, it’s useless. Keep it practical.
Best Practices for Effective Supplier Segmentation
Keep it simple: Don’t add 20 categories; start small and refine.
Involve stakeholders: Procurement alone can’t decide which suppliers are “strategic.”
Leverage technology: Procurement platforms (like Prokuria) can automate data gathering and analysis.
Balance cost, risk, and innovation: Don’t make decisions on price alone.
How Prokuria Can Help
Supplier segmentation only works when you’ve got the right data and tools. That’s where Prokuria comes in.
Our platform helps you:
Collect and centralize supplier data.
Track spend, performance, and risk in real-time dashboards.
Segment suppliers automatically based on your chosen model.
Tailor strategies for each supplier group with automated workflows.