Supplier Classification – How to show suppliers where they stand

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).

 

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2 thoughts on “Supplier Classification – How to show suppliers where they stand

  1. Hello Mr. Colewell,

    I am consulting for a health care insurance firm who would like to implement a concept similar to certifying suppliers but instead of suppliers they will be different doctors and health facilities. We were thinking of taking an ABC classification model and making it into a Gold, Silver, Bronze Classification system that doctors/health facilities could achieve.

    My question; How do you go about initiating a certification process like this?

    I am fresh out of college so the process directing something like this is new to me.

    Any help would be greatly appreciated,

    Thank you,

    Alex

    • Hi Alex
      I would be looking at developing a framework with key stakeholders.

      The link to “How to select suppliers to add value” and the follow-up post “Supplier Appraisal” (pre-contract) may give you a starting point. I propose a 3-part supplier appraisal which you might adapt for your purpose. i.e., is the health care service ready, willing, and able to do what the various stakeholders need? Draw up a list of criteria under the main headings: some will be essential, some very important, some nice to have. By considering all stakeholder perspectives you will identify important criteria that may not visible to the end-user. For example there may be administrative issues which are not part of the medical treatment provided to the patient but essential to the insurer when processing claims. When evaluating suppliers I would have typically 10-12 criteria under each of the headings. These can form the basis of a scorecard. You can weight individual criteria and score each service provider according to how well they fulfil each criterion.

      Have a draft list of criteria when you meet with stakeholders and get them to add/amend. I like to do this with small mixed groups rather than in one-to-one sessions because the interaction between stakeholders often throws up new perspectives and important considerations.

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