Guide to Supplier Segmentation

by Procurement Freelancers Team

Proper supplier segmentation is crucial for a business. It can play a significant role in improving the value of your business supply chain. Correct supplier segmentation can help drive and deliver increased value for your supply chain. Many businesses tend to segregate the suppliers based on the total amount of spending associated with them. The primary reason behind such an approach is the basic mindset that instigates the thought process like, ‘more the spending, better value does the supplier holds for the organization’.

But that said, is it justifiable to label a supplier as a strategic partner for the business based on the total spending? Certainly not! This is where the concept of supplier segmentation arises. According to supplier development engineer experts, performing proper supplier segmentation certainly helps in determining the role of a supplier based on the deliverables and the value addition commitment to end customers.

What is Supplier Segmentation?

You need to understand one basic fact- each supplier is unique in its way. There may be similarities but some differences will surely impact your business in one way or the other. This is the reason behind the need for supplier segmentation that points towards the need to divide suppliers into different segments or groups.

In simple terms, supplier segmentation is simply the approach to divide suppliers into different segments or groups based on behavior, characteristics, and needs. The process involves:

  • Segregating suppliers
  • Reviewing the different supplier segments
  • Preparing teams for supplier segmentation
  • Measuring the opportunities with suppliers
  • Developing service and product agreements
  • Performance monitoring and measuring
  • Implementing agreements
  • Generating reports based on cost and supplier profitability

Supplier Segmentation – Types

Supplier segmentation is usually classified into four types:

  1. Commodity
  2. Strategic
  3. Standard
  4. Key

That said, USA procurement freelancers often classify supplier segmentation based on the following additional factors:

  • Amount of money spent
  • Service/product complexity
  • The depth of supply base
  • The volume of supplied services and goods

Focusing on these attributes, suppler segmentation can be carried out by judging the following factors:

Annual expenditure with the supplier

This is important and must be taken into consideration. At the same time, it is equally necessary to focus on the YOY spend growth to focus on those suppliers with whom you want to have additional scopes (although they may not have notable spend on a given year). There can be a chance of considering such suppliers as your business’s strategic partner.

Collaboration and innovativeness

Does the supplier offer anything unique to the business? Can there be customized services available to meet the demands?

Is there any breakthrough offering with the supplier? Collaboration with a specific supplier only makes sense if there is a chance to create a new market segment, capture market share, or even trying to step into a new market.

The risk factors to look upon

Well, the risk factor is associated not only with the supplier segmentation but also with the supply plans and sourcing strategies. According to supplier development engineer experts, risk factors are segregated under two categories:

  • Actual failure (where past events or incidents are analyzed for determining the overall impact they might have on the business)
  • Potential failure (where a certain failure to supplier services or products are used for assessing the amount of impact it had on the business)

The impact caused to customers

How the relationship with the customers impacts the services and products offered by the suppliers play a significant role in identifying strategic partners. This is a very important step and must be carried out carefully.

The Importance of Supplier Segmentation

Through supplier segmentation, it becomes easier to locate suppliers who have a greater positive impact on the organization. This approach allows organizations to identify suppliers who have a greater level of engagement with the business and may prove to be an important asset to the organization in the future. Using different strategies by USA procurement freelancers, the right kind of attention can be offered to the suppliers to ensure better commitments towards services and product delivery.

Supplier segmentation is also crucial since it plays a crucial role in delving deeper into your business supply base and identifying the immediate needs and vendors that are more important to the business. It helps in creating a better relationship with all the key vendors from different levels, be it transactional, operational, or executive.

Final Words

Supplier segmentation helps in making a business follow a more organized route. The approach helps in identifying risk areas for the business. It can also help in identifying the quality of suppliers associated with a business and how to manage proceedings. Supplier segmentation helps in identifying a positive connection between the supplier and the customer. Are they being fulfilled? Is the connection reliable and properly manageable? Experts say it can be but through the best of approaches.

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