Recently I commented on a LinkedIn discussion, “Presently I am looking to devise a simple classification structure for my supply base – something that will allow my suppliers/providers to know where they presently stand from an engagement/expectation perspective and that shows them what they can work towards…. Does anyone have examples of such structures that they can share?”
My reply (edited):
Your starting point will depend on the maturity of your procurement organisation and practices. Factors such as criticality to the business and the supplier’s perspective need to be considered. I would normally first analyse categories and supply markets using Kraljic and Porter’s 6 Forces. You might also use Supplier Preferencing for ‘strategic’ and ‘bottleneck’ suppliers (according to Kraljic classifications).
Both Kraljic and Supplier Preferencing are relatively simple analyses, taking no account of the dynamics of the supplier’s circumstances – great for tactical procurement, although limited in their application when it comes to strategic category management. More details and alternatives can be found in my article, “How to Select Strategic Suppliers, Part 1: Beware the Supplier’s Perspective.”
It is likely that you will have suppliers who are ideal candidates for strategic partnership in part of your portfolio and, at the same time, have short-term tactical use in another part. So, if you intend to classify suppliers, you really need to relate the classifications to specific categories, sub-categories or even individual items.
Whatever your level of maturity, you will be looking to drive both supplier and internal stakeholder behaviour. I would suggest the following supplier classifications:
A. Core supplier – protect and enhance
(1) strategic – aiming to increasing value
(2) leverage – aiming to maintain/increase volume.
B. Preferred – develop/grow to either A1 or A2, in the meantime use as opportunity allows.
C. Tactical – exploit within parameters allowed by category strategy.
D. Nuisance – divest.
Additionally, non-suppliers will be unlisted or blacklisted.
You may be identifying unsatisfactory performance in any category but capability and performance need to be included in your selection/classification criteria.
I would be aiming quickly to develop strategies for A and B suppliers using more refined tools. More information can be found in “How to Select Strategic Suppliers – Part 2: Reconciling Buyer and Supplier Perspectives” and “Procurement for Projects: Supply Planning (Part 2) – 3 Key Elements; 6 Tools & Techniques.”
Generally for classifications A and B you will open with suppliers, aiming for shared objectives of growing volume (increasing share or enabling business growth), value (increasing scope at constant share) or simply improving performance.
An approach that I have found useful within narrowly defined categories, is to score suppliers against a set of criteria (under 3 headings: infrastructure and technology; strategy and outlook; systems and assurance). See “How to select suppliers to create value“. Share the results with suppliers; include the average scores and ranges for other suppliers (withholding both their individual scores and identities). This can give a very clear view of where the supplier stands, what they need to do and by how much they need to improve.
For classifications C and D you may be keeping your strategy confidential, or withholding information from your suppliers, for obvious reasons.
Internal stakeholders need to be aware that occasionally you may be open with C&D suppliers (for example recognising mutual advantage in co-operating tactically) or closed to A&B suppliers (for example to protect against monopolistic exploitation).
- Procurement for Projects: Supply Planning (Part 1)
- Procurement for Projects: Supply Planning (Part 2) – 3 Key Elements; 6 Tools & Techniques
- How to select suppliers to create value (Introduction)
- How to select suppliers to create value: Supplier Appraisal
- How to Select Strategic Suppliers – Part 1: Beware the Supplier’s Perspective
- How to Select Strategic Suppliers – Part 2: Reconciling Buyer and Supplier Perspectives