Supplier Segmentation and Why It Matters

Supplier Segmentation based on their potential impact on your business is the first step in effectively managing the relationship. By classifying suppliers into distinct groups, you can better dedicate the right level of resources to the partnership. In other words, where does this supplier fit in? How important are they to your supply chain? What risks do they pose? Once you understand this, you can tailor your interactions more efficiently.

Why Is Supplier Segmentation Important?

Suppliers you can identify as key to your business require more engagement than others. By separating them into groups based on your specific criteria, you can determine the level of attention needed and identify your risk exposure.

Key Supplier Classifications

Strategic—These partners are critical to your business running smoothly and meeting its core objectives. This level goes beyond cost savings and adds value to your business over the long term. Ask yourself: If this supplier went out of business today, would your organization be able to continue doing business? Strategic suppliers are the most difficult to replace.

Operational—Although not as critical to your organization’s functioning, these core suppliers are required to sustain daily business needs, but there are alternatives. Examples might include project management tools or talent acquisition firms. If these suppliers were to go out of business, it would be inconvenient, but you wouldn’t need to panic.

Transactional—These suppliers deal with short-term needs or one-off procurement of goods or services. Generally, you have plenty of options with limited impact on your supply chain. For instance, a transactional supplier may be someone you use for a one-time engagement, such as an event venue with many options and negligible transition costs.

Emerging—Suppliers who have the potential to critically impact your business but are in a pilot or testing period may fit best into this tier as they wait to move to a more permanent segment.

You can identify your key suppliers by answering questions like these:

Once you understand the characteristics of your various suppliers, you can begin assigning them to specific categories.

No One-Size-Fits-All Approach

Remember, there is no single approach to segmentation—choose the one that best fits your business. For instance, you can classify a supplier based on any number of quantitative metrics, including:

Qualitative metrics may include:

Your industry will influence your approach as well.

It’s essential to be flexible when working with each supplier, tailoring your relationship based on their needs and communication styles. Still, having some processes in place for those different kinds of strategic suppliers will strengthen your relationships and your work output.

Proper Segmentation = Better Reporting

When you take the time to classify your suppliers into the appropriate tiers, your reporting will become far more robust and meaningful where it matters most – with your most critical partners. You’ll gain greater visibility into your supply chain by seeing how your top-tier strategic suppliers perform on specific metrics, such as quality, response time, or availability. This deeper transparency allows you to pivot quickly and make necessary changes when issues arise.