How to Increase Supplier Collaboration: 5 Steps for Segmenting Your Supply Base

In a survey conducted by McKinsey, over a third of the respondents said they collaborated with suppliers, but fewer than 10 percent could demonstrate systematic efforts on supplier collaboration.1

I recently read a great personal account that was essentially “a day in the life of a small supplier” trying to work with a large global company to get setup as a vendor. The post was startling – the amount of administrative work this person (a freelance writer) had to do to simply be paid for the work he is doing was sobering. I recognise this isn’t the same across the board but if companies want to realise ultimate success, they must stop mistreating suppliers. Organisations should view suppliers as partners and make their purchase-to-pay processes easy for them – removing difficult, arduous steps that erode the relationship.

This brings us to our second post in this series on supplier collaboration. Our first post provided a high-level overview. In this post, we’re taking a deeper dive into the step of segmenting suppliers to begin a supplier collaboration project. 

Not All Suppliers Are Created Equal 

The SpendMatters paper, Leapfrog the Competition by Transforming Your Supplier Relationships from Tactical to Strategic, makes a very solid point: suppliers aren’t created equal. You’re not going to approach your strategic suppliers the same way you approach your longtail suppliers. But it is important to take a strategic approach in identifying and prioritising which supplier relationships to target first, second, third and so on when rolling out a supplier collaboration initiative. 

5 Steps to Segment Your Supply Base

To identify and prioritise collaborative relationships in your supplier base, follow these steps:

  1. Get 100% Spend Visibility 
    If you’re not currently capturing 100% of your transactions by processing 100% of your invoices (all types & formats, PO & Non-PO, direct and indirect spending) through one solution; on-boarding 100% of your suppliers; and achieving 100% user adoption of your e-procurement solution, then you can’t possibly see the full picture to support supplier segmentation. Complete financial data is critical to understanding how much you’re spending with various suppliers.

  2. Look at Annual Spend & Transaction Volume
    Sort your supplier base by spend. The suppliers that you’re spending the most money with and funneling majority of your orders to year-over-year are most likely going to be your top suppliers. Because of the sheer volume of business you’re doing with these companies, they are prime candidates to approach about a more collaborative relationship.

  3. Know the MVPs 
    It’s important to understand which suppliers are critical to your operations and know how your business would be impacted if those companies went out of business or no longer delivered products and services to you. These supplier relationships are essential and should be nurtured through a supplier collaboration initiative. 

  4. Consolidate Suppliers – But Don’t Overdo It
    If you have a lot of suppliers delivering the same or similar products and services, it makes sense to consolidate those orders and negotiate favorable contracts with a smaller number of strategic suppliers. This enables a host of benefits like volume discounts, better service, streamlined communication and more. These suppliers can be targeted for more collaboration in the process of funneling more business to them. But on the flipside, don’t overdo it. Make sure you aren’t injecting risk by relying too much on certain suppliers to deliver products and services or overwhelming their capabilities to deliver. You want to ensure that you have options. Similarly, if you find certain products and services are only available through specific suppliers, you may want to look at diversifying your supply base in that area to safeguard against the risk of supply chain disruption.  

  5. Make it Easy on the Longtail
    By the end of this exercise, it will be clear there are certain suppliers that do not make sense to target for more concerted relationships – but this doesn’t mean you can’t collaborate with them by making it painless to interact with you as a customer. Freelancers like the writer of the article I mentioned in the beginning of this post and longtail suppliers often get the short end of the stick, but the products and services they provide are still important to your business. You want to make it easy for them to on-board with your purchase-to-pay system and simple to send invoices, get paid quickly and communicate with you when necessary. This eliminates inefficiencies, errors and time spent on resolving issues that arise from an unfriendly, complicated process and solution – saving both parties valuable resources and energy. 

Supplier Motivation is Key

Don’t forget to consider your collaboration offer to suppliers from their perspective. Collaborative projects should pose a win-win for you and your business partners – not just be perceived as more effort for the same return to them. Key suppliers will be keen on forming a long-term strategic partnership. Suppliers who are eager for more business and wanting to grow will be excited to expand their involvement with your organisation. Longtail suppliers will be interested in faster payments and streamlined processes. There are benefits of collaboration on both sides – the key is demonstrating the pros. 

Business Consultants Can Help

Explore tools for supplier management and draw on the expertise of your purchase-to-pay solution provider. And as always, reach out to us at Basware – we’re here to help!