- Performance Management Procurement
The use of Supplier Segmentation for supply base implies categorizing suppliers through analysis and prioritization process solely to allocate suitable resources, manage and monitor them. Unfortunately, no one supplier segmentation applies to every business model. Today, segmentation complexities require multidimensional matrices to address all associated peculiarities and risk factors.
So, What is the Supplier Segmentation Matrix?
The supplier segmentation matrix is created majorly for activities like sourcing negotiations and supply base rationalization. Typical segmentation exercises help define “how dependent your business operation is on a particular supplier(s)?” or “how costly or difficult it is to switching supplier?”.
Nevertheless, there are several other considerations like competition, performance potential, market factors, and other considerations that can add to segmentation challenges. Getting familiar with these attributes or characteristics of critical suppliers can be attained while working with them. A typical approach is examining the supply base by “spend” and “risk.”
- The spend factor entails more concentration on critical suppliers to your business process and on whom you are willing to spend time and resources.
- The risk factor entails the degree of exposure your business has to performance failures from suppliers—for example, late deliveries, service failures, warranty problems, quality defects, and more.
While some risks are common, every business faces its specific types of threats in regards to suppliers. Concerning risk, the identification of vital supplier risk factors that can unfavorably affect your business process can be used for performance evaluations as well as in creating practical preventive actions.
The basic idea of a supplier segmentation matrix is the identification of all suppliers to be considered strategic or critical to the business.
“Strategic supplier delivers a product or service which adds value to a business, and if they fail, it impacts the customers, infrastructure, and operations.”1
“critical supplier delivers a product or service to a business such that if poorly done, either leads to no business operation or unhappiness amongst customers.” 1
Suppliers can be both critical and strategic, as they are not mutually exclusive. Segmentation matrices are mainly useful to initiate a thorough process and discussion within an organization to recognize relevant suppliers who deserve more attention, work, and close monitoring, rather than as a scientific undertaking.
Introduction to Negotiations Process
Basics of Inventory Management Course
Total Cost of Ownership & Serve
Below are 3 Types of Supplier Segmentation Matrix You Can Use to Classify Suppliers
1) Kraljic’s Classic Supplier Segmentation Model
Kraljic’s portfolio model is a classic supplier segmentation model whose main goals are to identify the strategic weight of strategic suppliers, both externally and internally, to aid adapt your business strategies.2
The Kraljic’s Classic Supplier Segmentation matrix aims to guide businesses facing economic, environmental, and technological transformation. 2
- Strategic suppliers, as earlier highlighted, are vital to attaining high impact and value concerning customer’s business and achieving long-term goals. For instance, strategic suppliers can deliver industry expertise, exceed contractual expectations, and actively manage costs. Any supplier considered as a strategic supplier are prime candidates for performance evaluation.
- The term “leverage supplier,” also called collaborative suppliers, implies leveraging purchase volumes with suppliers who can have a financial impact on a business process via a focus on overall ownership cost and decent profit margins.
- Bottleneck suppliers, also called custom suppliers, are not strategic but provide supplies that have a high dependence on the customers. Thus, such suppliers can generate a supply bottleneck if there is a supply failure or problem. They also present a potential risk of supply interruption, which are essential factors in performance monitoring.
- The noncritical suppliers, also called commodity suppliers, are the easiest to replace as their products and services are not considered critical or high risk to the business process. They also require less attention, other than focus on operational efficiency when engaged in a deal.
The difficulty with Kraljic’s Classic Supplier Segmentation matrix is the terms are imprecise, i.e., the categorization of suppliers is hard. Also, there are no guidelines to help quantify factors like risk and profit impact. The time spent in defining and quantify these concepts may not be worthwhile, especially when segmenting for performance measurement and monitoring.
In terms of supplier management and development, it is impossible to show multiple dimensions using one matrix. In this case, the matrices segment suppliers, according to categories of importance. For instance, the matrix covers suppliers’ level of commitment and specific strategic plans for building customer relationships.
For example, suppliers’ level of commitment to the customer (in Table 1) analyses which suppliers are committed to customers and value. A committed relationship, open communications, and trust are factors that help reduce risk.
Table 1. Supplier Commitment Matrix
| Low Commitment | High Commitment |
| Low Actual Commitment | Maintain | Plan for Improvement |
| High Actual Commitment | Caution | Maintain |
For supplier characterization matrix (Table 2) covers the characterizing suppliers based on product development. It exclusively covers how suppliers can contribute to improving the product and potential redesign options.
Table 2. supplier characterization matrix
| Low Spend | High Spend |
| High Design Input | The target for a redesign for the standard item | Savings through design Input |
| Low Design Input | Caution | Maintain |
Another supplier characterization matrix (for spend, Table 3) characterizes attention needed in terms of spend and risk. Where the risk is high, and the spend is low, more care is required in the supplier category. In the case of high spend, there’s a need for a relationship/partnership. Low-risk, high-spend suppliers entail less focus on the relationship and more on contract terms, as it is usually not worth it.
Table 3. supplier characterization matrix (spend)
| Low Commitment | High Spend |
| High Risk | Special attention | Partnership |
| Low Risk | Transaction | Contract |
2) Segmentation for Supplier Performance Management Actions
For performance management, businesses are expected to address the number of resources and time to invest in the development and management of supplier relationships alongside the procurement expertise level.
The supplier management matrix (in Table 4) incorporate multiple dimensions like an investment in the relationship, strategic importance, focus on Total Cost of Ownership (TCO) set against dependence on the supplier, criticality of the supplier, and switching difficulty. These actions vary in the type of supplier you choose.
The supplier segmentation matrix above also delivers general guidelines expected for focus on supplier performance management and measurement for collaborative, commodity, custom, and strategic supplier segments. This supplier segmentation matrix also addresses the experience level required by supply management personnel.
In Segmentation for Supplier Performance Management Actions, “custom” and “strategic” suppliers in any business operation often holds the highest risk and require monitoring. Nevertheless, the performance of “custom” suppliers require monitoring because they are critical to the business. Also, they are not classified as cost reduction prospects, as they generally involve less detailed performance monitoring and measurement.
Investment in relationships and more accurate evaluations are vital for “collaborative” and “strategic” suppliers. It entails more specific industry expertise in the management of strategic suppliers and less overall experience for commodity suppliers. For the custom supplier, it requires more experienced personnel to manage its performance, as faults can lead to a total business shutdown.
- The emphasis with strategic suppliers is highlighted through vital values, relationship value, and contribution to business growth.
- Continuous improvement is also essential for collaborative suppliers as they have a financial and operational impact on the business. The use of performance measures for financial and operational roles is considered vital.
- Custom suppliers offer continuity of supply with service levels and operational performance measures deemed useful.
- Commodity suppliers feature the lowest impact on business operations but can sometimes affect internal customer satisfaction.
For performance measures, the focus is typically on operational performance basics. For relationships with more strategic and partner-like connections amongst business and supplier, the more supplier performance hinges on non-contractible areas.
3) Supplier Segmentation Based on Relationship & Potential
This supplier segmentation matrix employs the process of segmenting the supplier base to establish a suitable engagement level for suppliers. The level definition helps in resource allocation required to sustain the business process. The different levels highlighted in the Supplier Segmentation Based on Relationship & Potential include Preferred (Strategic), Develop/Emerging, Maintain, Directed Suppliers, and Eliminate/Exit.
Additionally, the business requirements and Segmentation vital to this category strategy are further explained using the different headings (Definition, Benefits, Prerequisite Guidelines, and Supplier Criteria (Ideals)) in Table 5.
The Supplier Development Framework
Table 5. Supplier Segmentation Based on Relationship & Potential
| Preferred (Strategic) | Develop / Emerging | Maintain | Directed Suppliers | Eliminate / Exit |
Definition | A supplier that has demonstrated strong and consistent performance for at least 24 months, and have the potential to grow in line with business needs. | A supplier that has been evaluated for a unique value proposition (technical, cost, or supply improvement opportunities) | Legacy suppliers with an acceptable levels of performance. Resourcing may be prohibitive due to tooling or other issues. Not strong enough to be considered for future business | A supplier that has been ‘prescribed’ to us to use from a customer. Spend with such suppliers is negotiated by the customer; therefore, you may have no leverage. | A supplier that does not maintain an acceptable level of performance lacks the required capabilities Action is underway to remove all business from the supplier as soon as is possible for |
Benefits | ..to Supplier | - Buyer willing to extend into longer-term agreement’s to provide stability & allow greater planning horizons
- Joint product development opportunities
| - Candidate for proactive supplier development activities
- Access to new quote on fresh bids and technology roadmaps
| | | |
..to Buying Company | - ‘Full-Service Supplier’ concept..ability to:
- Provide design capabilities
- Test and validation services
- Increased value to product
| - Technology Enhancements
- Growing future supply base potential
- Access to supplier technology roadmaps
| | | |
Prerequisite Guidelines | Before achieving ‘Preferred’ classification- Commodity Manager collaborates with key stakeholders such as Operations, Quality, Product Engineering, Supplier Quality/Development to ensure alignment
- At least 24 months of performance
- Must meet all Supplier Performance KPI
- Strong Financial Position
- Strong Leadership and Management
| Before achieving ‘Develop/ Emerging’ classification- Commodity Manager collaborates with key stakeholders such as Operations, Quality, Product Engineering, Supplier Quality/Supplier Development to ensure alignment.
- Appropriate certifications are in place
- Process audit performed by a technical expert using specific process audit
| - Average suppliers that do not distinguish themselves in any particular way.
- Financially stable
| | - Has unacceptable performance in delivery, quality and cost.
- It is set to be eliminated due to their inability to improve their OTD, PPM, and/or cost performance.
|
Conclusion
The use of the Supplier Segmentation Matrix is an essential step in designing and implementation a robust business operation. The types highlighted above can find usefulness in most organizations having a wide range of attributes and priorities. With the aid of Supplier Segmentation Matrix, businesses can identify key value drivers, define suitable engagement levels and frequency.
References:
- Bullington, Kimball, Ph.D., Supply Base Segmentation, Middle Tennesee State University, Smart Ideas, ISM Nashville
- Kraljic, P.,”Purchasing Must Become Supply Management,” Harvard Business Review, 1983, 61(5), p.111.
- Gordon, R. Sherry, 2008, Supplier Evaluation and Performance Excellence, J Ross Publishing, USA.
FAQs
The basic idea of a supplier segmentation matrix is the identification of all suppliers to be considered strategic or critical to the business. “Strategic supplier delivers a product or service which adds value to a business, and if they fail, it impacts the customers, infrastructure, and operations.”
What is a supplier matrix? ›
One of the core tools in operating model work is a supplier matrix. The matrix helps clarify why some activities are done in house and others are subcontracted or bought in. It also identifies those suppliers with whom the organization needs to have a carefully designed collaboration.
What are the three different types of supplier relationships? ›
The three levels of involvement are:
- Vendor — These relationships are primarily transactional. ...
- Strategic Alliance — Strategic alliances are more entwined. ...
- Partnership — In partnerships, both parties work closely together to customize their business strategies to produce positive results.
Different Types of Vendors
- B2C (Business to Consumer) The B2C type of vendor sells directly to the consumer. ...
- B2G (Business to Government) The B2G type of vendor sells to the government. ...
- B2B (Business to Business) A B2B vendor is one that sells primarily to other vendors.
ITIL describes four categories of suppliers:
- Strategic Suppliers. These are suppliers that provide goods and services that are a key aspect of the purchasing organization's overall delivery of services. ...
- Tactical Suppliers. ...
- Operational Suppliers. ...
- Commodity Suppliers.
Supplier classification and segmentation involves dividing suppliers within a product or service portfolio into subgroups, based on defined criteria, to manage them more effectively. Gain visibility to determine the right mix of suppliers, best serve your business objectives, and reduce your overall supply risk.
What are the four 4 key quadrants in the Kraljic Matrix? ›
The quadrant four quadrants are: Strategic Items, Leverage Items, Bottleneck Items and Non-Critical Items.
How many categories are there in Kraljic Matrix? ›
Context in source publication
The result is a 2x2 matrix and a classification in four categories: bottleneck, non-critical, leverage and strategic items, see figure 1. Each of the four categories requires a distinctive approach towards suppliers. ...
What is a supplier segmentation? ›
Supplier segmentation is the process of categorizing suppliers into various categories in order to allocate limited resources to manage them efficiently. It's a vital component of supplier relationship management (SRM) strategy.
What is Kraljic matrix in procurement? ›
The Kraljic matrix is a method for classifying and analysing the purchasing portfolio in order to guide the procurement strategy of companies. It is a tool for managing item categories for a company in relation to the market.
Why is supplier segmentation important? Suppliers who are vital to your organization need a higher level of engagement. By classifying each of your suppliers using pre-agreed criteria, you can decide upon the appropriate level of attention needed to ensure that they deliver superior service/products.
What are the three basic components of supplier relationship management? ›
Supplier relationship management comprises of three important steps: supplier segmentation, supplier strategy development, and supplier strategy execution.
What are the three types of supply chain collaboration? ›
3 Types of Collaborations in Supply Chain Management
- Transaction Integration. Level one involves computerization of general business activities and transactions. ...
- Supply Chain Management Information Sharing. ...
- Strategic Collaboration.
8 key supplier relationship management strategies
- Segment your suppliers. ...
- Treat suppliers like partners. ...
- Examine supplier experience. ...
- Capitalize on technology. ...
- Make SRM an organizational priority. ...
- Plan for, then handle disruptions. ...
- Be adaptable about your RFP. ...
- Show you mean it.
There are many different supplier management activities, but some of the most common include:
- Evaluating and selecting suppliers.
- Developing and maintaining supplier relationships.
- Negotiating contracts and pricing with suppliers.
- Managing supplier performance.
- Resolving issues with suppliers.
New findings of a multi-year analysis of suppliers to Fortune 1000 companies, conducted by CVM, indicate that there are approximately 4.9 million unique suppliers in use by Fortune 1000 companies.
When selecting a supplier What factors should be considered? ›
The 6 most important factors to consider when selecting a supplier for your project
- Do the supplier's goals align with your own? ...
- Is the supplier experienced? ...
- Does the supplier claim to be flexible? ...
- What type of product or service quality does a supplier provide? ...
- Will the supplier bring value to the project?
The supplier is defined as a business or person that make goods available to another business or service. Suppliers are known as the first link in the supply chain, forming only B2B relationships and providing goods to manufacturers, in rather large quantities.
What is a key supplier? ›
A Key Supplier is one rated as important enough to the organisation to warrant regular and sustained monitoring to check its service delivery performance across: Key Contracts. Its overall viability, including financial. The nature of its risk profile under changing business circ*mstances.
What is Vendor classification in SAP? ›
SAP provides standard Functionality in Vendor master to classify the Vendors according to Business needs. The below is the path to maintain the Classification in the Vendor Master. Configuration steps for Vendor master Classification. We can utilize SAP Class & Method Functions to configure Vendor Master Classification ...
Supplier lifecycle management is an end-to-end procedure of managing external suppliers in a transparent and organized way. Third-party suppliers are major stakeholders in improving your supply chain efficiency. This process aims at minimizing disruptions arising from external forces.
What is supplier lifecycle performance? ›
SAP Ariba Supplier Lifecycle and Performance provides comprehensive tools to better manage suppliers. It helps you reduce onboarding and qualification cycle time and scale compliance for your entire supply base. The solution capabilities are designed to: Provide you with a single, up-to-date supplier record.
What are the 4 types of risks in the supply chain? ›
Supply Chain Risks Continue Mounting
Most of the risks that could disrupt your operations fall into four broad categories: economic, environmental, political and ethical.
What are the four types of buy that are described by the purchasing portfolio matrix? ›
Answer: d. Analyze, source, bid/negotiate contract, procure, reconcile and pay.
How does Kraljic matrix work? ›
The Kraljic Matrix works by mapping the profit impact of a product on one axis and your supply risk on the other. It essentially provides a portfolio management approach to managing an organization's many suppliers.
What is supplier preferencing model? ›
The supply preference model is a strategic procurement tool. It is also called supplier's preference model, meaning, assessing how suppliers view the company. The Supply Preference Model PowerPoint Template provides the 5-slide presentation to demonstrate attractiveness of company towards suppliers.
Who invented Kraljic Matrix? ›
The Kraljic Matrix is one of the most effective ways to deliver accurate supplier segmentation. In 1983, Peter Kraljic devised a means to segment the supplier base in the article in HBR. In this, he argued that supply items should be mapped against two key dimensions: risk and profitability.
What is supplier development strategy? ›
What Is Supplier Development? Supplier development is a business strategy that encourages working closely with diverse suppliers to help boost performance as well as drive continued growth. It involves embracing the expertise of the supplier and aligning it with the goals of the purchasing organization.
Which supplier segment has higher risk? ›
In Segmentation for Supplier Performance Management Actions, “custom” and “strategic” suppliers in any business operation often holds the highest risk and require monitoring. Nevertheless, the performance of “custom” suppliers require monitoring because they are critical to the business.
What is Bensaou model? ›
Bensaou's two-dimensional model identifies four relationship types: strategic partnership, market exchange, captive buyer, and captive supplier.
Bottleneck products/services are items that represent a relative limited value in terms of money but they are vulnerable with regard to their supply. Often bottleneck products/services can only be obtained from one supplier.
What is purchase Matrix? ›
In 1983, Peter Kraljic created a matrix called Kraljic portfolio purchasing model that could be used to analyse the purchasing portfolio of a company. This matrix helps a company gain an insight into the working methods of the purchasing department and how they spend their time on various products.
Why is it important to monitor supplier performance? ›
By measuring and monitoring supplier performance on an ongoing basis, companies can realize some significant benefits. Companies can avoid costly and potentially devastating supply disruptions.
What is supplier development in procurement? ›
Supplier development is working collaboratively with critical, strategic and high-potential suppliers to improve their capabilities and competitiveness in the areas of cost, quality, time and technology for the mutual benefit of both the customer and the supplier.
What is meant by supplier relationship management? ›
Supplier relationship management (SRM) is a business initiative that many companies undertake to build mutually beneficial relationships with suppliers. Well-designed SRM programs help companies to increase collaboration by identifying the right suppliers with whom to partner.
What is a supplier management framework? ›
A supplier management framework assists to manage a supplier's performance and relationship to help ensure best practice contract management and that all parties stay true to their obligations.
What is supplier engagement model? ›
A supplier engagement plan (SEP) documents the processes, systems and communication approaches put in place to ensure the highest levels of trust and accountability in all dealings with suppliers.
What are the stages of the customer supplier relationship? ›
This can be accomplished through a four-step process that includes acknowledging what has happened, identifying the causes of any problems, agreeing on and implementing corrective actions, and following up and maintaining the improved relationship.
What are three tools used to support planning and collaboration in the supply chain? ›
These are among the most important supply chain management tools.
- 1Shipping Status Tools. ...
- 2Order Processing Tools. ...
- 3Lean Inventory Tools. ...
- 4Warehouse Management Tools. ...
- 5Supplier Management Tools. ...
- 6Demand Forecasting Tools. ...
- 7Analytics and Reports Tools. ...
- 8Security Features Tools.
Synergy happens when the combined value of multiple companies is greater than the sum of those companies. Thus, as we rethink the supply chain, it's essential that we capture the collective value created when all companies in the chain work together in a harmonious and congruent manner.
Key benefits of supplier collaboration
Those benefits of participating in supplier collaboration include improvement in business performance, customer satisfaction, market share, and more revenue, while at the same time enhancing positive relationships with supply chain partners.
What are the types of supplier relationships? ›
The three levels of involvement are:
- Vendor — These relationships are primarily transactional. ...
- Strategic Alliance — Strategic alliances are more entwined. ...
- Partnership — In partnerships, both parties work closely together to customize their business strategies to produce positive results.
The study considered three types of buyer–supplier relationships; which are transactional, collaborative and strategic alli- ance relationships.
How do you build supplier relationships? ›
7 Tips for Establishing Great Supplier Relationships
- Consistent Communication. Any healthy relationship is founded on effective and constant communication. ...
- Your suppliers are not just vendors. ...
- Evaluate risks. ...
- Be a great customer. ...
- Be mindful of cultural differences. ...
- Understand your suppliers. ...
- Invest in technology.
The quadrant four quadrants are: Strategic Items, Leverage Items, Bottleneck Items and Non-Critical Items.
What is supplier classification and segmentation in SAP? ›
Supplier classification and segmentation involves dividing suppliers within a product or service portfolio into subgroups, based on defined criteria, to manage them more effectively. Gain visibility to determine the right mix of suppliers, best serve your business objectives, and reduce your overall supply risk.
Why is it important for product managers to effective supplier segmentation? ›
Supplier segmentation can also provide insights into your supply base regarding the extent to which each vendor is important to your business operations. This enables you to develop a closer working relationship with key suppliers at all levels (executive, operational, and transactional).
What is supplier preferencing model? ›
The supply preference model is a strategic procurement tool. It is also called supplier's preference model, meaning, assessing how suppliers view the company. The Supply Preference Model PowerPoint Template provides the 5-slide presentation to demonstrate attractiveness of company towards suppliers.
What is supplier segmentation? ›
Supplier segmentation is the process of categorizing suppliers into various categories in order to allocate limited resources to manage them efficiently. It's a vital component of supplier relationship management (SRM) strategy.
What is kraljic supply matrix? ›
The Kraljic matrix is a method for classifying and analysing the purchasing portfolio in order to guide the procurement strategy of companies. It is a tool for managing item categories for a company in relation to the market.
Supply Chain Risks Continue Mounting
Most of the risks that could disrupt your operations fall into four broad categories: economic, environmental, political and ethical.
What is Vendor classification in SAP? ›
SAP provides standard Functionality in Vendor master to classify the Vendors according to Business needs. The below is the path to maintain the Classification in the Vendor Master. Configuration steps for Vendor master Classification. We can utilize SAP Class & Method Functions to configure Vendor Master Classification ...
What is a supplier lifecycle? ›
Supplier lifecycle management is an end-to-end procedure of managing external suppliers in a transparent and organized way. Third-party suppliers are major stakeholders in improving your supply chain efficiency. This process aims at minimizing disruptions arising from external forces.
How do you manage suppliers? ›
Strategies to Improve Supplier Management
- Streamline supplier data from disparate sources to gain meaningful insights.
- Collaborate with suppliers to improve supplier relationship management.
- Monitor the suppliers' capabilities to feet current and future demands.
- Evaluate supplier risks and identify mitigating measures.
In Segmentation for Supplier Performance Management Actions, “custom” and “strategic” suppliers in any business operation often holds the highest risk and require monitoring. Nevertheless, the performance of “custom” suppliers require monitoring because they are critical to the business.
What is supplier development strategy? ›
What Is Supplier Development? Supplier development is a business strategy that encourages working closely with diverse suppliers to help boost performance as well as drive continued growth. It involves embracing the expertise of the supplier and aligning it with the goals of the purchasing organization.
What is supply positioning model? ›
The supply positioning model is a way to classify a spend portfolio based on risk and opportunity. The supply positioning model enables an organization to segment its supplies as per the pricing and vulnerability associated with the business - in an eventuality of supplier failure.
What is meant by supplier relationship management? ›
Supplier relationship management (SRM) is a business initiative that many companies undertake to build mutually beneficial relationships with suppliers. Well-designed SRM programs help companies to increase collaboration by identifying the right suppliers with whom to partner.
