February 2023 Volume 5

OPERATIONS & MANAGEMENT

The Language of Supplier Segmentation By Vic Venettozzi

and the chain weaves externally and internally until the product is in the hands of the ultimate customer's customer. The organizational chart and job descriptions of a company can tell you much about how far they have progressed in understanding this dynamic. Even today, companies have managers, directors, and executives with the words supply chain or supply chainmanagement as part of their titles. Still, the proper roles run the gamut from conventional purchasing and production planning assignments to roles genuinely responsible for the end-to-end internal and external components of the company's supply chain.

The third installment in our series of Supply Chain Management Tools addresses Supplier Segmentation. Supplier Segmentation is the allocation of the company's supplier relationships to carefully crafted and defined categories. It creates a language within your business that instantly communicates the criticality and nature of the business relationship with each supplier to everyone. Proper focus and attention by the functions involved in supply base management, based on the supplier's segmentation category, will help the buying company generate another competitive advantage in supplier relationship management - beyond simply buying and selling, while continuously reducing supply risk. Generally, segmentation will result in a strategic few and a more significant but still controlled number of core suppliers. But every supplier is categorized – if a supplier is not considered in such a segmentation exercise, and business with that supplier continues - the ability to reap the maximum benefit from the relationship is non-existent. There is no mandatory template; segmentation categories offered later in this writing can be modified as the buying company desires. But once defined, categories must be well understood within the buying company, and the suppliers must also be taught the same meaning. It must also be understood, internally and externally, how suppliers can progress through the segmentation categories. A company may require more segments than those we discuss below – there is no hard and fast rule. The model used in this article is one such framework – it may work perfectly for your company, or you might engineer a similar strategy. Regardless, it is an essential tool in the supply chain management toolbox. Before diving into the Supplier Segmentation tool, let's revisit a few modern supply chain management axioms. You have heard it before – but in today's business world, companies do not compete – supply chains compete. Supply chains extend from your suppliers' suppliers, the means of conveyance between supply chain nodes,

Our second axiom is why suppliers perform within a company's supply chain – and on the converse, why do suppliers fail to perform? It's three words and in this order; priority, capacity, and flexibility. Willis Pugh, ITW Automotive's current VPGM of Air Flow Management, coined this thought process in our work together in years past. We were able to build on this basic concept when diagnosing supplier performance problems, and it is helpful to explain it in detail here. First, if you do not have business priority with a supplier who is not performing; if another customer's business is prioritized before your own, or if the supplier cannot verbalize how they regard your business – stop there. The best equipped, most talented, highly sophisticated suppliers will fail in their performance if there is a question about your priority as a customer. If you clear the priority hurdle - if you are convinced the supplier regards your business as a priority - move to capacity. And answering the capacity question becomes one of mathematics. Does the supplier have adequate capacity for your business and the business of others? Are they sophisticated in using theoretical capacity and total preventive maintenance of their factory floor? Determining adequate capacity is the most straightforward answer of the three questions to ask when a supplier fails to perform. So, now you have confirmed that your business is a priority with the supplier. And you have validated that there is adequate capacity after deep diving into their numbers. There's only one thing left to

FIA MAGAZINE | FEBRUARY 2023 44