July 20, 2017 2:24 pm

What is Supplier Segmentation

Another type of segmentation solution segments suppliers based on various pertinent factors. Using this solution, companies are able to assess the performance of a supplier based on a number of objective measures, allowing them to make consistent, justifiable choices to allocate their business amongst their suppliers.

How it works

There are many factors that govern each supplier segment. Each characteristic can have many controls that influence segmentation. Below are the most common attributes used by an organisation for segmentation:

  • Supplier Spend. Annual spend with the supplier becomes a key lever in the segment. The company will decide a spend threshold for each segment based on their suppliers. It’s also important to consider the year on year growth in the suppliers spend, which provides insight into the future of the supplier engagement level. Some suppliers may not spend a lot however the company may have plans to increase their scope and may even consider them a strategic partner.
  • Supplier Risk. This section not only impacts segmentation, but also determines the companies sourcing strategies and supply plans. There are two important factors that relate to Supplier Risk:
    • Potential Failures – the impact that a supplier’s failure will have on the organisation and assessing all possible effects of this failure on the organisation. These can be defined as either high or low risk based on the amount of disruption this can cause the organisations operations.
    • Actual Failures – the organisation needs to recognise the effect of past incidents and events of supplier failure and how this has impacted the businesses ability to function. How often these failures have occurred and the level of disruption will determine whether the risk level is high or low.
  • Customer Impact. A supplier’s product or service which significantly enhances a customer’s experience and directly increases the organisations customer base has a distinctive impact, so these suppliers will be in the upper tier of the segmentation versus those who have no impact on how the organisation interacts with its customers. This includes suppliers that impact an organisations employees and their overall experience. Impact assessments can rated both internally and externally and included in the segmentation.

A precise segmentation will help to identify the key value drivers, select the appropriate engagement level and help the organisation decide how often they will engage with specific suppliers.

Case Study

Our solution for Santam was developed based on allocating insurance claims to a specific panel beater, their relative cost, location, B-BBEE status and other important factors but this can easily be extended to many different industries.