Last updated on 2024年8月7日

What are the key criteria and metrics for Supplier Segmentation?

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Supplier segmentation is a process of categorizing your suppliers based on various criteria and metrics that reflect their importance, performance, and risk for your business. By segmenting your suppliers, you can optimize your sourcing strategies, improve your supplier relationships, and mitigate potential disruptions. In this article, we will discuss what are the key criteria and metrics for supplier segmentation and how to apply them in practice.

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Luc Zilio

Retired Toyota Executive after 34 years
Sagarika Pattnaik

Product Owner- Sourcing & Digital Solutions| Senior Supervisor | Global Masters Supply Chain| Michigan University| ISM…

1 Criteria for supplier segmentation

The criteria for supplier segmentation are the factors that define the characteristics and value of your suppliers, which can be divided into qualitative and quantitative. Qualitative criteria are based on subjective assessments, while quantitative criteria are based on measurable data. Depending on your business goals and priorities, you can choose different criteria to segment your suppliers. For instance, you may consider their strategic importance, supply market complexity, supplier performance, and supplier risk. Strategic importance refers to how critical the supplier is for core business functions and competitive advantage; supply market complexity is how difficult it is to find alternative suppliers or switch to another source of supply; supplier performance is how well the supplier meets your expectations; and supplier risk is how likely they are to cause disruptions or problems for your supply chain.

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Luc Zilio

Retired Toyota Executive after 34 years
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In my experience, there are at least 2 key points to consider: 1. Main purpose of Supplier Segmentation by scoring and grading performance would be to decide which suppliers would need your support for improvement as you need those business partners to perform for your company to succeed. And it’s to focus your support as your resources are limited 2. The group doing thee scoring and grading cannot decide the criteria in a bubble and need to reach out to the stakeholders to help decide what are the key KPI’s that dictate supplier performance.

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Sagarika Pattnaik

Product Owner- Sourcing & Digital Solutions| Senior Supervisor | Global Masters Supply Chain| Michigan University| ISM Procurement| Toast Masters Certified| PGDBM in Enterpreneurship | Arts connoisseur
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The segmentation process must begin with the identification of segmentation criteria. Criteria can be based on several factors, such as business criticality, supplier importance, business impact. Once the criteria are established, an evaluation process can be followed to arrive at a result that would indicate significant suppliers. Based on the evaluation results, suppliers can be divided into different categories.

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2 Metrics for supplier segmentation

Metrics for supplier segmentation are the indicators that measure the criteria you have chosen, which can be absolute or relative. Absolute metrics are based on fixed values, such as total spend, defect rate, or lead time, while relative metrics are comparisons, like market share or customer satisfaction. Depending on your criteria and data availability, you can use different metrics to segment your suppliers. For instance, you might segment them by spend (how much you spend annually or per category), quality (number of defects per unit or order), delivery (on-time delivery rate), and service (responsiveness, cooperation, and support).

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Malathi Parthasarathy

Supply Chain Product Management Executive | Retail CPG Product Advisor | Swiftie
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Consumer-centric metrics: Metrics that measure supplier performance in delivering products that meet consumer demands and preferences. This includes factors like product quality, innovation, speed-to-market, and adherence to sustainability standards. Financial performance metrics: Metrics that assess a supplier's financial health and stability, as this directly impacts our supply chain resilience. This includes factors like financial ratios, payment history, and risk assessment scores. Supply chain agility metrics: Metrics that evaluate a supplier's ability to adapt to market changes and disruptions. This includes factors like supply chain visibility, inventory management efficiency, and responsiveness to demand fluctuations.

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3 Methods for supplier segmentation

The methods for supplier segmentation are the techniques that help you group your suppliers into different segments based on the criteria and metrics you have selected. These methods can range from simple, such as thresholds, rankings, or categories, to complex, such as matrices, models, or algorithms. Depending on your needs and resources, you can use different methods to segment your suppliers. For instance, the Kraljic matrix plots your suppliers based on their strategic importance and supply market complexity, resulting in four segments. Alternatively, a supplier performance scorecard assigns scores to your suppliers based on their performance in different categories. Finally, cluster analysis is a statistical method that identifies groups of suppliers with similar characteristics based on multiple criteria and metrics.

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Malathi Parthasarathy

Supply Chain Product Management Executive | Retail CPG Product Advisor | Swiftie
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Exceptions and Considerations: Industry-Specific Nuances: Different industries have unique supplier landscapes and challenges. For example, in the food industry, food safety and regulatory compliance might be paramount, while in the tech industry, innovation and speed-to-market could be more critical. Supplier Relationship Stages: The segmentation method may vary depending on the stage of the supplier relationship. For example, new suppliers might be segmented based on initial qualification criteria, while established suppliers might be segmented based on performance metrics and strategic fit.

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4 Benefits of supplier segmentation

The benefits of supplier segmentation are the outcomes that you can achieve by applying the process of categorizing your suppliers, which can be either operational or strategic. Operational benefits are related to improving efficiency and effectiveness in managing suppliers, while strategic benefits are connected to enhancing competitive advantage and sustainability in the market. Depending on your objectives and expectations, you may experience various advantages from supplier segmentation. For instance, you can optimize sourcing strategies by tailoring approaches and tactics to each segment, such as negotiation or contract. Additionally, you can improve supplier relationships by allocating resources and attention to each segment, such as monitoring or evaluation. Lastly, supplier segmentation can help mitigate potential disruptions by recognizing and managing risks and opportunities associated with each segment, such as contingency or diversification.

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5 Best practices for supplier segmentation

The best practices for supplier segmentation are the guidelines that help you implement the process of categorizing your suppliers effectively and efficiently. Whether general or specific, these best practices can be tailored to your particular context and situation. To ensure your supplier segmentation reflects your strategic direction and supports decision-making, you should align criteria and metrics with business objectives and priorities. Additionally, collecting and analyzing reliable data will ensure your segmentation is based on accurate information. Lastly, communicating and collaborating with stakeholders will guarantee understanding and acceptance of your supplier segmentation by both internal and external partners.

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Sagarika Pattnaik

Product Owner- Sourcing & Digital Solutions| Senior Supervisor | Global Masters Supply Chain| Michigan University| ISM Procurement| Toast Masters Certified| PGDBM in Enterpreneurship | Arts connoisseur
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Some best practices are a) Consideration of internal/external benchmarks b) Considering in-process inputs c) understand internal information and its effects

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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James Moran

Your supply management coach and teacher helping you reach the skill levels needed for your job.
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Great article. Remember, each company has different strategic visions, is part of different industry segments with their own cultures and will focus on different elements described above based on how their strategic vision pillars are outlined.

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What are the key criteria and metrics for Supplier Segmentation?

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1 Criteria for supplier segmentation

2 Metrics for supplier segmentation

3 Methods for supplier segmentation

4 Benefits of supplier segmentation

5 Best practices for supplier segmentation

6 Here’s what else to consider

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