Supplier Relationship Management

Supplier Segmentation

While many businesses depend upon multiple suppliers to source everything from product components to paper towels, some partnerships are more important to the bottom line than others. Segmenting vendors based upon their impact on a business is the first step in supplier relationship management. There are multiple ways to identify important suppliers by answering the following questions:

• Which product depends upon their component(s)? A supplier that manufactures a piece of your most profitable product is clearly an important partner. Losing this relationship could place financial stress on your company.
• How many vendors are capable of doing the same work? Imagine that you sell protective suits, such as those worn by firefighters. There may be multiple suppliers capable of producing reflective tape, but only a handful that manufacturer heat-resistant fabric. In other words, you are less able to cope with the loss of one supplier over another.
• What costs would be associated with sourcing products from other vendors? The answer to this question is at least partially dependent on the complexity of the product being sourced. However, logistical considerations such as transportation costs could also play a role.

No single vendor segmentation matrix exists, though most follow the same general criteria. The categories below are based upon research from Supply Chain Quarterly. Once the characteristics of a vendor are understood, you can assign a supplier to a specific category:

Strategic Suppliers

As the name suggests, the health of these suppliers is of paramount importance to your business’s long-term goals. This may be due to their advanced capabilities or knowledge of your products. Strategic suppliers are the most difficult to replace.

Tactical Suppliers

These vendors are important to a business, but not irreplaceable. Business plans do not hinge on the abilities or availability of tactical suppliers, as there are other sourcing options.

Transactional Suppliers

Vendors that supply common, standardized components do not represent a threat to the business. Transactional suppliers deal in commodities without a high level of specification.

Supplier segmentation allows procurement departments to determine how much effort to expend on supplier relationship management for a given vendor. It can also help prioritize the creation of mitigation plans to anticipate worst-case scenarios.

Supply Chain Strategy

Business stakeholders must take ownership of supplier relationships to capitalize on SRM. These points of contact are responsible for identifying untapped opportunities, unintended redundancies, and potential supply chain risks.

For example, regular conversations with a vendor could reveal that a parent and subsidiary company both contract with them. This may present an opportunity to bundle purchases at a lower price. A strategic approach to procurement depends upon a buyer willing to dig into the details. When buyers can more easily uncover this information, they have a chance of streamlining the purchasing process.

Supplier Coordination

For any procurement relationship to thrive, some operational information must be shared between buyers and suppliers. When a vendor makes changes to their business, it can have a cascading effect with consequences for clients. A certain level of transparency is required so that both parties can plan ahead to avoid disruptions.

Communication can also reveal new opportunities, such as the chance to cut costs or reduce transportation times based upon the growing capabilities of a vendor.

Supplier Relationship Management Software

Enterprise applications enable buyers to research new vendors, monitor the performance of current suppliers, and take a more proactive approach to managing the procurement process. Many of these data-as-a-service, or DaaS, programs gather supplier information from trusted sources such as business credit bureaus and company information databases.

When it comes to evaluating suppliers, purchasers have access to important features and insights like:

• Entity validation: Allows buyers to validate a business’s identity, legal status, ownership, and corporate relationships.
• Data cleansing and integration: Master data management processes, including de-duplication and data integration, help ensure buyers have the most accurate and up-to-date information on suppliers.
• Performance metrics: Allows supply chain managers to understand the overall health of a vendor, including possible financial risks or regulatory compliance issues.

When dedicated stakeholders have access to accurate data, supplier relationship management offers both buyers and vendors the opportunity to foster growth.