All companies need to understand their key suppliers and tier them according to importance. Based on the Kraljik matrix (HBR, 1983). Kraljik devised a methodology to segment the supplier base by mapping it against two key dimensions: risk and profitability. Once suppliers are categorised and tiered correctly, then companies may develop Supplier Relationship Management (SRM) strategies against each of them.
Kraljik distinguishes four types of tiering categories in these two dimensions with Tier 1 seen as the most critical.
Tier 1 vendors
These vendors are of strategic importance to your business. They provide goods and services that are only purchased from a single supplier, such as raw materials. These suppliers will have a high profit impact and high supply risk to your business such is their importance.
Tier 2 vendors
These vendors will provide bespoke or difficult to obtain goods / services, probably not of a high value but are essential for your business and supply chain and as such have a low profitability impact but a high supply risk. Failure to procure these goods and services will cause a bottleneck to your supply chain.
Tier 3 vendors
These vendors are the most numerous in your supply chain and are those who provide goods and services that can easily be purchased from different sources. When dealing with a market that has multiple outlets to meet demand, it is likely to be highly price sensitive with a resulting impact on profit which you can leverage through smart contracting.
Tier 4 vendors
These are your non critical, highly commoditised vendors. They are Non-Critical and will cause very few issues in your supply base if you need to change suppliers Having a low profit impact and a low risk to your supply chain means it is unlikely that there will be contracts in place for many of these suppliers given that most will be purchased via PO or credit card.