Phase 1: Classification
The profit impact of a given supply item can be
defined in terms of the volume purchased, percentage
of total purchase cost, or impact on product quality
or business growth. Supply risk is assessed in
terms of availability, number of suppliers, competitive
demand, make-or-buy opportunities, and storage
risks and substitution possibilities. Using these
criteria, the company sorts out all its purchased items
into the categories shown in Exhibit II: strategic (high
profit impact, high supply risk), bottleneck (low profit
impact, high supply risk), leverage (high profit impact,
low supply risk), and noncritical (low profit impact,
low supply risk).