A Guide to Superior Supplier Segmentation Improvements

Supplier connections resemble personal ones. Each enhances daily living and demands various amounts of care to maintain. Some suppliers are like best friends—your business can’t exist without them. Segmenting suppliers helps companies evaluate their relationships. With a supplier segmentation model, you can learn a lot about your suppliers. It shows how much you spend, how much you depend on each supplier, and how much they support your strategic sourcing goals.

Supplier segmentation basics are covered in this post:

• What’s supplier segment?
• Benefits of supplier segmentation
• Supplier segmentation steps
• Implementing supplier segmentation best practices
• How Kraljic Matrix segments suppliers
• Software enhances supplier segmentation

What’s the supplier segment?

Supplier segmentation groups suppliers by spend, risk, or business value. Companies can better manage supplier relationships and spending by grouping.

Companies can build high-value supplier relationships by segmenting suppliers. While avoiding low-value relationships, it saves resources.

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What are its benefits?

The procurement and finance teams can contextualise their supplier spend via supplier segmentation.

Supplier segmentation has organisational benefits:

• Efficiency increases when procurement teams focus on specific suppliers and categories.
• Data aids buyers in price negotiations and risk management.
• Supplier-type spending tracking helps finance teams identify cost factors.
• Supplier practice is continuously improved by procurement.
• Business continuity is maintained during supply chain disruptions.

The steps to supplier segmentation

Time and effort are needed to segregate suppliers for partnership evaluation. Both quantitative and qualitative data regarding each supplier connection are used. Segmentation may take time depending on the number of vendors in your supply base.

Consider staged segmentation, focusing on high-spend sectors or key suppliers. These areas generally yield cost reduction and resource optimisation wins.

Effective supplier segmentation requires data gathering, analysis, criterion selection, and implementation.

• Data collection: Gather supplier data. Your data should include financial information like spend and payment history and qualitative data like product and service quality.
• Data analysis: Analysing data After collecting data, analyse it for patterns and trends. This stage helps you identify spending patterns and savings potential. It will also discover the best-value suppliers of mission-critical services to the organisation.
• Choosing criteria: After analysing the data, choose provider grouping criteria. Supplier segmentation considers spend, risk, and strategic importance. After choosing your criteria, organise your suppliers.
• Implementation: Utilise supplier segments. This requires adapting your sourcing and procurement strategy to the new supplier categories. Develop clear communication strategy for each supplier segment so your organisation knows how to communicate with them.

Some of the Best Practices

When gathering and analysing supplier spend data, consider these recommended practices to improve supplier segmentation:

Consider the Pareto Principle: The Pareto Principle (also known as the 80/20 rule) states that 20% of suppliers account for 80% of your cost. Starting from scratch with supplier segmentation, focus on big-ticket providers. These few key suppliers likely do most of the segmentation. They may also offer the most cost optimisation.

Holistic approach: Supply management can miss critical context by focusing exclusively on the bottom dollar. Know each supplier’s value, including delivery, contract compliance, quality, and problem-solving.

Review performance regularly: Segmentation requires ongoing evaluation. Consider segmentation and supplier performance management ongoing processes with ongoing results. Supplier usage, terms, and overall value fluctuate over time, thus your supplier management programme should reflect this.

Supplier segmentation using Kraljic Matrix

Optimising your supply chain requires intelligent procurement. Many procurement teams utilise a Kraljic Matrix to chart a company’s supplier relationships.

Peter Kraljic created this 1983 tool to help procurement identify major suppliers, analyse supplier performance, and manage supply relationships.

The Kraljic Matrix divides supplier connections into four categories to assist firms manage them. Using those four categories, a matrix is created. The matrix contextualises suppliers by business impact and supply risk.

Classify each supplier vendor into one of four categories. The matrix shows your key vendors and those who need improved negotiating and performance management.

Each category’s management strategy depends on its importance and accessibility:

1. Leverage: These vendors offer beneficial yet low-risk products and services for your business. Other vendors offer leverage items or supplies, which boosts negotiation opportunities for better pricing.
2. Strategic: These parts and supplies can disrupt commerce. They may be single-source or complicated, making them hard to meet. Your company should prioritise strategic supplier relationships and may need high management involvement.
3. Non-critical: Risk and impact are modest for non-critical products. Reduce transactional goods acquisition costs by optimising prices and managing demand. Suppliers may offer new products or negotiate better profits.
4. Bottleneck: Items with limited commercial impact but unreliable supply. Bottleneck goods’ demand changes, therefore manage short-term supplies and eliminate long-term needs when possible.