3 Types of Supplier Segmentation Matrix You Can Use to Classify Suppliers

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.

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

Kraljic Supplier Segmentation

  • 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.

Supplier Segmentation

 

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:

  1. Bullington, Kimball, Ph.D., Supply Base Segmentation, Middle Tennesee State University, Smart Ideas, ISM Nashville
  2. Kraljic, P.,”Purchasing Must Become Supply Management,” Harvard Business Review, 1983, 61(5), p.111.
  3. Gordon, R. Sherry, 2008, Supplier Evaluation and Performance Excellence, J Ross Publishing, USA.
Dr. Muddassir Ahmed