Four steps for segmenting your supply base for performance management

When setting up a supplier performance management (SPM) process, procurement and supplier managers have often asked me which suppliers they should evaluate. Should they focus primarily on the suppliers with whom they spend the most money? Should they try to measure a large portion of their supply base? There is no quick answer other than this. But keep in mind that by measuring only those suppliers with whom you spend the most money, you may be missing some important opportunities and some potential risks. This process is called supplier segmentation. Segmentation is defined by ISM (Institute for Supply Management) as: “The strategic analysis of each supplier to determine the extent to which the supplier contributes to the core competence and competitive advantage of the buying organization.” In this case, one is segmenting the supply base for performance management — those suppliers who merit supplier evaluation and performance management resources and those who do not need to be measured.

Here are four steps to segmenting your supply base for performance management:

1. Based upon your firm’s strategies, identify the types of supplier relationships that are most important. Yes, amount of spend is important. But other types of suppliers may be important for additional reasons such as, for example, sole source, single source, strategic, small businesses, minority and women-owned businesses, etc.

2. Review your supplier performance expectations, particularly in regard to supporting your company’s goals and objectives and what your function need to accomplish. Identify suppliers who will be important in helping you meet these goals and objectives.

3. Look at high-priority or strategically important categories of suppliers. Suppliers can then be segmented according to the strategic value of the relationship, and the investment of resources can be aligned with that value.

4. Identify top spend in high-priority and strategic categories as well as strategically important low-spend suppliers. You may wish to track those suppliers’ performance more closely. Here are a few examples of the types of suppliers to consider in an SPM process:
  • Suppliers who have exhibited poor performance (even if not yet formally measured) such as late deliveries, poor customer responsiveness, and poor quality? Can or have these suppliers adversely affected your business?
  • Suppliers located in politically or geographically unstable areas of the world or who demonstrate other potential risks
  • Suppliers with whom improved communications about performance and mutually beneficial improvements would be valuable
  • Suppliers who are currently working with your company collaboratively on product development or have the potential to do so
  • High-potential suppliers who could be developed to become high performers and add more value to the business
  • New suppliers who have not yet established a performance track record
A simple ranking chart can be found in the Understanding Supplier Performance Management whitepaper on Iasta’s esourcingwiki site.

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