What Is a Supplier Segmentation Matrix?
A supplier segmentation matrix is a simple way to decide how much attention each purchase category and each supplier deserves. Instead of applying one purchasing policy to everything, from office paper to the specialised component your production line cannot run without, you place each category on a grid and manage it according to where it lands.
The best-known version is the Kraljic matrix, introduced by Peter Kraljic in his 1983 Harvard Business Review article "Purchasing Must Become Supply Management". More than four decades later it remains the starting point for most procurement teams, largely because it is easy to explain and leads directly to action. This guide explains the two axes, the four quadrants, how to score your own categories step by step, and how to turn the result into rules inside an ERP system so it shapes daily work rather than sitting in a slide deck.
Why Segment Suppliers at All?
A typical mid-sized company in Saudi Arabia deals with anywhere from a hundred to several hundred active suppliers. Procurement time is limited. If buyers spend the same effort renegotiating cleaning supplies as they do securing a sole-source spare part, two things happen at once: low-value categories absorb time they do not deserve, and genuinely critical relationships get too little care.
Segmentation fixes that by answering a practical question for each category: should we compete it hard, protect it, partner on it or simply automate it? The answer then drives decisions about contract length, number of suppliers, safety stock, approval routes and how often performance is reviewed.
The Two Axes
Profit impact
The horizontal axis measures how much a category affects your financial results. Typical factors include:
- Annual spend on the category and its share of total purchases.
- Its share of the cost of your finished product or service.
- Its effect on product quality or customer experience.
- How much a price change would move your gross margin.
Supply risk
The vertical axis measures how hard it would be to obtain the category if your current supplier failed. Typical factors include:
- Number of qualified suppliers available, locally and internationally.
- Availability of substitutes or alternative specifications.
- Lead time and its variability.
- Logistics exposure, for example a single shipping route or port.
- Regulatory requirements, such as conformity certificates that limit who can supply.
Combining the two gives four quadrants. Each calls for a different approach.
The Four Quadrants and How to Manage Each
| Quadrant | Profit impact | Supply risk | Core approach | Typical examples |
|---|---|---|---|---|
| Strategic | High | High | Partnership and joint planning | Key raw material, specialised machinery, core software platform |
| Leverage | High | Low | Competition and consolidation | Packaging, standard steel, fuel, freight on busy lanes |
| Bottleneck | Low | High | Secure supply, reduce dependency | Single-source spare part, special chemical, proprietary consumable |
| Non-critical | Low | Low | Simplify and automate | Stationery, cleaning supplies, basic office equipment |
Strategic items
These are the purchases that both matter financially and are hard to replace. A failure here can stop operations or damage your product. The right approach is a close, long-term relationship: multi-year agreements, shared demand forecasts, regular business reviews, joint improvement projects and, where possible, a second qualified source kept warm. Price still matters, but continuity and quality matter more.
Leverage items
Here you hold the bargaining power. Spend is high, specifications are standard and several suppliers want your business. Use structured requests for quotation, consolidate volumes across branches, sign annual framework agreements with price review clauses, and keep two or three approved suppliers so competition stays real. This is where procurement savings usually come from.
Bottleneck items
Bottleneck items are cheap but dangerous. A low-cost part from one overseas manufacturer can halt a plant if it is missing. The aim is security, not savings: hold more safety stock than usual, sign longer agreements that guarantee availability, qualify alternatives even at a slightly higher price, and work with engineering to see whether a more common specification could replace the unique one.
Non-critical items
These categories should cost you as little management time as possible. Consolidate to a few suppliers, set up an approved catalogue, let the system generate purchase orders at reorder points, and remove unnecessary approval steps for small amounts. Every hour saved here is an hour available for the strategic quadrant.
Building the Matrix Step by Step
- Extract twelve months of spend. Pull purchase orders and supplier invoices from your ERP by category and supplier. If categories are not coded consistently, fix that first, because the matrix is only as good as its data.
- Group items into sensible categories. Score categories, not individual SKUs. A category is a group of items bought from a similar supply market, such as corrugated packaging or hydraulic spare parts.
- Agree the scoring criteria. Pick three or four factors for each axis and weight them. Involve finance, operations and quality, not just procurement, so the result is accepted.
- Score each category from 1 to 5 per factor. Calculate weighted averages for profit impact and supply risk.
- Plot and review. Place each category on the grid, then challenge the outliers in a workshop. Experienced buyers often know about risks the data does not show.
- Assign a strategy and owner per quadrant. Write down what changes for each category: contract type, number of suppliers, stock policy, approval route and review frequency.
- Build the rules into the system and review yearly. Markets change. A leverage category can become a bottleneck after a supplier exits the market.
A Worked Example
Take a hypothetical food manufacturer in the Eastern Province with SAR 60 million in annual purchases. The team scores four categories using a weighted scale where 1 is low and 5 is high.
| Category | Annual spend (SAR) | Profit impact score | Supply risk score | Quadrant |
|---|---|---|---|---|
| Imported specialty flavourings | 6,500,000 | 4.2 | 4.0 | Strategic |
| Printed packaging film | 9,800,000 | 4.5 | 2.1 | Leverage |
| Spare seals for filling machine | 180,000 | 1.6 | 4.4 | Bottleneck |
| Cleaning and hygiene supplies | 420,000 | 1.8 | 1.5 | Non-critical |
The resulting actions differ sharply. For flavourings, the company signs a two-year agreement with its main supplier, shares a quarterly forecast and starts qualifying a second source. For packaging film, it runs a competitive tender among four local converters and consolidates all plants onto one framework price. For the seals, it raises safety stock from two weeks to three months of consumption and asks the machine maker for an approved equivalent part. For cleaning supplies, it moves to a single catalogue supplier with automatic replenishment.
Note the seals: under SAR 200,000 of spend, yet treated with more caution than a category fifty times larger. That is exactly the insight the matrix is meant to produce.
How the Scores Are Calculated
The numbers in the table above come from a weighted scoring model. Here is how the supply risk score of 4.4 for the filling machine seals could be built, again as a hypothetical illustration:
| Supply risk factor | Weight | Score (1 to 5) | Weighted score |
|---|---|---|---|
| Number of qualified suppliers (only the machine maker) | 40% | 5 | 2.0 |
| Lead time (eight to ten weeks from Europe) | 30% | 4 | 1.2 |
| Substitutes available (none approved yet) | 20% | 4 | 0.8 |
| Logistics exposure (sea freight, single route) | 10% | 4 | 0.4 |
| Total | 100% | 4.4 |
The profit impact score is built the same way from spend share, effect on product cost, effect on quality and margin sensitivity. A few practical rules keep the exercise honest:
- Define what each score means in words before scoring. For example, "5 on number of suppliers means one qualified source worldwide; 1 means more than five local sources".
- Keep the same weights for every category in one review cycle, otherwise the grid cannot be compared.
- Use the midpoint of the scale, usually 3, as the dividing line between low and high, and discuss categories that land close to it rather than forcing a mechanical answer.
- Record the reasoning next to each score. Next year's review will be faster and less political.
Looking at It From the Supplier's Side
The matrix shows how important a supplier is to you. It says nothing about how important you are to the supplier. A category may be strategic for your company while your account is small and unattractive for a large global manufacturer. In that situation, partnership on paper will not produce priority in practice.
For strategic and bottleneck categories, it is worth asking a few honest questions. What share of the supplier's revenue do we represent? Do we pay on time? Are our forecasts reliable, or do we change orders at the last minute? Are we easy to deal with? Improving your attractiveness as a customer, for example through steady forecasts and prompt payment, is often cheaper than finding a new source. An ERP helps here too, because payment performance and order change history are visible in the same system you use to judge the supplier.
Turning Segments Into ERP Rules
A matrix that lives in a spreadsheet tends to be forgotten within months. The lasting value comes when the segment becomes a field in the system that drives behaviour. Here is how each quadrant can translate into settings in an ERP:
| Setting | Strategic | Leverage | Bottleneck | Non-critical |
|---|---|---|---|---|
| Approval route | Senior management above set value | Procurement manager, tender record required | Fast-track to avoid delays | Auto-approve within catalogue limits |
| Safety stock | Agreed with supplier plan | Standard | High | Low |
| Approved suppliers | One main plus one qualified backup | Two to three | Any qualified source | One or two |
| Performance review | Quarterly | Semi-annual | Quarterly on availability | Annual or by exception |
| Contract alerts | Renewal planned months ahead | Before tender window | Before supply guarantee expires | Basic expiry alert |
Once these settings exist, the segment influences every requisition and purchase order without anyone needing to remember the strategy. Combined with supplier scorecards built from goods receipts and quality checks, you can see whether each quadrant is behaving as planned. Our article on supplier performance covers the measures that work best.
Saudi Context: Where Segmentation Gets Tricky
Several local factors can move a category on the risk axis:
- Conformity requirements: products covered by SASO technical regulations need certificates through the SABER platform, a product certificate plus a shipment certificate per consignment. Switching to a new overseas supplier of a regulated product therefore takes time, which raises supply risk.
- Shipping routes: the Red Sea disruption from late 2023 lengthened voyages for many importers and showed how route concentration feeds supply risk.
- Local content: if your customers or government tenders value local content, a category's strategy may include developing a local supplier even when an import is cheaper. Aramco's iktva program, launched in 2015, and the preference rules in government procurement law are the most common drivers.
- VAT discipline: whatever the quadrant, supplier master data must carry correct legal names and VAT numbers, since valid tax invoices are needed for input VAT recovery.
Common Mistakes
- Scoring suppliers instead of categories: one supplier may provide items in several quadrants. Segment the category, then manage the supplier relationship across it.
- Using spend as the only measure: spend is part of profit impact, but quality and customer impact matter too.
- Doing it once: markets shift, suppliers merge and regulations change. Review at least annually.
- Treating strategic as "always single source": partnership does not mean having no backup plan.
- Leaving it outside the system: without ERP settings, the matrix does not change how people buy.
How Tranquil ERP Supports Segmentation
Tranquil's purchasing, inventory and financial accounting modules share one database, so spend by category and supplier comes directly from purchase orders and supplier invoices rather than from manual compilations. Tranquil's customisation services cover screens, reports and multi-level approvals, which means a segment field and the approval routes and reports that depend on it can be set up to match your policy. See the purchase management and inventory management pages for the relevant features, and our overview of procurement KPIs for measures to track by quadrant. To discuss your setup, contact the Tranquil team.
Frequently Asked Questions
Is the Kraljic matrix still relevant?
Yes. It was published in 1983, but the core idea, that purchases differ in profit impact and supply risk and should be managed differently, still holds. Many teams add extra factors such as sustainability or local content, but the four-quadrant structure remains the common starting point.
How many categories should we score?
Start with the categories that cover most of your spend plus any you already know are risky. For many mid-sized companies, twenty to forty categories are enough for a first pass. Group the long tail into broader categories rather than scoring each item.
Can a supplier sit in more than one quadrant?
Yes. A distributor may supply both routine consumables and a critical spare part. The matrix classifies categories, and the supplier relationship is then managed with that mix in mind.
How often should the matrix be updated?
At least once a year, and whenever a major change happens, such as a supplier leaving the market, a new regulation affecting a product, or a large shift in your own product mix.
Do we need special software to apply the matrix?
No dedicated tool is required. What you need is reliable spend data and a way to store the segment against categories and suppliers so it drives approvals, stock settings and reviews. A well-configured ERP covers both.