For almost any business, success depends on managing its partnerships. But as a business grows, so does its supplier list until, too often, the supplier list becomes unmanageable. That’s when you risk not getting enough out of your top suppliers and getting too much (flak) from poor suppliers.
In a recent webinar, Patrick Connaughton, Senior Research Director at The Hackett Group, and David Hannon, Content Manager for Staples Business Advantage, discussed a strategy that business of any size can use to manage the madness: Supplier Segmentation.
Here are the 5 W’s (and one H) of supplier segmentation we took away from the experts:
Supplier segmentation (sometimes referred to as supplier stratification) is the evaluation, identification, and grouping or ordering of your supplier base. One best practice is to follow the 80/20 rule: segmentation should be done for the suppliers that make up the top 80% of your spend. That usually comes to about 20% of your supply base. You’ll also want to include any suppliers that critical to your business, regardless of how much you spend with them.
It might seem like a lot of work, but there are clear reasons and benefits to segment your suppliers. While the end result is an organized grouping or hierarchy of suppliers that you can more easily manage, it’s more complex than that. Supplier segmentation can help to identify and amplify relationship priorities with your suppliers, as well as establishing clear guidelines and expectations for suppliers in any given group or tier. It can also encourage your company to standardize your buying, easing the huge headache of rogue spend. And finally, it can motivate your suppliers to step up their game. If they’re not in your top tiers, they want to be.
It can be easy to fall into the trap of only looking hard, quantitative data. While analyzing the financial impact and value of each supplier is important, don’t overlook the qualitative factors, as well, like alignment with your company, the importance of the goods and services they provide to your operations, current relationships and integration and, of course, their performance as a supplier. Evaluating these criteria with a consistent, predefined rating system will allow you to compare and contrast easily.
This might seem like a peculiar question. But businesses can get hung up on where they do their ratings and stratification, looking for the perfect technology or program to house their efforts. While there are amazing tools out there, it doesn’t have to be complicated, and even something as simple as an Excel spreadsheet can be a good place to calculate and compare your evaluations.
The success of your supplier evaluation and segmentation hinges on who you involve—not just among your suppliers, as already discussed, but among your own organization, as well. One of the biggest benefits of segmentation is cross-functional visibility into your supplier spend, so it’s important to include buyers across business units, regions and functions to create an enterprise-level view of your suppliers.
It’s good to revisit your segmentation annually, particularly if you are encouraging suppliers to make improvements and become more strategic partners to your company. However, if significant changes occur, like bringing on new suppliers or experiencing a change in spend, you may want to tweak or adjust your segmentation throughout the year.
Whether you’re a midmarket company or a corporate procurement team, by the time you’re done with your supplier segmentation exercise, you should have a clear idea of the value and importance of the majority of your supplier base. This allows you to more effectively budget time and resources across your supplier base, no matter how large it might be.