The proper management of supplier relationships is key to maintaining efficiency and driving success for your manufacturing business. It requires vigilance, collaboration, and time — that last item a rarity across all industrial sectors.

Supplier segmentation is the process of placing suppliers into specific groups. While unique to each manufacturer, it has a common framework that, when used with the right tools, can help manage suppliers more efficiently, reduce risk, and maintain stronger financial control. 

Too many manufacturers treat suppliers interchangeably. In reality, each supplier has unique strengths in addressing specific needs, such as parts manufacturing or staffing agencies. 

Not all suppliers deliver the same levels of service. Some will prove to be more efficient than others, provide better customer service, or offer better discounts or pricing packages. Understanding the strengths and weaknesses of each supplier is critical for long-term success. 

Segmenting suppliers brings multiple benefits. Firstly, by breaking suppliers into specified categories, a business can uncover greater supply chain insights and see if there are risks, such as too much dependency on a single supplier for a critical component or ingredient.

Secondly, you can identify consistently reliable suppliers by segmenting based on performance. Such a metric extends to quality, timeliness and maybe even the ability to get you out of a pinch. With studies attributing $82 million in annual losses due to supply chain disruption, the value of segmentation in helping to identify reliable partners and reduce shipment delays becomes clear.

To make supplier segmentation work, you first need an effective strategy. It starts with the gathering and analysis of data. Factors to consider include delivery time, price, payment history and geographic location of each supplier.

It’s equally important to consider qualitative data. Is the supplier reliable? Does it communicate effectively? Is a given relationship likely to become more important in future? Incorporate all information impacting the end-to-end process, from initial transactions to strategic initiatives. 

Of course, data alone isn’t sufficient. You need the right tools to unpack your data into usable insights. Modern supplier analytics platforms help to centralize information for quick access to comprehensive information. 

Some tools utilize artificial intelligence to predict supplier and supply chain trends. AI can utilize qualitative and external information to make predictions about how, for example, the rainfall in Panama might impact the Panama Canal, or whether increasing international tensions will impact trade routes and tariffs.

Setting Objectives and Goals

Segmenting without objectives won’t get you very far. At the start of your strategy, allot some time to introspection. Consider the strengths and weaknesses of your current dealings with suppliers. How can segmentation help to strengthen your approach?

As with setting any targets in your organization, it's important to follow the SMART framework. This means that your segmentation objectives should be:

• Specific: Objectives shouldn’t be vague. Choose a target that clearly outlines the future direction of your business. 
• Measurable: Make sure that your objective aligns with metrics so that you can measure your progress. 
• Attainable: Objectives must be realistic and achievable. Avoid “biting off more than you can chew,” and make sure you have sufficient money and resources. 
• Relevant: Choose targets that relate to the specific needs of your organization. 
• Time-bound: Specify a timeframe for completion of your objectives.

As an element of Lean Six Sigma initiatives, SMART goals are a proven method. If your goal, say, is to increase your on-time, in-full (OTIF) order percentage, you need to have a realistic number to aim for. The SMART goal technique will increase your odds of achieving it.

Aligning Segmentation With Business Strategy

You’ve identified a clear set of goals. But which forms of segmentation can help you to reach them? 

Think of a business looking to improve its OTIF percentage. In this instance, it makes sense to segment suppliers based on their delivery performance metric, as it directly impacts yours.

Of course, you don’t have to segment based on just one metric. You can apply further segmentations to your data to create more granular results. 

For example, a small manufacturing business will likely want to balance costs and risk factors. As such, it would need to pull more specific and relevant reports from its accounting and operations management software to further segment the data, and find a supplier that meets its long-term financial and reputational needs.\

Creating a Segmentation Matrix

A segmentation matrix helps you to categorize suppliers into different groups. The best example is the Kraljic matrix, named after academic and author Peter Kraljic. Monitoring this model can help you assign supplier scorecards more effectively. The model plots value versus spend and splits suppliers into four different quadrants:

• Non-critical: Low value and low spend. 
• Bottlenecks: Low value and high spend. 
• Leveraged: High value and low spend. 
• Strategic: High value and high spend.

This segmentation model will not be applicable to every business. Think about your company’s unique needs and objectives. Consider how you can apply them to your segmentation matrix. 

Communicating With Suppliers

The importance of supplier communication cannot be overstated. Yet many manufacturers struggle to build a strong rapport with their numerous suppliers. This can lead to miscommunication around order quantities, delivery dates and other key areas. It also increases the chances of disputes emerging, which further damages relationships and can impact cash flow. 

Communication should be a key part of your segmentation strategy. One example is to use a sentiment analysis tool to analyze previous communications. This can identify whether the language used was positive, negative or neutral. By segmenting based on positive communications, you can identify suppliers with a history of positive dialogue with your organization.

You should also collaborate with your purchasing and operations leaders for further feedback. Additionally, exploring negative communications could help in fixing a potential issue before it gets worse.

Response rate is another useful area to consider. In the ever-moving world of business, swift response times are critical. Are suppliers getting back to you quickly, or leaving you hanging for a response? Segmenting based on response times can help you prioritize efficient communication.

Segmentation shouldn’t apply only to existing suppliers. Consider using your supplier segmentation criteria when choosing new suppliers. Examples might include segmentation based on:

• Cost: How much does a supplier charge for its goods or services?
• Innovation: Is your business looking to embrace digital transformation? Segmentation helps find the best suppliers for furthering this aim. 
• Risk: Which suppliers have put risk management strategies in place?

Monitoring Progress against KPIs

Recall the “M” in SMART: it stands for “measurable”. It’s important to assign a key set of metrics to assess progress toward your goals. Following are some of the key performance indicators that can be useful in supplier segmentation.

• Supplier delivery performance: It helps you to monitor the reliability of your suppliers as well as risk.
• Cost-related metrics: It’s useful to monitor supplier costs across various metrics. Enterprise resource planning (ERP) or accounting software can help you balance KPIs as well as discounts and pricing constructs.  
• Supplier quality performance: Issues with quality may be realized later in the production process. Collaborating with teams across your company will help in ensuring issues are logged. Again, your accounting or ERP system should help you balance and optimize speed, cost, and control. 

Reviewing and Adjusting Segmentation

Your approach to segmentation shouldn’t be static. Business needs and priorities change over time. As they do, it’s important to bring your segmentation in line with your updated strategic objectives.

Review your segmentation efforts regularly. Consider how you can alter your tactics to produce accurate and effective segments. Are you tracking the right areas? Are segments based on sufficiently detailed data to provide you with accurate insights? Are you tracking the correct metrics to monitor your progress?

The management of supplier relationships is a team effort, and worth the time investment. With the proper tools at hand, supplier segmentation can reduce risk, and in the long term save the company time.

Annette Grotz is director of industry marketing, distribution and manufacturing at Sage.