How to Segment Your Supply Base

Monday, 7 September 2026

Why does supply base segmentation matter?

Most organisations find that a relatively small number of suppliers account for the majority of their total procurement spend. This concentration is well documented. Peter Kraljic observed in his 1983 Harvard Business Review article that purchasing had remained largely transactional and price focused, when in reality the strategic significance of different categories varied enormously. The same pattern holds today across both public and private sectors.

Without segmentation, procurement teams default to a uniform management model. Every supplier gets a similar review cadence and similar levels of relationship investment. The result is that strategic suppliers with complex deliverables receive too little attention while low risk, easily replaceable suppliers consume disproportionate effort. Segmentation makes the distribution of value, risk and dependency visible, then links each segment to a governance model that matches its importance.

For Australian public sector organisations, the stakes are heightened by accountability requirements. The Australian Commonwealth’s Department of Finance’s Commonwealth Procurement Rules (CPRs) require value for money across the life of every arrangement. Concentrating management effort on the suppliers that carry the greatest risk and value is one of the most direct ways to meet that obligation.

What is the Kraljic Matrix and how does it work?

The Kraljic Matrix is the most widely recognised segmentation framework in procurement. Published by Peter Kraljic, then a director at McKinsey, it introduced a two dimensional model that plots purchases according to their profit impact and supply risk. The intersection produces four quadrants, each calling for a different strategy.

Strategic items sit in the high impact, high risk quadrant. These require close collaboration, joint planning and senior level engagement. Leverage items have high profit impact but low supply risk, meaning the buyer has purchasing power and should use competitive tension to extract value. Bottleneck items are high risk but low impact. The priority is securing continuity of supply rather than negotiating price. Non critical items are low on both dimensions and should be managed through simplification and automation. The Chartered Institute of Procurement & Supply (CIPS) recommends the Kraljic Matrix as a starting tool for supply base analysis, particularly for professionals building foundational segmentation discipline.

The framework’s strength is its simplicity. It gives procurement teams a structured way to have a strategic conversation about their supply base rather than treating every purchase as equivalent. Its limitation is that it reduces complex supplier relationships to just two variables. A supplier that delivers a leverage item for one category may also be a strategic partner in another. The matrix is static. Real supply markets move.

How should organisations segment their supply base in practice?

Effective segmentation starts with data. Spend analysis is the first step: mapping total expenditure by supplier, by category and by business unit to understand where procurement dollars are concentrated. This alone often reveals that 70 to 80 per cent of spend sits with 10 to 20 per cent of suppliers, confirming where the organisation’s supply base dependency actually lies.

The next layer is supply risk. This includes factors such as the number of alternative suppliers available, geographic concentration of the supply market and the supplier’s financial stability. Organisations that operate in regulated environments, as most Australian government agencies do, also need to factor in probity and transparency obligations at this stage.

Modern segmentation extends beyond the two dimensions of the Kraljic Matrix. The Ivalua supplier segmentation guide (2026) notes that leading organisations now incorporate additional criteria including innovation capability, collaboration maturity and environmental, social and governance (ESG) performance. These dimensions help procurement teams distinguish between a supplier that simply delivers on contract and one that contributes to the organisation’s broader strategic objectives.

The output of a well executed segmentation exercise is a tiered governance model. Strategic suppliers receive joint business plans and executive level reviews. Important suppliers get regular performance reviews and defined escalation pathways. Transactional suppliers are managed through automated ordering and compliance checks. The tiers do not imply that transactional suppliers are unimportant. They reflect that different supplier relationships require different types of attention.

What makes segmentation different in the Australian public sector?

Public sector buyers cannot simply favour strategic suppliers the way a commercial buyer might offer preferential payment terms or exclusive access to forward demand. Australian government procurement operates under probity, competitive neutrality and transparency obligations that constrain the ways in which differentiated governance can be expressed. This creates a genuine tension. Segmentation requires treating suppliers differently based on their value and risk. Probity requires treating suppliers fairly throughout a competitive process.

The resolution is that differentiated governance is not the same as preferential treatment. An agency can allocate more structured oversight to a high value, high risk supplier without breaching competitive neutrality. It can schedule more frequent performance reviews, assign a named relationship owner and invest in joint planning for contract transitions. None of that constitutes favouring a supplier in a procurement process. It constitutes managing an important relationship with the seriousness it warrants. The CIPS supplier relationship management guidance draws the same distinction, noting that segmentation determines the type and level of engagement, not whether one supplier is preferred over another.

For Australian practitioners, getting this right requires understanding both the segmentation methodology and the legal and policy framework that governs how supplier relationships can be managed in a public accountability environment.

How can professionals build capability in supply base segmentation?

Segmentation is a skill that sits at the intersection of data analysis, market knowledge and relationship management. It is also where public sector procurement practice diverges most from private sector approaches, because the governance overlay is more complex. AcademyGlobal (AG), the Chartered Institute of Procurement & Supply (CIPS) Centre of Excellence for Australia, New Zealand and Southeast Asia, delivers practitioner-led training for professionals who need to apply segmentation within these constraints.

AG’s Supplier Relationship Management in the Public Sector program addresses how to build a segmented supplier governance model that differentiates management intensity without compromising fairness or probity. It works through the practical challenges of categorising a public sector supply base, assigning governance tiers and structuring the review cadences and escalation pathways that make segmentation operational rather than theoretical. For professionals seeking a formal qualification, the nationally recognised PSP50616 Diploma of Procurement and Contracting, delivered through University of Queensland Skills (RTO 1511) in partnership with AG, embeds segmentation within its broader curriculum on public sector procurement governance.

A segmentation matrix that sits in a slide deck but does not change how suppliers are actually managed has not delivered value. The capability that matters is the ability to translate a segmentation output into differentiated operational practice.

Frequently asked questions

What is supply base segmentation?

Supply base segmentation is the practice of categorising suppliers according to criteria such as spend, risk, strategic importance and performance, then applying different management approaches to each category. The purpose is to concentrate governance and relationship investment where it creates the most value, rather than managing all suppliers uniformly.

What is the Kraljic Matrix used for in procurement?

The Kraljic Matrix is a strategic tool that plots purchases against two axes: profit impact and supply risk. It produces four quadrants (strategic, leverage, bottleneck, non critical) and helps procurement teams decide which categories need partnership, which need competitive leverage, which need supply security and which need process simplification.

How many segments should a supply base have?

There is no fixed number, but most organisations work with three to five tiers. Strategic, important, managed and transactional is a common structure. The right number depends on the size of the supply base and the organisation’s capacity to manage differentiated governance.

Can public sector organisations segment their suppliers?

Yes. Segmentation does not mean treating suppliers preferentially in a procurement process. It means allocating different levels of contract governance, performance monitoring and relationship management based on the value and risk each supplier represents. Australian public sector agencies can and should differentiate their supplier management approach while maintaining probity and competitive neutrality.

What skills do procurement professionals need to segment a supply base effectively?

Effective segmentation requires spend analysis capability, supply market knowledge, risk assessment skills and an understanding of the governance frameworks that apply in the operating environment. For Australian public sector practitioners, this includes familiarity with the Commonwealth Procurement Rules and the probity obligations that shape how supplier relationships can be managed. AcademyGlobal’s Supplier Relationship Management in the Public Sector program is designed to build these capabilities in a practical, public sector context.

References

1. Kraljic, P. (1983), “Purchasing Must Become Supply Management,” Harvard Business Review, https://hbr.org/1983/09/purchasing-must-become-supply-management

2. Chartered Institute of Procurement & Supply, “Kraljic Matrix,” CIPS Intelligence Hub, https://www.cips.org/intelligence-hub/supplier-relationship-management/kraljic-matrix

3. Chartered Institute of Procurement & Supply, “Supplier Relationship Management,” CIPS Intelligence Hub, https://www.cips.org/intelligence-hub/supplier-relationship-management

4. Department of Finance, “Procurement,” Australian Government, https://www.finance.gov.au/government/procurement

5. Ivalua (2026), “Supplier Segmentation,” https://www.ivalua.com/blog/supplier-segmentation/