Many sellers have an exaggerated view of their importance to the buyer. That is because they are not aware of how buyers measure supplier importance, or set strategy for a particular product category. This whitepaper will examine the fundamental basis upon which suppliers are segmented and procurement strategies are decided.

1. Retail Price: $4.99
Understanding How You Fit
Into The Buyer's Strategy
Many sellers have an exaggerated view of their importance
to the buyer. That is because they are not aware of how
buyers measure supplier importance, or set strategy for a
“Buyers are
particular product category. increasingly
encouraged to
tailor their
This whitepaper will examine the fundamental basis upon
which suppliers are segmented and procurement strategies
strategies...”
are decided. It will guide you to assessing your importance and
provide you with tips on how to act accordingly.

2. Understanding How Buyers Segment Their Suppliers
Buyers are increasingly encouraged to tailor their strategies to reflect
the importance of the different categories of goods and services being
purchased. This results in a segmentation of suppliers that has real
implications for how you sell.
Put simply 'all suppliers are not equal'. Some need to be partnered
with, while others can be 'thrown to the wolves' in the quest for
lowest price. But just how do buyers arrive at these decisions?
Buyer logic when it comes to procurement strategy and supplier
segmentation can be understood by reference to one of most
widely used procurement tools – The Kraljic Portfolio Purchasing
Model. As sellers we can use this model to understand, perhaps
even predict, how the buyer is going to buy our goods and services
into the longer term.
Introducing The Number 1 Model In Buying
The most widely known buying tool is The Kraljic Portfolio Purchasing
Model, created by Peter Kraljic. It is the equivalent of the 4 Ps in
marketing, or the periodic table of elements in chemistry and has
been around for approximately three decades.
The power of the Kraljic model rests in its simplicity. The model
focuses buyers on the reality that buying is product, or service
specific. It highlights 4 purchasing strategies that can be chosen by
buyers depending on the level of:
 Supplier risk
 Financial/profit impact.
The model focuses the buyer on the strategy as opposed to the
transaction, or more specifically on the twin goals of supply security
and cost reduction. But what does it mean for sellers?
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© The ASG Group 2012

3. How Sellers Can Use The Kraljic Model
Sellers who want to use the model must first find out where they fit
on the matrix. That is where the goods or services they provide are
positioned in the mind of the buyer in terms of the two criteria:
“The model
 Is there supply risk? For the buyer the issue of supply risk
includes consideration of such factors as; level of scarcity,
focuses the
availability of substitutes, concentration of suppliers, delivery buyer on the
logistics, risk of supply disruption, etc. This is in effect how the strategy as
buyer views the balance of power between buyer and supplier.
opposed to the
 What is the financial impact? For the buyer this includes transaction.”
consideration of the impact of the product/service on cost,
quality or value. If you are not sure where your category fits on
the financial impact axis you will be interested to know the rule
of thumb - only products that account for 3% or more of spend
above the line.
Once you have found your position on the matrix predicting the
buyer's likely strategy becomes clear.
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4. Are You Strategic?
This strategic quadrant is the area where buyers can achieve the
greatest impact and it is what matters most. Getting it right is key to
the performance of the business. It deserves the buyers close
attention and that means procurement is going to be involved.
Most sellers want to be in this category, on the other hand buyers
want to move suppliers out of this category and reserve it for the
select few that really matter. So it is that buyers may be developing
strategic long term relationships with some suppliers in this
quadrant, while at the same time lessening the dependence on
others (e.g. doing it in-house, or genericizing requirements).
If as a seller you want to be in the top right quadrant you must
seek to:
 Increase your importance to the performance of the
customer's business.
 Deepen collaboration through innovation and joint planning.
 Help the buyer to cut cost and maximize value.
 Connect with the buyer's strategic agenda.
 Help the buyer to manage risk.
Leverage: Are You Facing The Onset Of Buyer Power?
Buyers in this 'leverage' quadrant are opening their eyes to untapped
savings and are set to throw their weight around. They recognize that
they have more bargaining power than they are using and that it can
(given the volume of spend) be leveraged to deliver significant
savings.
Because of the potential savings procurement will seek to exercise
greater control, with buying decisions being wrestled away from
managers and end users.
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5. Sellers in this quadrant are about to come under attack. They must be
prepared for:
 The prospect of competitive tenders, auctions
and e-tendering is looming.
 The threat of substitute products or suppliers.
 The consolidation of purchases and
concentration of suppliers.
 Increasing price pressure.
The seller must be proactive, rather than reactive in
response to these challenges.
Sellers face the threat of cosy incumbent supplier
relationships being opened up to competition. They cannot count on
customer loyalty alone and must guard against complacency. They
must look to make themselves more important to the buyer through
innovation, service and other means of differentiating their solutions.
A key challenge for sellers is to communicate their impact on the
buyer's business, focusing the buyer's attention on total cost of
ownership as opposed to simply price. The seller who can do this
successfully has the potential to move the buyer into the strategic
partnership quadrant.
In addressing the price challenge sellers must be innovative. Cutting
price is not the only way to cut costs. The challenge for the seller is to
make the cost-cutting buyer a friend and show the buyer that
increased collaboration with suppliers can boost performance beyond
that of squeezing supplier margins.
Sellers can also look to leveraging higher-volume orders and longer
term supply agreements in return for greater discounts.
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6. Are You Causing A Bottleneck?
Sellers in this 'bottleneck' quadrant beware – 'you are being watched!'
This is an area where procurement is likely to
focus its attention. Quite simply it is a problem
area that needs to be fixed.
Buyers are likely to seek ways to take back
control, such as by; creating buffer stocks,
investigating substitute products, or suppliers
and managing supplier performance.
For incumbent suppliers in this quadrant 'the
writing is on the wall'. From the buyer's point
of view such troublesome suppliers are not
important enough to merit all the hassle. The
seller should therefore seize the initiative and
actively work to resolve the bottleneck
experienced by the buyer. If the seller waits for
the buyer to take action it may be too late –
they are at risk of losing some of their business
to new suppliers, or substitutes.
Are You A Non-Critical Item?
If you are in this quadrant your products and services are not
considered to be important by the buyer, and you face the increasing
threat of commoditization.
The 80:20 rule applies in this quadrant. The segment is likely to
account for less than 20% of spend, but as much as 80% of all
suppliers and related paperwork. That means it is a real administrative
burden – one that will rightly come under scrutiny.
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7. Making goods in this category easier (and more cost effective) to buy
represents an important strategy for sellers with the focus on EDI
(Electronic Data Interchange) related technologies in order to reduce
transaction costs.
“Buyers are also
Buyers will not be rewarded for their time spent on buying these
likely to pursue
relative unimportant good and services. They should step back once
cost competitive supply agreements and approved vendor catalogues areas where the
are in place. Helping the buyer to realize this is the seller's objective. seller can be
Buyers are also likely to pursue; consolidation/concentration of
proactive.”
products and suppliers, optimizing order volumes and automated
inventory replenishment – areas where the seller can also be
proactive.
Sellers in this quadrant are most exposed to being beaten up on price.
The challenge is to find new ways to matter, or at least a new basis for
competitive differentiation (other than just price). In particular they
must communicate this in terms of total value and total cost of
ownership.
In return for better deals suppliers are likely to look for increased
volumes, bundling of products and longer term supply contracts or
framework agreements.
Put It To Work
So pull out The Kraljic Model. Start by taking each of your top 5
customers and prospects and positioning them on the grid. Then
examine what the model tells your buyer his/her strategy should be.
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© The ASG Group 2012

8. The Science Behind This Paper
These insights and tools are based on:
1. Buyer Research – our ground-breaking research into how modern
buying decisions are made and the implications for sellers.
2. Best Practice Research – Over 1 million pages of best practice
sales case studies, books and research.
3. Common Practice Research – Our peer comparison benchmark of
1,000s of your competitors and peers.
The Sales Engine® and SellerNav are trademarks of The ASG Group.
The entire contents of this document are copyright of The ASG Group and cannot be
reproduced in any format without written permission.
Want help in tackling your sales challenges? Contact
enquiries@theASGgroup.com
www.theASGgroup.com
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© The ASG Group 2012