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July 4, 2023
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Supplier segmentation merely refers to categorizing or segmenting vendors by analyzing their service and products, so that they can be suitably monitored and managed, and prioritized.
There are different ways in which this can be done, and there is no single method that can be uniformly applied to all models of business.
The complex nature of segmentation necessitates the use of multidimensional matrices in order to account for every possible risk factor and distinct feature.
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The supplier segmentation matrix is drawn up mainly for tasks like negotiating purchase terms and rationalizing the supply base.
By performing segmentation, you can understand the level of dependence on specific vendors, and the expense involved in changing your vendors.
However, there are many other factors to think about like market conditions, performance potential, competition, and others, which make segmentation challenging.
As you work with different vendors, over time, you will become familiar with the characteristics or peculiarities of the important suppliers.
One of the popular approaches is analyzing the supply base by expense or spend, and risk.
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The spend factor refers to focusing on your suppliers essential to your business process, and on whom you are willing to spend time and money.
The risk factor refers to how much potential risk your business has if the supplier fails with regard to product quality, delivery time, issues with warranty, poor service, and so on.
A certain amount of risk is to be expected for any business in every aspect, even vendors.
So what you need to do is recognize the critical risk factors of suppliers that can hamper your business processes; you can use this to evaluate performance and to define preventive measures that can be practically implemented.
Basically, you should aim at identifying which suppliers are the most strategic or critical to your business.
A strategic supplier is one who delivers a value-adding service or product to your business.
If they fail, it is likely to affect your operations, customers, and even your infrastructure negatively.
When your critical supplier doesn’t deliver as expected, you can end up with business disruption, or unhappy customers.
Vendors can be both strategic and critical; segmentation matrices help to kick-off a meticulous process and intra-organizational discussion to identify relevant suppliers who need to be closely looked at, monitored, and so on.
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Vendors who are essential to your business need to be given more attention.
When you categorize all your suppliers with pre-defined criteria, you can determine how much attention you need to pay them in order for them to keep delivering high-quality products and service.
It can also deliver insights about your vendor base, and tell you the extent to which different vendors are essential to your business operations.
This will also help in creating a better working relationship with your important vendors at every level.
Finally, it becomes easier to identify the level of risk to which your business is potentially exposed by creating a vendor segmentation matrix.
If you depend on just one source to supply certain essential goods or services, and that source fails to fulfil your needs, you may have to stop production or sales, and turn customers away.
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Depending on what product or service the vendor supplies, you can categorize them into any of the four quadrants. This approach or matrix is called the Kraljic Matrix.
But the segmentation can also be on the basis of:
Considering these factors, you can categorize your suppliers by:
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How much do you spend in a year with a specific vendor?
What is the growth of spending year on year?
Maybe you have supplier without a huge spend, but you can plan to widen their scope and put them on the list of potential strategic partners.
This will determine vendor categorization, supply plans, and strategies of sourcing.
You must consider:
Looks at vendors whose products and services let you improve the shopping experience for customers or enhance your customer base substantially, must be prioritized as strategic partners.
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Let’s now look at 3 models of supplier segmentation.
This is a classic model and it aims to identify the external and internal strategic importance of your strategic suppliers so that you can modify your strategies.
It also aims to help businesses that are undergoing transformation that is economic, technopolitical and environmental in nature.
Strategic suppliers deliver great value, and help to attain long-term goals; they offer industry expertise, manage costs effectively, and may even exceed expectations – and any vendors who fit this bill must be carefully evaluated.
Collaborative or leverage vendors means you leverage purchase volumes with them, as they affect business process financially, by concentrating on overall cost of ownership and reasonable margins.
Then you have custom vendors who supply product that are highly dependent on customers – this means in the event of failure, you could face a huge bottleneck, and run the risk of interrupting supplies: critical element of monitoring performance.
Commodity suppliers are easily replaceable, since their offerings are not very critical to your business process, and necessitate less action.
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The terms in this matrix are vague, and categorizing the vendors is also not easy.
It’s difficult to quantity risk and impact on profit.
You can spend inordinate amounts of time in defining and quantifying these concepts when you want to categorize for monitoring and measuring performance.
With a single matrix you can display several dimensions to manage and develop suppliers, where the matrix segments vendors depending on their importance – considering levels of commitment and plans to develop relationships with customers.
You are expected to identify how many resources and how much time you need invest in developing and managing supplier relationships together with the procurement expertise levels.
The matrix includes several dimensions like investing in the relationship, strategic importance, focusing on TCO vs supplier dependence, criticality, and difficult of changing vendors.
These actions will differ depending on the type of supplier you select.
This matrix also offers guidelines to focus on managing and measuring supplier performance for various supplier segments, and tackles the issue of requisite experience of supply management teams.
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Here, the strategic and custom vendors are the riskiest, and necessitate meticulous monitoring as they are essential to the business.
Investing in relationships and precise assessments are essential for collaborative and strategic suppliers and involves more exact industry expertise to manage strategic suppliers; custom suppliers need more experienced professionals as for performance management as their failures can cause complete business disruption.
The importance of strategic supplies is showcased through critical values, involvement in business growth, and relationship value.
Collaborative suppliers impact the business operationally and financially and hence it’s imperative that they improve continuously.
It is critical to measure performance for these elements.
Commodity suppliers impact businesses the least if they fail but could have some effect on customer satisfaction, while custom suppliers’ performance has to be monitored as supply continuity is crucial.
To measure performance, you need to focus on the fundamentals of operational performance.
For more strategic relationships between your business and vendors, supplier performance depends more on non-contractible sectors.
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This matrix categorizes your vendor base to determine the ideal level of engagement.
This helps to assign resources for sustaining business processes.
The different levels in this matrix are Strategic or Preferred, Emerging or Develop, Maintain, Directed Suppliers, and Eliminate.
Some vendors could be recommended by customers, and in such cases the spend is negotiated by them, leaving you with no leverage.
Suppliers that don’t maintain expected performance levels or don’t have the necessary capabilities should be eliminated from the supplier base.
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Financially stable average suppliers who don’t stand out in any way
Poor quality, delivery, high cost, etc., and inability to improve their performance, are eliminated.
Using the supplier segmentation matrix is a critical step in designing and deploying a strong business operation. The matrix helps in identifying the elements driving critical value, determine the levels and frequency of appropriate engagement levels, and more.
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Tranquil ERP has a robust procurement management module with a rich Supplier Management feature that will take care of identifying your best and most reliable suppliers so that you don’t have to. This will go a long way in helping you craft a strong vendor and procurement strategy so that you can cut costs, have reliable supplies, and boost your profitability.
