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Managing every supplier in the same way may seem fair and simple. In practice, however, it often wastes time and leaves important risks unnoticed.
Some suppliers provide routine, low-cost items. Others support services that an organisation cannot operate without. Supplier segmentation helps procurement teams recognise this difference and give each supplier the right level of attention.
The scale of procurement makes this especially important. The National Audit Office reported that the UK Government spent £259 billion procuring goods and services in 2021–22. 1 A clear approach to supplier control can therefore have a major effect on cost, service quality and risk.
Supplier segmentation is the process of placing suppliers into groups based on their value, importance and level of risk.
It gives procurement teams a simple way to decide:
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The aim is not to label one supplier as good and another as bad. It is to manage each relationship according to its effect on the organisation.
A supplier may be low in annual spend but still be critical. For example, a small technology provider may support an important system. If that system fails, the effect could be much greater than the value of the contract.
A practical supplier segmentation model can divide suppliers into four groups. The names may change between organisations, but the basic approach remains similar.
Strategic suppliers have a major effect on the organisation’s services, goals or long-term plans. They may manage high-value contracts, provide specialist expertise or deliver a service that is difficult to replace.
These relationships need close attention. They may involve:
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Treat strategic suppliers as key business partners, not just companies that receive orders.
Critical suppliers provide goods or services that the organisation depends on. Their contract value may not always be high, but a failure could interrupt operations or affect customers.
Examples may include a specialist maintenance contractor, a key software provider or a supplier with access to sensitive information.
Set clear service standards for these suppliers. Also, create backup plans and check risks often. Procurement teams should know how quickly they can find a new supplier if a problem occurs.
This is important because competition cannot always be taken for granted. Of the 16,000 contracts reviewed across major government departments in 2021–22, only 63% had been competed to some extent. 2 Supplier choice and market availability should therefore form part of the segmentation process.
An organisation may spend a lot with leverage suppliers. However, it can usually find other suitable suppliers in the market. Examples include office supplies, utilities and common business services.
The main aim is to get better value. Procurement teams can:
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These suppliers may not need meetings with senior leaders. Still, teams should check their spend often. Even a small saving on a large contract can reduce costs.
Routine suppliers provide low-cost goods or services with little risk. Also, they are often easy to replace. Therefore, they have less effect on daily work.
The process should be quick and simple. Too many meetings or checks may cost more than the purchase.
Teams can manage routine suppliers through:
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As a result, procurement teams have more time to manage key suppliers.
Supplier segmentation should be based on evidence rather than opinion. A short scoring process can make decisions more consistent.
Start by checking how much the organisation spends with each supplier. Include every department and location to get a clear total.
However, do not group suppliers by spend alone. Use it as a starting point.
Next, think about what would happen if the supplier stopped work tomorrow.
Would work continue, slow down or stop? Also, would this affect customers, residents or staff? These answers will show how important the supplier is.
Look at financial stability, service performance, data security, health and safety, legal compliance and supply continuity.
Payment behaviour should also be considered as part of a responsible relationship. Research commissioned by the Department for Business and Trade found that 28% of UK businesses are affected by late payments each year. 3 Fair and reliable payment processes can help protect smaller suppliers and improve supply chain stability.
Ask how many suitable alternatives are available. A supplier becomes more critical when only a small number of businesses can provide the required service.
Teams should also consider how long it would take to change providers. A replacement may exist, but moving the service could still take several months.
Procurement, finance, contract managers and service teams should review the results together. This reduces the chance of one department making the decision without understanding the full picture.
External procurement consulting support may be useful when supplier data is incomplete or the organisation has not used segmentation before.
Segmentation only provides value when it changes how suppliers are managed.
Strategic suppliers may need monthly performance meetings and annual improvement plans. Critical suppliers may require quarterly risk reviews and tested continuity arrangements. Leverage suppliers may need regular price comparisons, while routine suppliers can be managed through simpler systems.
The frequency of reviews should reflect the supplier’s importance. It should also be possible to move a supplier between groups when circumstances change.
Modern supplier management includes more than delivery times and cost. Organisations may also want to consider social value, local employment, sustainability and support for smaller businesses.
For example, Northern Ireland’s current social value policy requires qualifying services and works tenders to give social value at least 10% of the total award criteria.4 Although the policy has a defined regional scope, it shows how wider outcomes can influence supplier assessment.
These factors can be added to supplier scorecards. However, measures should remain relevant to the contract and easy to check.
A supplier’s position can change over time. Contract values may grow, market conditions may shift or a once-common service may become harder to source.
Review the segmentation model at least once a year. An earlier review may be needed after:
Reliable data across procurement and supply chain management makes these reviews faster and more accurate.
In short, supplier segmentation helps procurement teams use their time well. It protects key services, controls costs and makes daily purchases easier.
Also, the model can stay simple. A few clear groups, fair scores and regular checks can give you more control.
Finally, if you need help grouping suppliers or managing key contracts, Inprova is here to help.
How many supplier segments should an organisation use?
Four groups are usually enough for a simple model. Larger organisations may add further categories if they have more complex supply chains.
Is supplier segmentation based only on spend?
No. Spend is important, but service impact, supply risk, market choice and replacement time should also be considered.
How often should suppliers be reviewed?
A full review should normally take place at least once a year. Critical changes or performance problems may require an earlier review.
Can a supplier move between categories?
Yes. A supplier may become more important because spend increases, the market changes or its service becomes harder to replace.
Who should be involved in supplier segmentation?
Procurement teams should work with finance, contract managers and service users. This gives a more complete view of each supplier.
Source:
Lessons learned: competition in public procurement
PPN 01/21 – Social Value in Procurement
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