Supplier Segmentation: Definition, Methods & Benefits

Not all your suppliers are equal. 

While some supplier relationships add immense value to your business, there are other suppliers that may not hold the same importance and hence, don’t require the same level of attention. 

So it makes sense to group them according to different criteria and that’s where supplier segmentation comes into play. 

What is Supplier Segmentation?

Supplier segmentation is the process of classifying suppliers according to their value addition, requirements, attributes, and behaviour.

What is Supplier Segmentation?

Supplier segmentation is the process of classifying suppliers according to their value addition, requirements, attributes, and behaviour.

Today, eCommerce businesses work with multiple suppliers that can range from tens to even hundreds that aid with their order fulfilment process. It’s not only impossible to treat every one of them equally but also futile. 

From providing the supply base to identifying the list of suppliers that need a higher level of engagement, supplier segmentation forms an integral part of supplier relationship management and ensures a closer working relationship with key suppliers. 

Benefits of Supplier Segmentation 

1. Efficient Supplier Management 

Effective supplier segmentation brings you one step closer to efficient supplier management. Segmentation data showcases the value generated from critical suppliers. This helps eCommerce businesses determine which vendors deserve a more collaborative partnership and increased time and investment. 

2. Innovation 

Innovation is one of the critical aspects of choosing a particular supplier. You have a few suppliers that are content with the products they sell and are pretty laid back with innovation. 

While you can continue sourcing products from them, you need to have at least another set of suppliers who primarily helps you drive innovation to your order fulfilment process. It is how you thrive and stay ahead of the curve. Supply segmentation highlights which relationships you should leverage to advance innovation. 

3. Reduced Costs

One of the primary goals of supplier segmentation is to optimise resources and spend economically on those that don’t add much value and make a substantial investment towards those that do. 

This results in allocating resources where they’re needed and saving costs at places that fail to generate the ROI. You can scrutinise the quality of the supplier output that impacts and contributes directly to the eCommerce bottom line. 

4. Service

A supplier’s performance is closely connected to the level of engagement, communication, and priority they receive from the buyer. Prioritising suppliers provides them with a better understanding of the strategic objectives of your business. This can go a long way in enhancing the overall service levels.

Ways to Segment Suppliers

1. The Kraljic Matrix Approach 

One of the most common ways to segment suppliers today is through the Kraljic Matrix approach which was developed by Peter Kraljic in 1983. The approach involves using a 2*2 matrix and categorising suppliers into four quadrants.

Let’s break this matrix into detail. 

The matrix categorises the suppliers into four categories based on their profit impact and supply risk (also known as high value/high spend factors). Risk comprises the likelihood of an unexpected event that has the ability to halt operations in the supply chain. The risks can range from multiple factors such as the business model, supply, geographic, and socio-political factors. 

The profit margins show how much you spend with the suppliers, how much innovation they drive in your organisation, and if they offer competitive pricing, etc. 

Leverage Items 

As the items provided by the suppliers have a high-profit impact but low risk, it can mean the items can be obtained from other suppliers but in terms of service, the suppliers are providing a high level of service with or without your involvement.

Strategic Items

If you would have to allot value to your supplier amongst the four quadrants, strategic suppliers are the ones who provide the most value and should ideally receive the most attention from you when it comes to supplier relationship management. Since they provide high-profit impact and have high risk, they have the potential to disrupt your supply chain if not catered to properly. 

Non-critical Items

They’re the complete opposite of strategic suppliers. With low risk and low-profit impact, this category of supplier provides little value to your supply chain. Ideally, they should take the least effort to manage. 

Bottleneck Items

While the bottleneck items have a low-profit impact, they have high risk, meaning, for the time being, they can prove to be very essential for your business. They’re the single source of your supply but they also don’t add enough value to your business. Hence, they play a mediocre role in your strategic SRM.

Whether you’re a brick-and-mortar store or an online store, this matrix helps you frame out your suppliers in a strategic manner that can be useful for your company’s bottom line. 

2. The Pyramid Approach 

If you have a smaller group of suppliers, you can opt for the pyramid approach for supplier segmentation. This approach divides the suppliers into strategic, important, and transactional. The strategic suppliers are at the top of the pyramid since these include collaborative partners that offer the most value to you. 

The important partners are at the middle of the pyramid and there are a few alternatives for the same. Lastly, transactional partners fall at the bottom of the pyramid and add the least value to your supply chain.

Best Practices in Supplier Segmentation

Share your Findings

Whatever your segmentation method is, it’s essential that you keep the internal and external entities in the loop with the supplier segmentation model. This way, they can understand all the touchpoints, ensure consistent messaging and give priority to the important suppliers.

Follow the 80/20 Rule

Just like how you use this module for customer segmentation where 20% of your customers bring 80% of your revenue, supplier segmentation works in a similar fashion. 20% of the supplier database usually consumes 80% of your spending budget. These are the places to look first for segmentation. 

Use Technology 

Technological tools like spend analysis automatically categorise your suppliers based on how much you spend on them and across different dashboards of pricing opportunities and payment terms. It eases your work of categorising them and leaves you to do the strategic work and determine relationships with each type of supplier.

4. Review the Segmentation Regularly 

Due to the volatile conditions of the logistics and retail service market or change in your brand values and product shifts, your supplier relationships are bound to change. As a result, you cannot segment your customers and call it a day. You have to continuously review your segmentation process to ensure you put resources into suppliers that need them the most. 

Conclusion 

Supplier segmentation is an important step towards the overall supplier relationship management. Ultimately, you can be the best judge of what method can be the right fit for segmenting your suppliers as you need to consider multiple factors in account. 

For any additional logistics need, you can get in touch with us at PACK & SEND and we can help you get started with your logistics requirements.

Image source: Forbes