How to optimise your purchasing approaches and segmentation to be more competitive?

Purchasing segmentation competitive advantages
August 1st, 2023
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In order to build their procurement strategy, companies must, first and foremost, map their purchases. Only with a clear view of their procurement portfolio can they implement the right action plans. This approach to purchasing approaches segmentation is therefore essential to their long-term competitiveness.

Procurement segmentation first before optimisation

Approaches to purchasing segmentation consists of identifying and classifying all company purchases (products and services) into several groups. Each procurement segment must be coherent enough (whether this means the supplier market, technology, logistics, etc.) for a strategy to be applied, with defined levers.

This segmentation works like a funnel where each procurement segment can then be grouped into categories and then into procurement families. This global view of the procurement portfolio also helps companies work out the most relevant procurement structure for their company.

Here is an overview of the procurement segments you will find in a company, whether it is a public or private business markets:

  • Energy and fuels;
  • Insurance;
  • Vehicles;
  • Transport;
  • IT and telecoms;
  • Marketing and communication;
  • Consulting, audits and expertise;
  • Training;
  • Maintenance and green spaces;
  • Work environment, etc.

This approach to procurement segmentation naturally involves extensive data collection. This process has to be carried out in tandem with the finance department. The idea is to list all the purchases made by the company, without exception, to avoid any increase in maverick spend. This enables procurement departments to improve their performance while helping to focus on value creation.

Definition of maverick spend
For your information, maverick spend refers to purchases made outside set processes. Because it is responsible for a lot of hidden costs, it inevitably has a significant impact on a company’s profitability.

The Kraljic matrix: the leading procurement segmentation method

There are several approaches to segmenting procurement. However, Kraljic's matrix is often seen as the leading solution in the procurement world. This method was theorised by the economist of the same name, Peter Kraljic, in an article published in the Harvard Business Review in 1983. This matrix is designed so that you can classify and analyse your procurement portfolio in order to define a strategy for it.

It consists of a combination of two key factors, namely:

  • The strategic importance of procurement (expenditure, total cost of ownership, impact on profitability, etc.);
  • The complexity of the supplier market (competition, barriers to entry, costs and logistical difficulties, etc).

This first step helps you classify the procurement portfolio into four main categories:

  • Strategic procurement (high financial and business impact and complexity of the supplier market);
  • Lever purchases (high financial and business impact, moderate supplier market complexity);
  • Critical purchases (moderate financial and business impact, high supplier market complexity);
  • Simple purchases (moderate financial and business impact and supplier market complexity).

While this procurement segmentation matrix is often summarised in this mapping, please note that the author suggests that further analytical thinking is required. This includes analysing the market, positioning the different strategic procurement categories and establishing an action plan.

What procurement strategy should you adopt?

It is only on the basis of such an analysis that procurement departments can improve their management of each segment through an appropriate procurement strategy and policy.

Still using the example of the Kraljic matrix as a basis, the author recommends several approaches which contain specific characteristics:

  • Strategic procurement: building real partnerships with suppliers, vertical integration, etc.
  • Lever procurement: competition between suppliers, research into substitute products, etc.
  • Critical procurement: securing stocks, managing relations with suppliers, etc.
  • Simple procurement: product standardisation, process optimisation, etc.

Based on this mapping, the procurement departments naturally began by structuring the management of purchases that were considered to be the most strategic at the time. Today, they are increasingly interested in understanding and implementing long-tail spend (known by many names: long tail, indirect purchases, non-production purchases, simple purchases, critical purchases, etc.), whose total cost of ownership (TCO) must also be optimised.

The case of long tail spend

There is a proven methodology, named Savin’side®, and is based on 6 levers to optimise these procurement categories.

Supplier rationalisation

The first lever involves replacing certain suppliers with an approved distributor in order to understand, identify, and reduce administrative costs, the process of dividing teams’ workload, and place bulk orders.

Product selection optimisation

The second lever is for verifying the adequacy of the products purchased based on their customer or users’ functional needs. This means you can avoid over-quality and promote responsible procurement.

Digitalisation of transactions

This third lever involves digitalising the entire Procure-to-Pay process (from product search to invoicing). Procurement departments can thus target reducing administrative costs, cut down on low value-added tasks, and reduce transactions’ carbon footprint all at once.

Logistics optimisation

This fourth lever enables companies to improve procurement processes with a view to reducing potential greenhouse gas emissions.

Deployment of agreements

Through this fifth lever, procurement departments ensure that all their sites capitalise on the benefits negotiated in contracts with their suppliers. This enables them to make direct savings while eliminating maverick spend patterns.

Quality management

The objective of this sixth and final lever is to learn and resolve the root causes of the malfunctions that have been identified in order to sustainably optimise the service rate. The idea is to promote continuous improvement and reduce the carbon footprint associated with claims.

Each approach to purchasing segmentation has its own strategy! Data, combined with the expertise of procurement teams and their partners, can certainly be used to activate the right levers and ensure successful results