Close relationships with suppliers have been key for some businesses to avoid some of the shortages, delays and higher prices that have plagued supply chains over the last few years. But for most companies, it’s impossible — and costly — to give each supplier equal attention.
In such a situation, businesses can use supplier segmentation as a strategy to determine the appropriate level of engagement. By categorizing vendors based on their business or supply chain value, procurement managers can focus their efforts on maximizing the value of supplier relationships.
There are a few reasons why a business would want to pursue supplier segmentation:
- Supplier management: Segmentation showcases the value generated from critical suppliers, helping businesses determine which vendors are most appropriate for potential collaborative partnerships or increased investment.
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Resource optimization: An engagement plan based on segmentation helps optimize the time and resources spent on supplier management. While strategic suppliers may require quarterly meetings, transactional suppliers can be seen less often. This helps to clearly focus energy on customer-oriented outcomes.
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Innovation: Segmentation can highlight which relationships should be leveraged to advance innovation. The 5-nanometer microchip in Apple’s new products, for example, was possible due to its relationship with their strategic supplier Taiwan Semiconductor Manufacturing Company.
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Service: A supplier’s performance is closely linked with the level of communication and engagement it’s receiving from the buyer. Prioritizing suppliers and giving them a better understanding of strategic objectives goes a long way to enhance overall service levels.
Procurement executives should holistically review their network and determine whether a supplier could help advance business objectives — whether it be around cutting costs, addressing sustainability or advancing new technologies.
Developing a segmentation strategy on an annual basis can help businesses stay ahead of the curve and maintain resilience in the face of emerging challenges. But it also helps companies stand out against competitors in regard to revenue, innovation and profitability.
Praveen Kumar Soni is a procurement manager at Colgate-Palmolive.
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