January 19, 2023 | Procurement Strategy
Supplier segmentation helps procurement determine the psychology and behavior patterns of a supplier. It allows organizations of all sizes to segregate their suppliers into various strategic parameters. This will allow them to use the right set of suppliers to maximize supply chain efficiency and minimize costs, risks and liabilities.
Procurement usually deploys methodologies such as supplier performance management (SPM), supplier relationship management (SRM), scorecards, incident reports and action plan. These methodologies provide an accurate estimate, the right information and helps manage supplier evaluations.
Supplier segmentation, on the other hand, provides procurement with an overall summary with help of a matrix or a grid. Here, suppliers are batched and plotted based on their behavior, risk, sustainability, business impact and various other parameters that provide the necessary measures for segmentation.
Supplier segmentation provides information on the value the supplier brings to your organization and the type of risk it carries along.
Segmentation helps classify suppliers into various components and what percentage of these components they fall under.
These suppliers are like family. They have been with the organization for a long time, provided tremendous value based on service, costs and delivery. They also go over and above their scope of work. These suppliers are one of the reasons that the organization functions successfully.
These suppliers are tactical as well as critical to the organization. They provide products and services that are extremely specialized and may even have a monopoly or few competitors. Such suppliers are hard to find and must be nurtured.
Such suppliers are strategic to a point where the organization can position them to strengthen their position on cutting costs and drive deeper negotiations. Such suppliers have a lot of competitors, and their products and services also have more demand. Therefore, it allows such suppliers to provide more wiggle room on pricing.
These suppliers provide goods and services based on the current need within an organization. They may or may not be strategic in nature and they may or may not have a contract or even be preferred. They are available to fulfil the demand and supply requirements within an organization for that place and time. Such suppliers usually do not provide a lot of room for negotiations and discounts.
These suppliers are low-priority, low-risk suppliers as they may not contribute or impact the organizations spend. However, they may be a potential risk as their cost-to-time ratios may vary. Organizations often end up spending more time and energy on such suppliers than it’s required.
These suppliers may not be critical to the organization but can disrupt production or supply chains. Take chip production and manufacturers for example. There was a semiconductor shortage globally and it became a bottleneck for a lot of organizations. Organizations should always be on the lookout for alternatives when it comes to bottleneck suppliers.
There are many quadrants and matrixes that fall under supplier segmentation. The most common matrix is the Kraljic matrix, and most segmentation routines and strategies are a direct outcome found within the matrix.
As an organization, what works best for you depends on how well you understand your core suppliers and what value these suppliers bring to the table.
How do they impact the current business in a changing market? Do your suppliers adapt? Are they sustainable? Are they a nuisance? How well are they being managed?
Supplier segmentation is a vast concept that dwells into supplier management. There are various supporting concepts such as the SPM, SRM, KPIs, category workbench, incident reports, action plans, should cost modeling, third-party risk management and spend analysis that directly or indirectly provide estimated measures and behavior patterns of suppliers within a quadrant.
Author: Apurva Malewar