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Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy

Supplier Segmentation — Everything You Should Know

Key take-aways

  • Supplier segmentation is a strategic procedure that groups suppliers based on specific criteria.
  • Segmenting your suppliers enables efficient management, resource allocation, and partnership development.
  • An effective supplier segmentation includes data gathering and analysis, criteria selection, and implementation.

As a procurement professional, you should know that there are a wide variety of types of suppliers and as a result, you may be aware of the process of supplier segmentation. But what it is really and how does it affect the procurement process of your organization?

For this article, we will discuss what supplier segmentation is and its impact on the overall procurement process of your organization. Additionally, we will look at the process and guidelines for conducting Supplier Segmentation.

After reading this article, you will have a better knowledge of supplier segmentation, the role it plays in an organization, and how to utilize it.

What is Supplier Segmentation?

Supplier segmentation is a tactical procedure for grouping suppliers according to specific criteria. Depending on how important each type of supplier is to the company’s core activities, it enables businesses to manage them carefully and allocate resources more efficiently.

Additionally, by classifying suppliers into meaningful segments, companies can allocate resources, negotiate contracts, and develop partnerships that align with their unique business needs and goals.

As a result, it also increases overall procurement and supply chain management efficiency and is a key component of supplier relationship management(SRM). Businesses may make sure that their time managing the procurement and supply chain is focused on the key suppliers who deliver the greatest value by using an efficient supplier segmentation approach.

Based on the distinctive qualities of suppliers in each segment, they can also modify their approach to supplier management. This could lead to efficiency gains that permeate throughout the company and have an impact on supply chain finance strategy, procurement, and inventory management.

Why is Supplier Segmentation Important?

Every supplier is unique. There is a need for specific management of each supplier based on their size, risk profile, and importance to the buyer business.

In other words, the ideal method of managing suppliers varies according to the size, purpose, and type of each provider. Without taking into account each supplier independently, it is simpler to implement customized management techniques when they are divided into cohesive groupings.

Due to the significance of suppliers to the overall success of the buyer’s business, supplier segmentation is crucial. Segmenting suppliers can identify your level of exposure to risk, e.g. a single source of supply for a product or service. Small positive adjustments in supplier management, especially for large businesses, can produce significant efficiency gains that increase profit.

Steps to Supplier Segmentation

It takes time and effort to create a segmented supplier list that will aid in relationship evaluation. It is based on information about each supplier relationship, both quantitative and qualitative. Starting the segmentation process could take some time, depending on how many vendors are in your supply base.

Think about your segmentation into stages, concentrating on your most substantial spend or well-known key suppliers. These are frequently the same areas that provide significant cost savings and efficient resource allocation.

Here are a few steps for effective supplier segmentation:

1. Data gathering

Compile data on all of your vendors. Both quantitative and qualitative information, such as the caliber of the goods and services delivered, should be included in this data. Financial information should be included, such as expenditure levels and payment history.

2. Data analysis

After gathering the data, examine it for patterns and trends. This stage will assist you in identifying your present spending patterns and potential areas for cost-cutting. Additionally, it can assist you in determining which suppliers offer the most cost-effective mission-critical services to the company.

3. Criteria Selection

It’s time to choose the criteria you’ll use to classify your suppliers after you’ve examined the data. Typical selection criteria for suppliers include spent amounts, risk considerations, and strategic importance. Start arranging your providers based on the parameters you’ve chosen.

4. Implementation

Start using your supplier segments. To reflect the new supplier categories, you must update your sourcing and procurement strategy. To ensure that everyone in your business knows how to communicate with each sector of suppliers, you should also create clear communication plans for each section of suppliers.

Supplier Segmentation Models

There are so many different ways to divide your suppliers, but three of the most commonly used supplier segmentation techniques are those shown below:

The Kraljic Matrix

The supplier segmentation matrix, also known as the Kraljic Matrix, plots suppliers on two axes to divide them into value and spend categories. Spend indicates how much your organization really spends with the supplier, whereas value refers to the significance of the provider to business operations.

The matrix is divided into the four quadrants listed below:

Listed below are the four quadrants that you should know about.

Non-Critical: Low-value, low-spend suppliers

Risk and impact for non-critical goods are both minimal. To ease the burden of purchasing these transactional goods, put your attention on price optimization and smart demand management. Different suppliers might be able to bargain for a higher profit margin or offer new product possibilities.

Bottleneck: Low-value, high-spend suppliers

Items in bottlenecks have less effect on the business but less dependable supply availability. Focus on efficiently managing the short-term supply and, when possible, removing long-term needs for bottleneck goods because demand for them fluctuates frequently.

Leveraged: High-value, low-cost suppliers

These vendors provide your company with valuable but low-risk products and services. The availability of leverage goods or supplies from other suppliers raises the possibility of price negotiations.

Strategic: High-cost, high-value vendors

The parts and supplies that have the ability to interfere with corporate operations are referred to as strategic goods. They might only originate from one place or have a level of complexity that makes them challenging to complete. Your company should pay the most attention to its strategic supplier relationships, which may necessitate involvement from high management.|

Possibly the two most important measures for determining how important a supplier is overall are value and spending. You may determine which of your supplier network’s segments require the most attention by plotting it on the Krajlic Matrix.

Pyramid Approach

The supplier database can be viewed differently using the same priorities—strategic, important, and transactional—by creating a pyramid.

For medium-sized and smaller businesses, this is frequently the method of choice for segmenting suppliers. Depending on whether partners are divided into their own group or put in the strategic category at the top of the pyramid, a supplier pyramid normally comprises three to four stages.

The value of suppliers rises as we travel up the pyramid, while the number of suppliers in that category declines.

Which Supplier Segmentation will work for your organization?

Supplier segmentation encompasses a wide range of quadrants and matrices. The Kraljic matrix is the most common matrix, and the majority of segmentation practices and tactics are a direct result of the matrix.

What works best for you as an organization depends on how well you comprehend your primary suppliers and the value they bring.

In a changing market, what effect do they have on the existing business? Are your suppliers flexible? Are they resilient? Are they a bother? How effectively are they managed?

Conclusion

Organizations can enhance the value they get from their supplier relationships by using the strategic strategy of supplier segmentation. Businesses may optimize resource allocation, reduce risks, and promote stronger collaboration by categorizing suppliers based on their traits and aligning procurement strategy accordingly. Effective supplier segmentation has the ability to promote procurement excellence and support overall organizational performance in a highly competitive business environment.

Frequentlyasked questions

What is Supplier Segmentation?

Supplier segmentation is a tactical procedure for grouping suppliers according to specific criteria.

Why is Supplier Segmentation Important?

Because every supplier is unique and due to the significance of suppliers to the overall success of the buyer’s business, supplier segmentation is crucial.

Which Supplier Segmentation will work for your organization?

Supplier segmentation encompasses a wide range of quadrants and matrices.What works best for you as an organization depends on how well you comprehend your primary suppliers and the value they bring.

About the author

My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.

Marijn Overvest Procurement Tactics