Sourcing and Procurement

How procurement can do effective supplier segmentation

Procurement isn’t just about sourcing goods and services anymore. It’s about creating value while managing cost, quality, and risk. But with so many suppliers in the mix, how can businesses focus on the right ones without wasting resources? The answer lies in supplier segmentation. By categorising suppliers based on their role, value, and impact, procurement teams can sharpen their focus, make smarter decisions, and foster stronger relationships.

Supplier segmentation, a critical component of category management services, begins with the understanding that not all suppliers are the same. Some play a critical role in operations, while others handle more transactional tasks.

“Roughly 80% of consequences come from 20% of causes.”
-The Pareto principle or the 80/20 rule

Treating all suppliers the same way is, therefore, inefficient and costly. Segmentation is crucial to identify where to prioritise resources for maximum value.

Here are some key factors that can help businesses segment their suppliers well and be more efficient in their category management procurement:

• Spend value: How much the organisation spends with the supplier. High-spend suppliers demand more attention.
• Risk exposure: The risks associated with a supplier, such as delivery disruptions or compliance issues.
• Strategic importance: The supplier’s role in critical operations, such as providing essential components.
• Performance history: Past performance metrics like reliability, responsiveness, and quality.

Once suppliers are assessed, they can be typically grouped into four key categories:

1. Strategic suppliers: High-value, high-risk suppliers critical to operations. These require close collaboration and mutual investment.
2. Leverage suppliers: High-value but low-risk suppliers offering opportunities for cost savings through negotiation.
3. Bottleneck suppliers: Low-value but high-risk suppliers controlling niche markets or products. Risk mitigation is essential here.
4. Transactional suppliers: Low-value, low-risk suppliers where efficiency matters more than deep engagement.

Let’s look at how this works in practice. Take a large consumer electronics company, for example. A chip manufacturer providing essential components might be classified as a strategic supplier here due to its high value and operational importance. A supplier of packaging materials, on the other hand, might fall under leverage suppliers, offering room for cost negotiation. A provider of rare minerals needed to create the electronics could be categorised as a bottleneck supplier, requiring contingency planning for supply disruptions. Lastly, a vendor supplying office stationery would likely be a transactional supplier, where processes are automated for efficiency.

Supplier segmentation, therefore, isn’t just about grouping—it’s a roadmap to maximise efficiency, minimise risks, and strengthen relationships. It allows procurement teams to not only allocate resources effectively but also identify high-risk suppliers early, allowing them to plan ahead and minimise disruptions. Cost efficiency is another critical advantage, as segmentation helps identify opportunities for bulk purchasing, renegotiation, or supplier consolidation.

That said, implementing supplier segmentation isn't as simple as grouping names on a spreadsheet. Organisations must:

1. Ensure supplier information is accurate and up to date. Incomplete or incorrect data can lead to poor segmentation decisions.
2. Use tools like spend analysis software or procurement platforms to streamline segmentation and monitor supplier performance.
3. Collaborate across departments to ensure segmentation criteria align with organisational goals. For example, finance teams may highlight risks that procurement teams haven’t considered.
4. Schedule periodic reviews to ensure segmentation reflects current needs and challenges. Supplier segmentation isn't a one-and-done activity. Markets evolve, businesses grow, and supplier roles shift over time. Therefore, avoid static categories that lose relevance over time.
5. Keep suppliers informed about their categorisation and what it means for their partnership. Clear communication builds trust and strengthens relationships.

Looking ahead, it’s clear that supplier segmentation and category management procurement overall are set to play a major role as the competition grows. Technologies and trends will continue to redefine this approach. For instance, one of the recent trends that is soon going to take centre stage is sustainability. Some organisations have already started including sustainability metrics in their segmentation frameworks, evaluating suppliers based on environmental and social impact alongside traditional criteria.

In the future, knowing which suppliers to trust, invest in, and prioritise will mean the difference between staying ahead or falling behind. The right supplier segmentation strategy will turn chaos into clarity and complexity into control. Businesses that get category management services right will not just be managing suppliers but creating the backbone of a resilient, stable and innovative business in the constantly changing market.

How can Infosys BPM help?

Infosys BPM supports procurement teams with precise category management services, ensuring seamless execution of category plans. By simplifying supplier segmentation and driving focused strategies, we help businesses optimise supplier relationships, improve efficiency, and align procurement goals with broader business needs.