This content is part of the Essential Guide: The essential guide to supply chain management best practices

Why is supplier segmentation key to supplier relationship management?

Your customer relies on your supply chain to work well, so that means you need effective supplier relationship management. Here's information to help you create it.

Managing suppliers has been a key facet of supply chain success since the first vendor failed to deliver an order as it was expected.

Supplier relationship management practices have varied and continue to vary based on the relationship between supplier and customer. What is clear is that not every supplier should be treated equally, because each represents a different level of value to the buyer. That's where supplier segmentation comes into the picture.

In simple terms, supplier segmentation means suppliers that are critical to the success of the business deserve more attention than those that supply commodities that can be found from a wide range of supplier sources. Understanding this difference and using supplier segmentation to categorize your vendors will improve relationships with all your vendors and ease your management duties.

Supplier segmentation for maximum business value

Supply chains depend on efficiency and accuracy to make customers happy and keep the engines of commerce running smoothly. When things don't go right, operations can grind to a halt, outbound orders are delayed and customers are disappointed and begin to look elsewhere. The coordination of inbound products and their distribution is critical to this process, and working in tandem with suppliers to perfect their order fulfillment success rate can be tricky and time-consuming. It's important to focus attention where it's needed and understand when to push a vendor that's not performing up to expectation and when to find an alternative.

Begin the process supplier segmentation by defining which vendors fall into specific categories so you can exert the right amount of effort to each.

Begin the process of supplier segmentation by defining which vendors fall into specific categories so you can exert the right amount of effort to each. The categories can vary based on your business operations, but start with these three and expand as needed.

1. Strategic vendors are those that are critical to making your business run. They are typically characterized as high value because they may be the sole source of key components. They may be low-volume suppliers, but timing and accurate delivery are mandatory. There are probably few vendors that fit into this category and they are the ones that need top levels of attention. If they are performing per specification, they don't require excessive intervention, but they should be on your speed dial list.

2. Important vendors are those with whom you've developed good working relationships and can be counted on to supply components with high levels of quality on reliable schedules. They are important and deserve your attention, but the products they supply are available from other, also reliable, sources. Automate your oversight of this category of vendors to alert you to critical or ongoing issues and address them as needed. But if you need to make a decision of whether to address an issue with a vendor in this category or a strategic vendor, pay attention to your strategic vendor first.

3. Tactical vendors supply high volumes of commodity items and compete for your business based on their prices, level of service and reliability to deliver as needed. They are typically easy to replace and they understand their position, so automate the monitoring of their compliance with your instructions and intervene when necessary.

Know the value of your vendors and treat them accordingly. That isn't to say any of them should be treated without respect or the recognition of the value they provide, but it does mean that you should spend your time and energy appropriately based on the value they bring to your business.

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