Executive Briefings

Create Differentiating Value in the Supply Network Through Supplier Segmentation

Analyst Insight: Supplier segmentation is a critical foundational component for executing on your supply management strategies and for understanding and building value in the supply network. Supplier segmentation supports an end-to-end supply chain segmentation strategy. However, it must be aligned with downstream processes to ultimately deliver value to customers. Unfortunately, Gartner Supply Chain research finds two-thirds of organizations take a one-size-fits-all view to supplier relationship management, resulting in misaligned resources and little delivered value. - Mickey North Rizza, Gartner Supply Chain Research

Creating real differentiated supply base value starts with supplier segmentation.  Gartner Supply Chain Research finds a detailed analysis and a segmented approach to your supply base is an important aspect of building a resilient and secure supply chain while reducing complexity.  Supplier segmentation is a critical and necessary tool for visibility; it provides a standardized simplified foundational approach for supplier relationship management.

To deliver real differentiated value, these aspects must be considered in supplier segmentation:

• Not all suppliers are created equal.  Supplier segmentation provides a methodology and fundamental advantage to organize the supply base and the supplier information.  It provides a common language for procurement to manage suppliers globally.

• Technology is nascent answering the call for supplier segmentation visibility.  Spend analysis tools provide visibility to identify the large-volume-spend suppliers.   However there is currently no technology tool that brings in the additional supplier attributes and information that provide strategic value, such as scale; unique components, features and/or functionality; supplier/buyer power; and geographic location to markets, or high risk.

• Supplier relationships and the resulting supplier contracts must be aligned to supply chain types.  Using a low-volume / high-mix supplier for a high-volume supply chain will only create frustration for the customers, buyers and suppliers.  Creating supplier value requires a focus on optimizing the trade-offs of delivering unique customer value, low price, faster speed to market, and enhanced differentiation and services.

• Supplier segmentation is not a rigid siloed business process done every few years.  The high-tech, consumer products and retail verticals find supplier segmentation must be done every 6 months to ensure sourcing strategies stay current and are aligned with their market expectations.

• Recognize that the basic supplier segmentation types of transactional, commodity, strategy and bottleneck suppliers are just a baseline.  Real advantage is achieved when the supplier segmentation baseline is compared to the supplier's demand characteristics that they need to execute against (i.e., low price, cycle time, personalization, etc.).  This advanced segmentation then aligns the sourcing and supplier relationship management strategy accordingly.

• Creating a supplier segmentation framework that delivers differentiating value requires a long-term strategic organization direction and outlook.   Utilizing a sole-source and bottleneck supplier that provides unique product functionality can bring real market value for the customers, buyer and supplier in the short term.  However, the ability to create additional sources of supply for these unique items while satisfying increased market demands requires a supplier segmentation framework to manage this shifting supply base. Innovation, strategic advantage, joint profitability and market share opportunities can be uncovered with a strategic long-term approach.

                                      The Outlook

In 2012, Gartner expects more procurement organizations to implement advanced supplier segmentation methodologies. Segmentation will give way to lower procurement organization costs as transactional and commodity suppliers are outsourced; the procurement focus will continue to shift to managing the suppliers that are high-risk and bring significant strategic value.

In addition, expect technology vendors to begin focusing on the multitude of supplier attributes and company requirements to automate supplier segmentation methodologies.


Keywords: Supplier Relationship Management, Sourcing & Procurement Solutions, Technology, Business Strategy Alignment, Supply Chain Analysis & Consulting, Global Supply Chain Management, Gartner, Supplier Base Value, Supplier Segmentation Methodologies, Supplier Attributes

Creating real differentiated supply base value starts with supplier segmentation.  Gartner Supply Chain Research finds a detailed analysis and a segmented approach to your supply base is an important aspect of building a resilient and secure supply chain while reducing complexity.  Supplier segmentation is a critical and necessary tool for visibility; it provides a standardized simplified foundational approach for supplier relationship management.

To deliver real differentiated value, these aspects must be considered in supplier segmentation:

• Not all suppliers are created equal.  Supplier segmentation provides a methodology and fundamental advantage to organize the supply base and the supplier information.  It provides a common language for procurement to manage suppliers globally.

• Technology is nascent answering the call for supplier segmentation visibility.  Spend analysis tools provide visibility to identify the large-volume-spend suppliers.   However there is currently no technology tool that brings in the additional supplier attributes and information that provide strategic value, such as scale; unique components, features and/or functionality; supplier/buyer power; and geographic location to markets, or high risk.

• Supplier relationships and the resulting supplier contracts must be aligned to supply chain types.  Using a low-volume / high-mix supplier for a high-volume supply chain will only create frustration for the customers, buyers and suppliers.  Creating supplier value requires a focus on optimizing the trade-offs of delivering unique customer value, low price, faster speed to market, and enhanced differentiation and services.

• Supplier segmentation is not a rigid siloed business process done every few years.  The high-tech, consumer products and retail verticals find supplier segmentation must be done every 6 months to ensure sourcing strategies stay current and are aligned with their market expectations.

• Recognize that the basic supplier segmentation types of transactional, commodity, strategy and bottleneck suppliers are just a baseline.  Real advantage is achieved when the supplier segmentation baseline is compared to the supplier's demand characteristics that they need to execute against (i.e., low price, cycle time, personalization, etc.).  This advanced segmentation then aligns the sourcing and supplier relationship management strategy accordingly.

• Creating a supplier segmentation framework that delivers differentiating value requires a long-term strategic organization direction and outlook.   Utilizing a sole-source and bottleneck supplier that provides unique product functionality can bring real market value for the customers, buyer and supplier in the short term.  However, the ability to create additional sources of supply for these unique items while satisfying increased market demands requires a supplier segmentation framework to manage this shifting supply base. Innovation, strategic advantage, joint profitability and market share opportunities can be uncovered with a strategic long-term approach.

                                      The Outlook

In 2012, Gartner expects more procurement organizations to implement advanced supplier segmentation methodologies. Segmentation will give way to lower procurement organization costs as transactional and commodity suppliers are outsourced; the procurement focus will continue to shift to managing the suppliers that are high-risk and bring significant strategic value.

In addition, expect technology vendors to begin focusing on the multitude of supplier attributes and company requirements to automate supplier segmentation methodologies.


Keywords: Supplier Relationship Management, Sourcing & Procurement Solutions, Technology, Business Strategy Alignment, Supply Chain Analysis & Consulting, Global Supply Chain Management, Gartner, Supplier Base Value, Supplier Segmentation Methodologies, Supplier Attributes