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Supplier Segmentation

Supplier segmentation

Table of contents:

What is supplier segmentation?

Supplier segmentation is a process of differentiating the company's supplier base in terms of the impact each individual vendor has over your organization. In doing so, procurement professionals will be in a better position to determine the level of engagement each supplier needs so as to make more effective use of their resources.

Suppliers can be segmented by four different criteria as follows:

1. By Spend

The annual spend, as well as the year-over-year spend growth, should be taken into consideration when segmenting suppliers.

2. By Innovation/Collaboration

This can refer to either the specificity of the offer such as if the supplier is offering a customized or unique product. It can also refer to a breakthrough offering such as if you're working together with the supplier to create a new market segment, capture a market share, enter a new market, etc.

3. By Supplier Risk

This type of segmentation can be further divided into potential and actual failures. Potential failure segmentation can help assess the magnitude of the impact caused by a supplier's failure. Actual failure segmentation looks at past incidents to determine the effect they had on your business success.

4. By Customer Impact

Suppliers whose products or services can enhance your customer base or their overall experience with your brand. These suppliers should be considered strategic partners.

What is supplier segmentation software?

Supplier segmentation tools are widely used in procurement nowadays. They greatly streamline supplier segmentation by automating the entire process. Depending on what type of segmentation, be it by spend, risk, customer impact, or innovation/collaboration, the automated system will pre-allocate your suppliers into different tiers.

Suppliers can then, further be reallocated, as needed, based on other qualitative criteria selected by the user. For example, a supplier will be automatically allocated based on annual spending into three main groups such as transactional, important, and strategic. They can further be divided based on customer impact and/or supplier risk.

By using a supplier segmentation application tool, businesses will ensure that all of their suppliers are allocated to the right tier and will not be duplicated.

Main benefits of vendor segmentation solutions

As the Covid-19 pandemic has shown, the integrity and well-functions of supply chains are critical to the success of any business, regardless of industry. If the supply chain breaks down, the company and its customers will only stand to suffer.

At the end of the day, supply chains depend heavily on efficiency and accuracy. When things don't run smoothly, your operations can grind to a halt, your outbound orders are delayed and your customers become disappointed and start looking elsewhere to fulfill their needs.

By coordinating inbound orders and their distribution, companies can stay ahead of any potential disruptions. And it's by working together with suppliers to improve and perfect their order fulfillment success rates. However, this can become quite time-consuming.

It's, therefore, important to focus your attention on where it's most needed and understand when and where to push a vendor that's not performing to your needs and expectations, or when it's time to find an alternative. When it comes to supplier segmentation, there are three main benefits to consider:

1. Vital Suppliers Require a Higher Degree of Engagement

By classifying each supplier based on your pre-agreed criteria, you will be able to decide on the exact level of attention and engagement you need to provide each vendor so that you ensure the optimum level of service they offer in return.

2. Further Insights Into Your Supplier Base

Supplier segmentation will also provide you with additional insights into how important is each vendor in regard to your business operations. This allows you to develop closer working relationships with key suppliers at all levels of the organization such as transactional, operational, and executive.

3. Identifying the Level of Risk Exposure

Supplier segmentation will also determine the exact level of exposure to risk your company is in. Many organizations, for example, depend on a single source of supply for their critical goods and services. If for whatever reason, that source is unable to fulfill its overring, your company will also be unable to satisfy its own customer down the supply chain.

Other benefits of supplier

Aside from the main advantages of identifying the level of risk exposure, gaining additional insights into the supplier base, and providing increased visibility into your vendor relationship priorities, supplier segmentation can also benefit organizations by:

1. Establishing Clear Guidelines for Different Suppliers

With different vendors falling within different tiers, you will be in a better position to define clear guidelines and expectations for each individual one.

2. Establishing Better Companywide Definitions

By having a more comprehensive view of your supplier base, you will also be in a better position to set common definitions across your entire organization.

3. Improve Resource Allocation Across Your Entire Supplier Base

By knowing which of your suppliers are more critical to your organization and which aren't, you are better suited to know where your resources should be focused on more.

4. Motivating Vendors to Become Better

With more important suppliers receiving more of your time and resources, the entire supplier base will be motivated to become better and advance through the tiers.

5. Identifying Opportunities for Supplier Base Optimization

By having a bird's-eye view across your entire supplier base, your organization will also be in a better position of identifying which areas need improvement so as to enhance the overall optimization of all of your vendors.

When to use a supplier segmentation software

Supplier relationship management (SRM) activities shouldn't be linked only to category management requirements. They should also be linked with all supplier-facing processes as well. These need to be coordinated and improved on a continuous basis.

For many organizations, this is the default way by which they manage their supply base and use it to coordinate interactions throughout the entire supplier lifecycle. In this framework, sourcing becomes simply a subprocess. Nevertheless, this can quickly become disadvantageous, especially if the implementation is not tightly managed.

It's by working closely with their strategic partners and suppliers that businesses can unearth the most value. This should be the main objective of every sourcing and procurement department. Yet, given the limited amount of time, resources, and other competing priorities, procurement teams often have to focus their attention and efforts on more pressing matters.

Achieving the right balance between the time spent and potential opportunities will require a carefully laid out supplier segmentation plan. This model should not only consider traditional characteristics such as the amount spent or business criticality but also the overall risk profile, potential for collaboration and innovation, as well as their customer impact.

The aim of supplier relationship management is to work together with suppliers as a means of reducing costs and responding to changing market conditions. It's also about driving innovation and making processes more efficient overall.

It's, therefore, essential for SRM teams to better understand their company's objective and whether their current suppliers' capabilities align with theirs. To prioritize these efforts, the procurement department needs to implement a comprehensive supplier segmentation strategy.

7 Steps for Effective Sourcing

How to implement the software

The first step towards implementing this process is to analyze your current situation. The purpose of this initial phase is to accurately determine where you stand, how your current supplier base is performing, and what necessary steps need to be taken in order to improve efficiency, build stronger vendor relationships, and streamline processes.

The next viable phase is to decide on a pilot project that will be able to satisfy all of your goals established in the previous step. Lastly, you will have to choose a procurement manager and/or team capable of seeing the project to fruition.

Companies need to build strong and sustainable relationships with their key suppliers in order to obtain the best possible value. Strategic vendors will need to be given special attention as opposed to others.

By dividing vendors into groups based on various supplier segmentation criteria such as spending, innovation, or risk, you will be able to achieve this task. There are two strategic supplier segmentation methods that this can do.

The Matrix Approach - This strategic supplier segmentation model is based on plotting to spend alongside value. The value is defined by the importance each supplier provides for your business continuity.

As a general rule of thumb, strategic vendors typically make up between 10 to 15 percent of a supplier base. Known as the Kraljic Matrix, this approach can be customized to provide a more detailed sub-group within each quadrant.

The Pyramid Approach - This second strategic supplier segmentation model is usually employed by smaller and mid-sized organizations.

Typically divided into three tiers as Strategic, Important, and Transactional, the pyramid approach is a more straightforward way of grouping suppliers based on their importance. Likewise, the higher the tier in the pyramid, the more value supplier have and the smaller their number is.

How Prokuria can help, why is different?

One of the most seamless, accurate, and intuitive ways of segmenting suppliers is by using supplier management software like Prokuria. If your company doesn't have the time to properly segment its supplier base, Prokuria will enable you to do it at only a fraction of the time and cost.

With its easy-to-use interface, Prokuria is designed to minimize as many manual processes as possible, freeing up organizations' time and resources to focus on other key areas of the business. And since it's a cloud-based solution, Prokuria doesn't require investing in expensive hardware or software to operate.

Give us a try and see how easy it is to start segmenting your suppliers. You can create an account here, sign up with no credit card required!

We've got your back if you run into any questions along the way - just book a free demo and we'll show you how easy it is to evaluate your suppliers with Prokuria!


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