Use this framework to segment your suppliers and your customers
In September 1983, Peter Kraljic, a director in the Düsseldorf office of McKinsey, wrote an article in the Harvard Business Review entitled "Purchasing Must Become Supply Management". This rather dreary title hides an interesting and useful framework.
Kraljic proposed a segmentation of suppliers to companies. It's all very obvious when you think about it. Some suppliers are likely to be critical to the success of a company and others are not. The two axes which Kraljic used for his matrix were company strength and supplier strength. If a company is buying products which are widely available and not critical to the future of a company, quite clearly it holds the whip hand. Suppliers in this case would have poor leverage and the company could keep low inventories and buy on spot. Conversely, if the supplier is critically important to a company, it would be wise to bolster stocks and actively search for substitutes or alternative suppliers. In other words, Kraljic was proposing a portfolio of suppliers segmented according to their importance to companies and the relative strength of suppliers. In a world which is becoming increasingly nationalistic, supply chains are threatened and Kraljic's 36 year old matrix is well worth reviewing.
The Kraljic matrix has inspired a similar sort of classification which is useful to business to business marketers. For example, a manufacturer of paper clips will have a different marketing philosophy to a utility company, or a supplier of key plant and equipment. The strategic importance of the products to customers and the amount they spend on these products affects marketing strategy. Plant and equipment marketing almost certainly will involve strong relationships with key buyers whereas sales of stationery products are likely to be based on volume marketing and aggressive promotions.
The Kraljic segmentation can be used to segment your customers according to their annual purchases and their strategic importance.
The small number of customers of high strategic importance and high spend with your company will be looked after personally and given a considerable amount of attention. The loss of one of these customers would be serious.
You may have a number of customers that do not currently spend a great deal with your company but they have high potential for doing so. These are in the north west corner of the matrix and are well worth nurturing to foster future growth.
The high spending customers in the south-east of the matrix are judged to have low strategic importance, possibly because they are in a declining market sector or because your profit margin with them is very low. They are worth looking after to ensure that your company has a high output which gives you economies of scale and efficiencies.
In the south west corner are those customers (and you might have lots of them) which spend very little with your company and are never likely to grow in importance. They should be dealt with in a highly efficient way as they could still generate decent profits. A low touch approach using digital or telephone contact would be appropriate for this segment.
Some things to think about:
Thinking about your key account customers, where do you think the strength of the relationship lies – is it with you as the supplier or does the customer have the whip hand?
In those accounts where the supplier has more strength than you, what plans do you have to diversify away from them?
Thinking about your customers in terms of the level of their spend and your strategic importance to them, what percentage are "utilities", what percentage are "plant equipment", what percentage are "paperclips", and what percentage of "business critical consumables". How can you reduce your dependency on "utilities" and "paperclips"?