Supply Strategy and Supplier Segmentation

Introduction

Supplier management is most effective when it is connected to organisational strategy rather than treated as a series of transactions. Purchasing decisions influence cost, quality, innovation, resilience, compliance, customer service and reputation. A supplier supplying office stationery should not be managed in the same way as a supplier providing a critical production component, a cloud platform or a regulated pharmaceutical ingredient.

Supply strategy provides the direction for managing external resources. Supplier segmentation converts that direction into differentiated management approaches. The central principle of this chapter is that supplier-management effort should reflect both the value of the purchase and the risk of supply failure.

The analysis normally progresses through five connected activities:

1. understanding organisational and category strategies;
2. analysing expenditure and demand;
3. analysing the supply market and supply risks;
4. segmenting categories and suppliers; and
5. selecting relationship, governance and development approaches.

Segmentation is not a one-time classification. Markets, technologies, business requirements and supplier capabilities change. A category classified as routine may become strategic after a supply disruption, while a strategic supplier may become less critical after standardisation or the development of alternatives.

Learning Objectives

By the end of this chapter, the reader should be able to:

• explain how supplier management supports organisational and category strategy;
• conduct basic spend analysis and interpret its limitations;
• assess supply-market structure, supplier power and external risk;
• apply the Kraljic Portfolio Matrix appropriately;
• distinguish supplier criticality, dependence and relationship intensity;
• design supplier tiers and differentiated governance arrangements;
• recommend sourcing and relationship strategies for different segments; and
• evaluate ethical, technological and implementation issues in supplier segmentation.

1. From Organisational Strategy to Supply Strategy

Organisational strategy describes how an organisation intends to create and sustain value. It may emphasise low cost, superior service, innovation, speed, sustainability, reliability, market access or a combination of these objectives. Supply strategy translates those priorities into decisions about what should be bought, from which markets, under what contractual conditions and with what level of supplier collaboration.

For example, a hospital pursuing patient safety cannot evaluate a medical-device supplier solely on price. Regulatory compliance, traceability, product quality and continuity of supply are strategically important. A discount retailer may place greater emphasis on landed cost, volume flexibility and logistics performance. A technology company may prioritise access to specialist knowledge and rapid innovation.

A useful alignment sequence is:

Organisational strategy → operating model → category strategy → sourcing strategy → supplier-management plan → performance outcomes

A category strategy should normally define:

• business requirements and demand profile;
• total-cost objectives;
• quality and service requirements;
• supply-market conditions;
• risk and resilience requirements;
• sustainability and ethical expectations;
• make-or-buy boundaries;
• sourcing model and contract approach; and
• supplier-performance and governance arrangements.

A common failure is to apply a single procurement policy to every category. Standardised procedures are useful for control, but strategic differentiation is necessary for effectiveness. Governance should be proportionate: low-risk purchases should not consume the same managerial attention as purchases that could stop production or expose the organisation to legal and reputational harm.

2. Spend Analysis: Understanding What Is Bought

Spend analysis is the systematic examination of organisational expenditure in order to identify patterns, opportunities and risks. It is the factual foundation for category management, although it is not sufficient by itself to determine strategy.

2.1 The spend-analysis process

A professional spend analysis commonly involves:

1. Data extraction: obtain accounts-payable, purchase-order, contract and supplier-master data.
2. Data cleansing: remove duplicates, correct supplier names, standardise currencies and address missing fields.
3. Classification: assign transactions to consistent categories, commodities and subcategories.
4. Consolidation: link subsidiaries, trading names and parent companies where appropriate.
5. Validation: reconcile analytical totals with the general ledger and investigate exceptions.
6. Interpretation: identify concentration, fragmentation, maverick spend, demand trends and strategic opportunities.

Spend should be analysed across several dimensions: supplier, category, business unit, location, time period, contract status, purchase type and currency. A supplier that appears small at one business unit may be strategically significant when group-wide expenditure is consolidated.

2.2 Core spend measures

Total category spend is the sum of transaction values during a defined period:

Here, S_c is total spend for category c, x_i is the value of transaction i, and n is the number of transactions. The formula assumes that transactions are recorded consistently and that values have been converted to a common currency where necessary.

A supplier’s share of category spend is:

where S_j is spend with supplier j and S_c is total category spend. The result is a percentage and is meaningful only when the category boundary and time period are clearly defined.

The supplier concentration ratio for the largest k suppliers is:

where suppliers are ranked from largest to smallest by spend. A high CR_k may indicate buying power, but it may also indicate dependency and vulnerability. Concentration is therefore neither automatically good nor automatically bad.

A simple measure of contract coverage is:

“Addressable spend” means expenditure that could reasonably be managed through a sourcing or contracting intervention. Some expenditure is excluded because of regulation, emergency conditions, mandated suppliers or legitimate business constraints.

2.3 Illustrative spend analysis

An organisation spends $10 million annually on packaging. Supplier A receives $4.5 million, Supplier B $3 million, Supplier C $1.5 million and smaller suppliers $1 million. The concentration ratio for the two largest suppliers is:

CR₂ = ($4.5m + $3.0m) ÷ $10m × 100 = 75%

Thus, 75% of category spend is concentrated with two suppliers. This may create negotiation leverage through volume, but it also means that disruption at either major supplier could have substantial consequences. The next question is not merely “How much do we spend?” but “How difficult would it be to replace this supply, and what would failure cost?”

2.4 Limitations of spend analysis

Spend data may be distorted by poor coding, incomplete purchase orders, inconsistent supplier names, inflation, currency movements, one-off projects and off-contract purchases. Monetary value also fails to capture criticality. A low-value component may be essential to production, while a high-value commodity may be easy to replace.

Accordingly, spend analysis should be combined with operational, technical, risk and market information. It should also distinguish price reduction from total-value improvement. A cheaper supplier may increase inspection, transport, failure, inventory or switching costs.

3. Supply-Market Analysis

Supply-market analysis examines the external environment in which suppliers operate. It asks whether supply is abundant or constrained, whether suppliers are differentiated, how easily buyers can switch, and what events could affect continuity, cost or compliance.

3.1 Dimensions of market analysis

Important dimensions include:

• number and size of capable suppliers;
• geographic distribution and logistics routes;
• barriers to entry, such as capital, patents, certifications or regulatory approval;
• availability and volatility of raw materials;
• supplier capacity and utilisation;
• technological change and substitution possibilities;
• buyer and supplier bargaining power;
• currency, interest-rate and inflation exposure;
• geopolitical, environmental and climate risks;
• labour and human-rights conditions; and
• likely future demand and capacity investment.

Porter’s five-forces perspective can assist analysis by considering rivalry among suppliers, threat of new entrants, threat of substitutes, supplier power and buyer power. It is a strategic lens, not a mechanical scoring system. A market with few suppliers may still be contestable if new technology is emerging; a market with many suppliers may be effectively constrained if only a few possess the required certification.

3.2 Switching and substitutability

Switching cost includes more than the quoted price difference. It may include qualification, testing, tooling, data migration, employee training, contract termination, inventory build-up, downtime and customer approval. A supplier is strategically difficult to replace when alternatives are technically, commercially or legally limited.

Substitutability should be assessed at several levels:

• supplier substitutability: can another supplier provide the same item?
• product substitutability: can another specification or design meet the requirement?
• process substitutability: can the organisation change how the requirement is delivered?
• demand substitutability: can the organisation reduce or eliminate the requirement?

This broader analysis prevents procurement teams from assuming that a second supplier automatically represents a genuine alternative.

4. The Kraljic Portfolio Matrix

The Kraljic Portfolio Matrix classifies purchases using two principal dimensions: profit impact and supply risk. Profit impact refers to the effect of the purchase on financial or operational performance. Supply risk refers to the difficulty and consequences of obtaining the requirement reliably.

The matrix is a prioritisation tool, not a substitute for judgement. “Profit impact” should be interpreted broadly. For a public service or hospital, service continuity and patient outcomes may matter more than direct profit. Similarly, risk should include quality, cyber, legal, environmental and reputational consequences.

4.1 Routine items

Routine items are widely available and have limited effect on organisational performance. Appropriate approaches include catalogue buying, standard specifications, electronic ordering, framework agreements and supplier rationalisation. The objective is usually to reduce process cost and prevent excessive administrative effort.

4.2 Leverage items

Leverage items have significant expenditure or financial impact but are available from several capable suppliers. The organisation may use demand aggregation, competitive tendering, volume commitments, should-cost analysis and periodic benchmarking. Excessive supplier intimacy is unnecessary if competition remains credible.

4.3 Bottleneck items

Bottleneck items have relatively low financial value but high supply risk. They may require specialist equipment, proprietary technology, scarce materials or regulatory approval. The organisation should focus on continuity, safety stock where justified, alternative specifications, supplier development, contingency planning and escalation rights.

4.4 Strategic items

Strategic items have both high impact and high risk. They justify senior governance, joint planning, transparent performance data, executive-level relationships, collaborative improvement and carefully designed contracts. Strategic does not necessarily mean informal partnership. A strategic relationship still requires clear accountability, commercial discipline and exit planning.

5. Dependency and Power Analysis

The Kraljic matrix classifies categories, whereas dependency analysis examines the relationship between a particular buyer and supplier. Two suppliers in the same category may require different treatment because their dependence, alternatives and bargaining positions differ.

5.1 Buyer and supplier dependence

Buyer dependence increases when the supplier is difficult to replace and the purchase is critical. Supplier dependence increases when the buyer represents a large share of the supplier’s revenue, provides valuable growth, or offers a prestigious or technically important relationship.

A practical assessment may examine:

• percentage of the buyer’s requirement supplied by the supplier;
• percentage of the supplier’s revenue represented by the buyer;
• availability and capability of alternatives;
• switching time and cost;
• uniqueness of knowledge, assets or intellectual property;
• contractual termination rights; and
• consequences of failure for each party.

Revenue share alone is not a complete measure of supplier dependence. A small customer may be important because it offers market access, technological credibility or future growth.

5.2 A structured dependency score

Organisations may use a weighted score to make assumptions visible. For example:

where D is the dependency score, w_i is the weight assigned to criterion i, r_i is the rating for criterion i, and the weights sum to 1. Ratings must use a defined scale, such as 1 to 5. This is a decision-support device, not an objective measurement of dependency. Results depend on the quality of criteria, weights and evidence.

Possible criteria include switching difficulty, technical uniqueness, operational criticality, alternative availability and failure impact. A score should be accompanied by narrative evidence and sensitivity testing. If changing one uncertain assumption moves a supplier from medium to high dependency, management should treat the classification cautiously.

5.3 Relationship strategies

Relationship approaches can be positioned along a spectrum:

• transactional buying;
• preferred-supplier management;
• coordinated sourcing;
• collaborative improvement;
• strategic alliance or joint development; and
• vertical integration or internal provision.

The appropriate position depends on value, risk, capability, trust, information requirements and expected duration. Collaboration should have a business purpose. Sharing forecasts is useful where it improves capacity planning; joint innovation is justified where both parties can create and protect value. Collaboration without governance can create ambiguity, dependency and excessive switching costs.

6. Supplier Tiering and Governance

Supplier tiering groups suppliers according to strategic importance, risk and management requirements. A four-tier model is often practical, although organisations should adapt the number of tiers to their scale and complexity.

Tiering should not be based on spend alone. A low-spend cybersecurity provider may require stronger governance than a high-spend commodity supplier. Criteria should include business criticality, supply continuity, information security, regulatory exposure, sustainability, financial health, substitutability and performance history.

6.1 Supplier scorecards

A scorecard may combine measures such as quality, delivery, cost, responsiveness, innovation, sustainability and compliance. Weighted scoring can be expressed as:

where P is the overall performance score, w_i is the weight for criterion i, s_i is the normalised score for that criterion, and the weights sum to 1. Scores should be based on defined evidence and consistent measurement periods. A high aggregate score should not conceal a critical failure in safety, ethics or regulatory compliance; some criteria should operate as mandatory gates rather than compensating scores.

Governance should also define escalation thresholds, meeting frequency, data owners, corrective-action deadlines and consequences of non-performance. A scorecard without action ownership is merely reporting.

7. From Segmentation to Category Strategy

Segmentation becomes valuable only when it changes decisions. The following approaches are commonly appropriate:

Routine categories

Standardise specifications, reduce the number of transactions, use catalogues and automate approval. Procurement should avoid over-engineering negotiations for low-risk purchases.

Leverage categories

Aggregate demand, use competitive sourcing, compare total cost, negotiate volume and challenge incumbent pricing. Maintain sufficient competition to avoid creating unnecessary dependency.

Bottleneck categories

Map vulnerabilities, qualify alternatives, hold carefully justified buffer stock, redesign specifications and monitor supplier health. Continuity may justify a premium when the cost of interruption is high.

Strategic categories

Develop joint plans, exchange relevant forecasts, conduct executive reviews, coordinate innovation and build resilience. Contracts should address intellectual property, data, business continuity, audit rights, change control, service recovery and exit assistance.

The category strategy should specify what is to be managed centrally and what may be delegated. It should also identify when a segment will be reviewed. For example, a strategic supplier may be reassessed annually, while transactional suppliers may be reviewed when spend, risk or performance changes materially.

8. Illustrative Case: Meridian Foods and Packaging Supply

Background

Meridian Foods, a fictional regional food manufacturer, spends $10 million annually on packaging. Packaging affects product safety, branding, production speed and regulatory compliance. The procurement team initially treated the category as a leverage opportunity because expenditure was substantial.

Problem

Two suppliers account for 75% of expenditure. One supplies printed film using proprietary artwork and tooling; the other supplies standard cartons. A disruption at the film supplier could stop several high-volume product lines within days. The company also has incomplete visibility of labour standards at an overseas subcontractor.

Analysis

Spend analysis showed high concentration, but market analysis revealed different conditions within the category. Standard cartons were available from five qualified regional suppliers. Printed film required specialised printing capability, approved food-contact materials and several weeks of testing before a new supplier could be used. The film supplier therefore had high supply risk and high operational impact, despite the possibility of negotiating lower prices through volume.

The team classified:

• standard cartons as leverage;
• printed film for core products as strategic;
• a low-volume specialist barrier film as bottleneck; and
• miscellaneous labels and consumables as routine.

Dependency analysis found that Meridian was highly dependent on the printed-film supplier for short-term continuity, while the supplier was moderately dependent on Meridian because Meridian represented a meaningful but not dominant share of its sales.

Approach and solution

For cartons, Meridian consolidated demand and conducted a competitive tender using total-cost evaluation, including delivery and defect rates. It retained two qualified suppliers rather than selecting a sole source solely on price.

For printed film, Meridian established a joint business plan, quarterly technical reviews and a business-continuity programme. It required disclosure of critical subcontractors, evidence of food-contact compliance, disaster-recovery arrangements and notification of material changes. The parties also began qualification of a second source and reviewed artwork ownership and tooling access.

For the specialist film, Meridian worked with engineering to test an alternative specification and introduced a controlled emergency inventory policy based on lead time and failure consequences. It did not automatically hold unlimited stock, because packaging obsolescence and shelf-life risks could create waste.

For routine items, catalogue buying and delegated approval reduced administrative effort.

Outcome

After implementation, Meridian achieved competitive savings in cartons, improved continuity planning for printed film and obtained clearer evidence on ethical and regulatory controls. The strategic supplier relationship became more collaborative, but the second-source programme reduced excessive dependency. The case demonstrates that one broad category can contain several distinct supply strategies.

Learning points

1. Spend concentration does not by itself determine the relationship strategy.
2. Segmentation should occur at a level that reflects materially different supply conditions.
3. Total cost and failure consequences are more informative than price alone.
4. Resilience may require qualification of alternatives, not merely contractual promises.
5. Collaboration should be accompanied by transparency, governance and exit capability.

9. Governance, Ethics and Regulatory Considerations

Supplier segmentation can create ethical and legal risks if it is used to justify unequal treatment without objective criteria. Organisations should avoid excluding smaller suppliers merely because they lack scale when they can meet requirements through proportionate controls. Requirements should be relevant, transparent and achievable.

Important governance issues include:

• conflicts of interest in supplier classification or award decisions;
• competition law and improper information sharing;
• confidentiality and protection of supplier intellectual property;
• modern slavery, forced labour and human-rights due diligence;
• environmental claims and the risk of greenwashing;
• data protection and cybersecurity in supplier systems;
• anti-bribery controls, gifts and hospitality;
• audit rights that are proportionate and actually usable; and
• fair treatment of suppliers during financial distress or termination.

A supplier should not be labelled “low risk” simply because the buyer has no information. Lack of information is itself a risk signal. Risk assessments should distinguish inherent risk before controls from residual risk after controls. They should also identify who owns each risk and what evidence supports the rating.

10. Technology, Analytics and Contemporary Developments

Procurement platforms can integrate purchase orders, invoices, contracts, supplier records, performance data and external risk signals. Machine-learning tools may identify duplicate suppliers, unusual transactions, emerging financial distress or likely contract leakage. However, automated classifications require human review because historical purchasing patterns may reproduce biased or poor decisions.

Useful technologies include:

• spend-classification and supplier-master platforms;
• contract-lifecycle management systems;
• supplier-risk monitoring services;
• electronic catalogues and procure-to-pay automation;
• supplier portals and performance dashboards; and
• scenario tools for disruption and capacity analysis.

Artificial intelligence can support document extraction, category classification and early-warning analysis. Its use should include data-quality controls, explainability, access governance, confidentiality protection and validation against operational facts. A model may infer that a supplier is low risk because no disruption has been recorded, even though the organisation has poor visibility. Technology should enhance professional judgement, not replace accountability.

Contemporary supply strategies increasingly address resilience, climate transition, cyber risk, geopolitical fragmentation and responsible sourcing. The emphasis is shifting from lowest purchase price toward value, continuity and adaptability. Nevertheless, resilience investments have costs. Multiple suppliers, additional inventory and dual tooling may reduce disruption risk while increasing working capital and complexity. Decisions should therefore compare the cost of resilience with the probability and consequence of failure.

11. Implementation Road Map and Common Errors

A practical implementation road map is:

1. establish executive sponsorship and category ownership;
2. define category boundaries and data requirements;
3. cleanse and validate spend data;
4. conduct supply-market and dependency analysis;
5. classify categories and suppliers using documented criteria;
6. agree differentiated strategies and governance levels;
7. communicate expectations internally and to suppliers;
8. implement contracts, scorecards and risk controls; and
9. review classifications using performance and environmental changes.

Common errors include:

• treating the Kraljic matrix as a permanent label;
• confusing high spend with high strategic importance;
• assuming that two suppliers are genuine alternatives;
• relying on subjective scores without evidence;
• over-managing routine suppliers;
• under-managing low-spend but critical suppliers;
• measuring meetings rather than outcomes;
• ignoring internal stakeholders and technical requirements; and
• pursuing collaboration without protection against dependency and lock-in.

Good practice requires clear definitions, cross-functional participation, documented assumptions, periodic review and an explicit link between classification and action.

Chapter Summary

Supply strategy aligns external purchasing with organisational and category objectives. Spend analysis reveals expenditure patterns, concentration, contract coverage and opportunities, but must be supplemented by supply-market, operational and risk analysis. The Kraljic Portfolio Matrix distinguishes routine, leverage, bottleneck and strategic categories according to impact and supply risk. Dependency analysis adds a relationship-specific perspective by examining alternatives, switching difficulty, criticality and the relative power of buyer and supplier.

Supplier tiering translates analysis into governance. Strategic suppliers may require joint planning and executive oversight, while transactional suppliers are better managed through automation and standard controls. Effective segmentation is dynamic, evidence-based and proportionate. Ethical conduct, regulatory compliance, information security, sustainability and resilience must be incorporated into classification and supplier governance. Technology and artificial intelligence can improve visibility and early-warning capability, but they require data governance and human judgement.

Key Terms

Spend analysis: Systematic examination of expenditure to identify patterns, risks and opportunities.

Category strategy: A plan for managing a defined group of related purchases.

Supply-market analysis: Examination of supplier capability, competition, constraints and external risks.

Profit impact: The financial or operational significance of a purchase to the buying organisation.

Supply risk: The likelihood and consequence of difficulty in obtaining required supply.

Kraljic Portfolio Matrix: A framework classifying purchases by impact and supply risk.

Routine item: A low-impact, low-risk purchase generally managed through simplification and automation.

Leverage item: A high-impact, relatively low-risk purchase where competition and aggregation may be used.

Bottleneck item: A low-impact but high-risk purchase requiring continuity protection.

Strategic item: A high-impact, high-risk purchase requiring intensive and collaborative management.

Supplier dependency: The extent to which a supplier relies on a buyer or a buyer relies on a supplier.

Switching cost: The financial, operational, technical and legal cost of changing suppliers or solutions.

Substitutability: The availability of alternative suppliers, products, processes or demand options.

Supplier tiering: Grouping suppliers according to importance, risk and required governance.

Supplier scorecard: A structured set of measures used to evaluate supplier performance.

Total cost: All relevant acquisition, operating, failure, switching and lifecycle costs.

Resilience: The capability to prepare for, absorb, respond to and recover from disruption.

Maverick spend: Expenditure made outside approved contracts, processes or suppliers.

Residual risk: Risk remaining after controls and mitigation measures are applied.

Review Questions

Short Answer Questions

1. Why should spend analysis not be used as the sole basis for supplier segmentation?
2. What are the two principal dimensions of the Kraljic Portfolio Matrix?
3. Define a bottleneck item and state two appropriate management responses.
4. What is meant by supplier dependency?
5. Why should supplier tiering include non-financial criteria?

Long Answer Questions

1. Explain how organisational strategy is translated into category and supplier-management strategy.
2. Describe the stages of a professional spend-analysis exercise and discuss common data-quality problems.
3. Explain the four Kraljic segments and recommend a suitable approach for each.
4. Discuss how supply-market analysis and dependency analysis complement the Kraljic Portfolio Matrix.
5. Evaluate the benefits and risks of collaborative relationships with strategic suppliers.

Analytical / Application Questions

1. An organisation spends $8 million in a category. Its three largest suppliers receive $2.8 million, $1.6 million and $1.2 million. Calculate CR₃ and explain what the result does and does not reveal about supply risk.
2. A low-value software provider controls access to a system required for regulatory reporting. Classify the purchase using the Kraljic logic, identify relevant dependency risks and recommend governance arrangements.
3. Design a supplier-tiering approach for a hospital that purchases medicines, catering, clinical equipment, office supplies and cloud services. Explain the criteria and why spend alone would be insufficient.

Multiple Choice Questions with Answers

Question 1

Which combination represents the two principal dimensions of the Kraljic Portfolio Matrix?

A. Supplier size and contract length

B. Profit impact and supply risk

C. Purchase price and payment terms

D. Quality score and delivery frequency

Correct Answer: B. Profit impact and supply risk

Question 2

An item is widely available, has low organisational impact and is inexpensive to administer. Which strategy is most appropriate?

A. Joint product development

B. Executive-level alliance governance

C. Catalogue buying and process automation

D. Emergency inventory without review

Correct Answer: C. Catalogue buying and process automation

Question 3

An organisation spends $10 million in a category, of which $4 million is with Supplier A and $3 million with Supplier B. What is CR₂?

A. 30%

B. 40%

C. 70%

D. 75%

Correct Answer: C. 70%

Question 4

Which statement best describes a limitation of spend analysis?

A. It cannot identify supplier names

B. It measures expenditure but may not capture criticality or switching difficulty

C. It is useful only for public-sector organisations

D. It automatically proves that the lowest-price supplier is best

Correct Answer: B. It measures expenditure but may not capture criticality or switching difficulty

Question 5

A low-value component is difficult to replace and could stop production if unavailable. How should it generally be classified?

A. Routine

B. Leverage

C. Bottleneck

D. Non-addressable

Correct Answer: C. Bottleneck

Question 6

Which factor most directly increases buyer dependence on a supplier?

A. Many technically qualified alternatives

B. Low switching cost

C. Unique capability combined with high switching difficulty

D. Short invoice-processing time

Correct Answer: C. Unique capability combined with high switching difficulty

Question 7

What is the main purpose of supplier tiering?

A. To give every supplier identical governance

B. To allocate differentiated management according to importance and risk

C. To eliminate all small suppliers

D. To rank suppliers only by annual spend

Correct Answer: B. To allocate differentiated management according to importance and risk

Question 8

Why should a supplier-performance scorecard sometimes include mandatory gateway criteria?

A. To ensure critical failures cannot be hidden by strong performance in other areas

B. To make all criteria financially identical

C. To remove the need for evidence

D. To guarantee that every supplier receives the same score

Correct Answer: A. To ensure critical failures cannot be hidden by strong performance in other areas

Question 9

Which is an example of genuine supply substitutability?

A. A second supplier exists but requires impossible regulatory approval

B. A different process can meet the same requirement within acceptable risk and cost

C. The incumbent supplier promises not to increase prices

D. The buyer has no contract with the incumbent

Correct Answer: B. A different process can meet the same requirement within acceptable risk and cost

Question 10

Which is an appropriate governance principle when using AI for supplier-risk classification?

A. Accept automated classifications without review

B. Use historical data regardless of its quality

C. Ensure explainability, data controls and human accountability

D. Allow the system to disclose confidential supplier data

Correct Answer: C. Ensure explainability, data controls and human accountability