Identifying Strategic Suppliers to Reduce Risk & Cost in the Supply Base

Modern supply chains are complex, integrated networks where customers depend on suppliers, now more than ever, to reduce risk and costs in a competitive landscape. The current increase in the practice of committing to building collaborative alliances as a partnership approach to supplier-customer relationships is a direct response to organizations’ growing needs for risk mitigation in their supply bases.

Identifying Strategic Suppliers to Reduce Risk & Cost in the Supply Base

The first step in building these relationships is to identify strategic suppliers by segmenting the supply base. This is a primary function of purchasing that can be used to be proactive in responding to supply disruption. But these efforts aren’t always successful, making strategic segmentation of great importance to your organization.

Whether or not purchasing teams will succeed in their efforts to build strategic alliances to reduce risk comes down to how effectively they understand their supply bases through segmentation. If they can do this effectively, the big payoff is a lasting collaborative partnership with suppliers of critical products or services that removes significant stress from complex supply chains.

Suppliers of strategic components or services are where organizations should spend the most resources in building collaborative partnerships and alliances. But what makes a supplier strategic?

A supplier is strategic if its greatest risk to supply and profitability is a disruption with its ability to fulfill orders. Strategic suppliers typically make up a low percentage of your overall supply base so the risk to cost and fulfillment by re-sourcing is higher compared to the average supplier. Strategic suppliers have something that’s core to the customer’s value and isn’t easy to source elsewhere.

The relationship between supply risk and profitability as a method for segmenting the supply base was envisioned by Peter Kraljic in the Harvard Business Review in 1983. The tool developed in that published work is, appropriately, the Kraljic matrix, and is a valuable tool for segmenting the supply base, even today.