From Selection to Segmentation and Management: The Critical Role of Supplier Management

By?Rafael Vela ?/ April 04, 2023

In today's global marketplace, effective supplier management is critical for businesses of all sizes. Whether you're a large corporation or a small startup, managing your suppliers is essential to maintaining a competitive edge and ensuring that you have the resources you need to meet customer demand. In this article, we'll explore what supplier management is, why it's important, and some best practices to help you get the most out of your supplier relationships.

Supplier management refers to the process of selecting, evaluating, and managing suppliers to ensure that they meet your business's needs. This includes everything from sourcing raw materials and components to negotiating pricing and contracts. Effective supplier management requires a comprehensive understanding of your business's supply chain and the ability to identify and mitigate potential risks.

Supplier management is a critical component of the broader supply chain management process. Your suppliers are a crucial part of your supply chain, and their performance can have a significant impact on your business's ability to deliver products and services to your customers. Effective supplier management can help you build strong, long-term relationships with your suppliers, ensuring that you have a reliable supply of goods and services that meet your quality standards.

THE IMPORTANCE OF SUPPLIER MANAGEMENT

Effective supplier management can provide several benefits to your business, including:

• Improved quality control: By carefully selecting and evaluating your suppliers, you can ensure that the goods and services you receive meet your quality standards.
• Cost savings: Effective supplier management can help you negotiate better pricing and terms with your suppliers, reducing your overall costs.
• Risk mitigation: By identifying and managing potential risks in your supply chain, you can reduce the likelihood of disruptions to your operations.
• Competitive advantage: Strong supplier relationships can help you differentiate your business from competitors and improve your ability to respond to changing market conditions.

These are just a few of the benefits derived from a sound supplier management strategy.

SUPPLIER MANAGEMENT - THE PROCESS

SUPPLIER SELECTION CRITERIA.

This is the first step in the process of managing suppliers. Selecting the right suppliers is critical to effective supplier management. Some key criteria to consider when selecting suppliers are:

• Quality: Ensure that potential suppliers can meet your quality standards and have the necessary certifications and qualifications.
• Cost: Evaluate suppliers' pricing and payment terms to ensure that they align with your budget.
• Delivery times: Consider suppliers' ability to meet your delivery deadlines and their track record for on-time delivery.
• Reliability: Look for suppliers that have a history of delivering consistent, high-quality products and services.
• Communication: Choose suppliers that are responsive to your needs and can provide clear communication throughout the procurement process.
• Geographical location: Selecting a supplier that is in a high-risk area or has a limited supply chain can increase your supply chain vulnerability. This can lead to disruptions in the supply chain due to natural disasters, political instability, or other external factors.

Selecting the wrong supplier can have extreme consequences for a business therefore it is essential to conduct thorough research and evaluate potential suppliers based on specific criteria to mitigate these risks and ensure that you are partnering with the right supplier for your business needs.

SUPPLIER EVALUATION.

Once you've selected suppliers, it's important to evaluate their performance regularly. This is step two of the supplier management process. Some key factors to consider when evaluating suppliers include:

• Quality: Assess suppliers' quality performance and identify any areas where improvements are needed.
• Cost: Track suppliers' pricing and payment terms to ensure that they remain competitive.
• Delivery times: Monitor suppliers' on-time delivery performance and address any issues that arise.
• Reliability: Evaluate suppliers' overall performance and identify any areas where they may be falling short.
• Innovation: Consider suppliers' ability to offer new and innovative products and services that can help you stay ahead of the competition.

The process of evaluating suppliers involves a series of steps to assess the performance and capabilities of potential or existing suppliers. Here are the typical steps involved in evaluating suppliers:

• Develop evaluation criteria.
• Collect and analyze supplier data.
• Assign supplier ratings: This can be done either using a numerical scale, such as a scorecard, or a qualitative rating system, such as "excellent," "good," "average," or "poor."
• Develop improvement plans.
• Monitor supplier performance:

Evaluating suppliers is a critical process that helps businesses ensure that your suppliers are maintaining or improving the elements that made your organization select them as suppliers. By following a structured approach to supplier evaluation, businesses can make informed decisions, identify areas for improvement, and build stronger, more effective supplier relationships.

SUPPLIER SEGMENTATION.

Now, before jumping to the third step of the supplier management process, the managing of the supplier part, I want to bring up the issue of supplier segmentation as a fundamental activity to achieving a successful supplier management process.

Supplier segmentation is the process of categorizing (grouping) suppliers based on their importance to your business and their potential impact on your supply chain. The driving concept here is that not all suppliers require or deserve the same kind of attention or level of management. Managing suppliers requires a lot of effort and resources and you want to make sure those resources, which are most of the time very limited, are used properly.

By segmenting your suppliers, you can allocate your resources more effectively and focus on managing the suppliers that are most critical to your business. Based on my experience I prefer to segment suppliers into the well-known and widely used categories of Non-Critical, Leverage, Bottleneck, and Strategic suppliers as follows:

Leverage Suppliers: These are suppliers who have a low impact on the company's operations, but the company has a high impact on their business. As a result, the company can leverage its buying power to negotiate favorable terms, such as lower prices or better delivery times.

Non-Critical Suppliers: These are suppliers who have a low impact on the company's operations, and the company has a low impact on their business. These suppliers can be replaced easily if they do not meet the company's expectations, and the company does not rely heavily on their products or services.

Bottleneck Suppliers: These are suppliers who have a high impact on the company's operations, but the company has a low impact on their business. These suppliers provide critical components or services that are essential to the company's operations, and the company cannot easily replace them.

Strategic Suppliers: These are suppliers who have a high impact on the company's operations, and the company has a high impact on their business. These suppliers provide critical components or services that are essential to the company's operations, and the company relies heavily on them. These suppliers are usually long-term partners with whom the company has established a strategic relationship. An example I always bring up is the strategic relationship between McDonald's and its 38,000 restaurants worldwide and Coca-Cola. McDonald's only sells Coca-Cola products thanks to a very strategic relationship that started in 1955.

By segmenting suppliers into these categories, the company can develop a customized supplier management strategy that reflects the importance of each supplier and the level of engagement required to manage the relationship effectively.

Once you have segmented your suppliers then it’s time to determine which management approach will be applied to each segment, and this is where we jump to step three of the supplier management process, the management of the relationship.

RECOMMENDED SUPPLIER MANAGEMENT APPROACH BASED ON SEGMENTATION

The third and final step in the process. The recommended management approach for each supplier segment will vary. Here are some general recommendations for managing suppliers in each segment:

For Leverage Suppliers:

• Consolidate your purchases to a smaller number of leverage suppliers to maximize your buying power and negotiate better prices and terms.
• Implement a vendor-managed inventory (VMI) system to reduce inventory carrying costs and improve order fulfillment.
• Establish clear performance expectations and monitor supplier performance closely to ensure they meet your standards.

For Non-Critical Suppliers:

• Streamline the procurement process for non-critical suppliers by implementing online catalogs or a procurement system that automates the purchase order process.
• Reduce the frequency of order placement for non-critical items and consolidate orders to minimize transaction costs.
• Monitor non-critical supplier performance regularly and evaluate their status periodically to determine if they can be re-categorized as leverage suppliers or removed from your supplier list.

For Bottleneck Suppliers:

• Develop a close relationship with bottleneck suppliers and establish contingency plans to mitigate supply chain disruptions.
• Implement a just-in-time (JIT) system to reduce inventory carrying costs and improve order fulfillment.
• Monitor bottleneck supplier performance closely and establish clear performance metrics and KPIs to ensure they meet your standards.

For Strategic Suppliers:

• Develop a long-term strategic partnership with your strategic suppliers to foster collaboration and innovation.
• Engage with strategic suppliers early in the product development process to leverage their expertise and ensure their products or services meet your requirements.
• Conduct regular performance reviews with strategic suppliers and establish joint improvement initiatives to drive continuous improvement.

By implementing this action plan, you can improve the efficiency and effectiveness of your procurement process.

By tailoring your supplier management approach to each supplier segment, you can effectively manage your supply chain and minimize the risks associated with supplier disruptions.

By categorizing suppliers you can allocate your resources more effectively and prioritize your supplier management activities creating stronger relationships with your most important suppliers while managing the risks associated with less critical suppliers.

BEST PRACTICES IN SUPPLIER MANAGEMENT.

I know I have said it before in many of my previous articles but I think it is worth repeating, a best practice is a method, technique, or approach that has been proven to be effective in achieving a particular goal or objective. They are practices that have passed the test of time and represent the collective knowledge and experience of a particular industry, discipline, or organization, and are often shared as a standard for others to follow.

Adopting best practices can help organizations improve performance, reduce costs, and achieve better outcomes.

Following are the top 10 best practices in supplier management:

• Develop a supplier selection process: Establish a formal process for selecting suppliers that considers your business needs, supplier capabilities, and evaluation criteria.
• Conduct thorough due diligence: Conduct background checks, financial reviews, and other relevant assessments to ensure that suppliers have the capabilities and resources to meet your business needs.
• Establish clear expectations: Define your expectations for supplier performance in terms of quality, delivery, price, and other key criteria. Make sure suppliers understand these expectations and agree to meet them.
• Communicate effectively: Establish clear lines of communication with suppliers to ensure that you can collaborate effectively and resolve any issues that arise in a timely manner.
• Develop a supplier segmentation strategy: Segment your suppliers into categories based on their importance to your business and develop tailored management strategies for each segment.
• Monitor supplier performance: Regularly monitor supplier performance using key performance indicators (KPIs) and other metrics to ensure that they are meeting your expectations.
• Foster collaborative relationships: Work closely with suppliers to build collaborative relationships based on trust, transparency, and mutual benefit.
• Implement supplier development programs: Provide suppliers with training, resources, and support to help them improve their capabilities and meet your business needs.
• Continuously improve your processes: Regularly review and improve your supplier management processes to ensure that they are efficient, effective, and aligned with your business objectives.
• Embrace technology: Use technology tools such as supplier management software, analytics, and automation to streamline your supplier management processes, improve data visibility, and optimize supplier performance.

These best practices can help businesses build stronger, more effective supplier relationships, improve performance, and reduce risk. By adopting a strategic, proactive approach to supplier management, businesses can better manage their supply chain, reduce costs, and drive long-term success.

Effective supplier management is critical to the success of any business. By carefully selecting and managing your suppliers you ensure that your supply chain remains resilient in the face of changing market conditions.

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