Supplier Segmentation Tools Help Drive Procurement Productivity

Today’s blog draws a comparison between Marketing & Sales and Purchasing in relation to the critical factor of segmentation. The overall objective of segmentation is to identify high-yield segments, that is, those segments most likely to be profitable or show good growth potential. According to Wikipedia, “Market segmentation assumes that different market segments require different marketing programs – that is, different offers, prices, promotion, distribution, or some combination of marketing variables.”

In our case of B2B, Marketing & Sales performs a customer segmentation in order to compile a group of customers (or segments) that presents shared characteristics like similar industrial applications, comparable needs, common interests, and similar buying behavior, among others. After the segmentation, Marketing & Sales may implement Customer Relationship Management (CRM), a process of managing a company’s interaction with current customers, specifically designed for each segment.

On the other side of the table, we notice Purchasing treating all suppliers similarly, although I believe the customer segmentation rationale should be the same for Purchasing as with Marketing & Sales; that is, a company’s different suppliers should be treated differently. Without a doubt, all suppliers must be treated with respect and high ethical standards. However, the attention level, communication, and frequency of communication to each one should be different, involvement of purchasing leadership and stakeholders should be different, and most important, the negotiation and purchasing strategies should be different too because the key drivers are different.

According to the Procurement Strategy Council, “On average, purchasing organizations spend 60% on sourcing activities and less than 20% actively managing supplier value.” That’s where Supplier relationship management (SRM) comes into play.

What is SRM?

Supplier relationship management, according to Wikipedia, is “the systematic, enterprise-wide assessment of suppliers’ assets and capabilities with respect to overall business strategy, determination of which activities to engage in with different suppliers, and planning and execution of all interactions with suppliers, in a coordinated fashion across the relationship life cycle, in order to maximize the value realized through those interactions.”

Before implementing SRM with an Account Manager and Account Plan, then, you must segment your suppliers in order to define which ones are considered strategic to your company. In this case, a Supplier Segmentation Tool will provide invaluable help in this process.


The first step is to ask your buyers, purchasing manager, and director to list 5 strategic suppliers. The next step is to ask why they are strategic. This is when the revelations begin as each of them gives their own rationale – or more often, mere gut feeling – and criteria can then be examined in the open.

Strategic suppliers, by definition, are those who are strategic to the entire company, however your company chooses to define its strategy. Therefore, the supplier segmentation should be done at the highest commodity levels, i.e., Raw Materials, Packaging, MRO, Logistics, and Corporate Services. The benefits of supplier segmentation are many, as outlined below.

  • Enables better resource allocation by:
    • assigning appropriate people to each segment
    • guiding Purchasing time management within Suppliers
    • assuring leadership time with important Suppliers
  • Defines engagement model for each Supplier segment by:
    • enabling alignment within Purchasing and also stakeholders
    • defining roles, activities, and frequency of engagement
    • identifying which Suppliers receive Collaboration
  • Defines tactics model by:
    • guiding sourcing and negotiation strategy
    • guiding communication level and frequency
    • guiding performance management level

The Tool

The tool I have developed has two dimensions, VALUE (y-axis) and IMPORTANCE (x-axis) and creates four quadrants (shown below). Value includes tangible elements like Spend, EBIT, Revenue Impact, TCO, and more. Importance includes less-tangible elements like Risk, Complexity, Impact, Service Disruption, and others.

For both dimensions (Value and Importance), there are 13 Criteria that you designate as High, Medium, or Low. The tool allows you to also create your own criteria and scale if you wish.

For each highest level of commodity (e.g., Raw Materials) you select from 3 to 5 criteria where your suppliers will be evaluated. For each criterion, you input the weights: 9, 3, or 1 (high, medium, or low), and you must use all weight levels (that is, you cannot choose level 9 across the board). Next, you add all suppliers to be evaluated against the criteria, along with their respective annual spend. As a team (which may include stakeholders), you will agree on a score (9,3,1) for each criterion for each supplier.

Once all suppliers are scored, the tool will segment each supplier into one of the four segmentation groups available:

Strategic: High Value / Very Important, Important: Very Important / Low Value, Value: High Value / Not Important, Tactical: Low Value / Not Important

The tool will list all suppliers in their respective segments. The segmentation tool will calculate the overall score for each supplier. (Scores are not shown because the numbers do not have specific meaning). The overall score, then, is compared to the average in each dimension in order to position each supplier within a quadrant.

If the scores for suppliers are close to each other, you may have more or fewer strategic suppliers than you would like to have, but the tool is flexible, so you can alter the number of strategic suppliers by changing the sensitivity analysis. This sensitivity can change the average position from -30% to +30% (of the dimension average).

Once you have your suppliers segmented, you must allocate your resources accordingly. This will require you to 1) define which engagement model you should pursue within each segment, 2) define the tactics of communication level, frequency, and performance management, and 3) define sourcing and negotiation strategies for each segment.


An old Purchasing axiom comes to mind: “Not all suppliers are created equal.” Recalling this wisdom reminds us that we select different suppliers using our keenest purchasing lenses, with each them being treated differently according to each of our company’s interests. Segmenting our supplier base is the first step to allocating resources and treating them according to each their appropriate segmentation. The benefits of supplier segmentation for your company is achievable through better relationships, cost reduction, and value creation.

Taking Purchasing to the next level,

Paulo Moretti

Is SRM Worth the Investment?

I was recently interviewed by Dustin Mattison, Publisher at, where you can also hear the recording of the interview.

We talked about Supplier Relationship Management (SRM) and the preliminary results of a recent SRM benchmark study.  Below is a transcript of the interview.

1.      Please give us a brief background about yourself.

I worked for 35 years at Dow Chemical in different areas like Manufacturing, R&D, Sales, Marketing, Finance, Strategic Planning, e-Business, and (the last 12 years in) Purchasing. In 2012, I started a consultant firm called PM2Consult, with a focus in Purchasing.  I am also a Senior Consultant at Vantage Partners.

2.      Where are we now with Supplier Relationship Management?

I think it is a hot topic today, and several leading consultant companies have endorsed the need of SRM.

  • A.T. Kearney: “Leaders use SRM process more consistently than followers.
  • Deloitte Consulting: “SRM is underinvested due to immediate savings priority.
  • Hackett Group: “SRM is the hottest area today.
  • IBM: “Supplier collaboration helps top performers bring the outside in.

I think I’m able to answer this question with data because we at Vantage Partners just finished a huge benchmark study.

We had over 800 responses from all kinds of sectors like Mining, Arts & Entertainment, Manufacturing, Health Care, Finance, Transportation, etc. This survey reached companies with a total revenue of almost $5 trillion or 6.8% of world GDP, so I believe we have enough data to talk about it.

  • 78% of responses said they have some kind of SRM practice in place.  However, only 10% of them said they have reached maturity or highly effective organization in terms of SRM.
  • They said that they have reached only 44% of potential value available, so there is a potential to achieve value at 1.5 times what they’ve got.
  • Regarding investment and return, they said they have invested $3.5B to date. Last year’s return reported by all companies reached $14.3B. So, you see that I’m comparing the investment to date with last year’s return, and the reason is that the investment in SRM takes time to realize.
  • So, there is no doubt that investment in SRM has yielded excellent returns.

3.      Why are we where we are?

The data indicates that there is a good correlation of investment made in SRM and results achieved. Each company is in a different level of maturity in terms of SRM, so the investment needed may be in different areas.

  • Investments are made in formal SRM governance mechanisms and business processes like joint strategic planning, and performance reviews yield large payoffs.
  • Investment is critical in individual skill-building for staff with interactions with suppliers. The benchmark data show that this investment will be one the highest priorities in the next 3-5 years.
  • Time devoted for managing critical relationships should be one-third of their time.
  • The data also show an excellent correlation between Maturity Level in SRM, Investment, and Returns. Companies classifying themselves as mature or highly effective in SRM had higher investments in SRM and also presented higher returns.
  • So, a simple answer is investment priority.

4.      Where are we going?

Part of our benchmark survey was related to the next 3-5 years.

  • 70% of responses said SRM is Very Important for the next 3-5 years, and 26% said Somewhat Important, so the great majority believes SRM is an important area in their organization.
  • Most of the companies said they will invest in People, Training, Work Process, and Tools, with People and Training the highest ranked areas.
  • In terms of objectives for the next 3-5 years, the majority of responses said they will focus on two areas:
    • Cost savings through joint collaborative efforts with suppliers
    • Reduction in supply chain risk
  • In order to achieve the full potential of their relationship with suppliers, 52% of responses said they need a Major Change or Total Transformation, and 32% of responses said a Moderate Change is required.
  • So, they see the importance of SRM, they will invest, and most important, they need to change to achieve full value.

5. Do you have any recommendations?

  • Build stronger relationships and enhanced collaboration with key suppliers in order to realize increased value from joint collaboration, technology innovation, and improvements in service and support.
  • Leverage supplier assets and capabilities to generate a competitive advantage (versus only focusing on purchasing goods and services at a lower cost).
  • Ensure more structured and focused engagement with key suppliers in order to become a Customer of Choice.
  • The benchmark shows that three practices stand out as most likely to yield results:
    • Tracking and measuring the total financial and strategic value delivered by SRM
    • Aligning and integrating strategic sourcing, category management, contracting and contract management, and SRM
    • Developing multi-year strategic plans with the most important suppliers

I hope you found this summary useful to your work.  Feel free to call me with any concerns you have about SRM at your company.

Taking Purchasing to the next level,

Paulo Moretti