The segmentation process

The process of segmentation is the division of an entire supply base into discrete groups according to their importance through the application of the segmentation criteria, applied supplier-by-supplier to arrive at a segmented supply base. Conducting segmentation ideally requires a cross-functional workshop involving carefully selected participants and facilitated discussion and debate. It is not a once only activity, but once done for the first time should be revisited on a regular basis.

Segmentation might seem straightforward; after all, if we have a good set of criteria all we need to do now is apply it to the supply base and figure out who is important. Easy? No, actually this can be one of the hardest steps within SRM and there are three issues that hinder us here:

• The size of the supply base - if there are, say, 10,000 suppliers in total, and we chose to apply the full segmentation criteria to all suppliers then the process would take about four and half months! Clearly unworkable.

• The degree of depth required to do it properly - determining how individual suppliers stack up against criteria such as alignment and future importance requires close and detailed understanding of specific suppliers and marketplaces. Determining risk requires detailed risk mapping. Research and evaluation to support this takes time and resource. If we attempted this across the entire supply base it could take nearly five years!

• The ability to assimilate lots of information to make sound judgements - when organizations segment their supply base there appears to be a tendency to use some sort of mathematical model that sums scores according to all the criteria met. Such approaches are usually flawed or at best sub-optimum as suppliers only end up being regarded as important if they meet multiple criteria. Suppliers that score low but present potentially show-stopping risk could easily be disregarded.

Applying segmentation criteria to an entire supply base with any degree of depth is unworkable and so we need something a bit more pragmatic. Here Pareto principles apply and we need to be able to exclude the vast majority of suppliers we are certain we are not interested in. This is a bit like how sales teams qualify the leads they are going to spend time pursuing where a 'sales funnel' is used to apply certain tests and carry out certain sales activities with a view to a sale emerging. For our supply base we need to adopt a similar funnel approach, and here our segmentation funnel allows us to make a series of 'passes' where different tests are applied to create or qualify the pool of suppliers against whom the full segmentation criteria will later be applied (Figure 4.5).

Segmentation is most successful when it is performed by an assembled group of those individuals who are close to suppliers, understand the organization and are best placed to have an opinion here. A team of five to seven is about right. Allow sufficient time (ideally an entire day) and ideally the session should be facilitated. For each important supplier identified, the scores against the segmentation criteria should be recorded and the outputs of each discussion and debate about each supplier should be captured as we will need to refer back to both later. Figure 4.6 gives an example segmentation score sheet, using a simple 1-5 score for each criterion together with definitions to aid assigning scores.

With the right individuals assembled conduct segmentation as follows:

1 First pass - quick method 'hurt, help or heroes'. Start with the entire supply base and brainstorm who could hurt us most, who could best help us, who are the heroes? Use strict brainstorming rules (no discussion or debate, just ideas until it all goes quiet). Record on a flip chart and 'park it' to revisit later. Aim to spend no more than 10 minutes doing this.

2 Second pass - high-spend check. Again, considering the entire supply base, use spend data to determine those suppliers with whom there is a current high spend or high projected spend. Aim to identify the top 50-100 suppliers here. These will be the group we will focus on but bear in mind there could still be suppliers with low spend who present risk and we need to ensure we don't overlook these. Ideally spend data would be available from a corporate system; if not, there are specialist companies who can carry out spend analysis or analysis of purchase orders or payment records can provide data here.

3 Third pass - who is important. Apply the full segmentation criteria in rapid fashion to the suppliers identified during the first two passes; rating each supplier against each criterion based upon the knowledge

FIGURE 4.5 The process of segmentation

The process of segmentation

FIGURE 4.6 The segmentation supplier score chart

The segmentation supplier score chart

of the group and recording the scores. This pass is about identifying those suppliers who are important or could hurt us, therefore only a superficial assessment of factors such as future importance and alignment are needed at this stage.

4 Fourth pass - who is strategic. Comprehensively apply the full segmentation criteria to the most important suppliers identified during the third pass (perhaps the top 10-20), again recording the scores. Here we are considering who has the potential to significantly help us, or who are the heroes, and any suppliers who could significantly hurt us. Therefore factors such as future importance and alignment need to be considered more deeply. This may involve agreeing fact find actions to verify assumptions made by the group. Aim to identify around 5-10 strategic suppliers in total. If more emerge, challenge the criteria or the way it is being applied. It is possible to conduct the third and fourth pass together in one go.

5 Fifth pass - new suppliers. Until this point segmentation has focused on identifying who is important from our current pool of suppliers. However, if at this stage, and based upon VIPER and what the business needs from the supply base, we either lack something or feel there might be greater opportunity elsewhere in the market, then new suppliers should be considered. This may well involve thorough market research and data gathering actions agreed by the group.

Once all passes are complete, finalize the segmentation and list those suppliers who are important or strategic. Triangulate back with the first pass to check for any suppliers who were initially identified but have not emerged from the detailed segmentation activity. Plan to revisit the list regularly.

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