Supplier Management & Relationship Management
Master supplier segmentation, performance management, risk assessment, and relationship strategies to build strategic supplier partnerships.
Course Overview
Duration
45-60 minutes
Level
Intermediate
Lessons
7 lessons
What you'll learn:
- Supplier segmentation strategies
- Supplier performance management frameworks
- Supplier risk assessment and monitoring
- Supplier relationship management (SRM) strategies
- Supplier development and improvement programs
- Supplier diversity and inclusion
- Supplier exit strategies
Supplier Segmentation
Supplier segmentation is the process of categorizing suppliers based on their strategic importance and the complexity of managing the relationship. It helps you allocate resources appropriately and develop tailored relationship strategies.
The Kraljic Matrix
The Kraljic Matrix is a classic framework for supplier segmentation. It categorizes suppliers based on two dimensions: profit impact and supply risk.
Figure 1: Kraljic Matrix for supplier segmentation
Strategic Suppliers
High profit impact, high supply risk. Critical suppliers that require close partnership and collaborative management.
- • Long-term contracts
- • Joint development
- • Risk sharing
- • Strategic partnerships
Leverage Suppliers
High profit impact, low supply risk. Suppliers where you have negotiating power. Focus on cost optimization.
- • Competitive bidding
- • Volume leverage
- • Price negotiations
- • Standard contracts
Bottleneck Suppliers
Low profit impact, high supply risk. Suppliers with limited alternatives. Focus on securing supply.
- • Supply security
- • Alternative sourcing
- • Inventory buffers
- • Risk mitigation
Routine Suppliers
Low profit impact, low supply risk. Standard suppliers with many alternatives. Focus on efficiency.
- • Process automation
- • Catalog buying
- • Minimal management
- • Standard terms
Segmentation Criteria
When segmenting suppliers, consider:
- Spend volume: Total annual spend with the supplier
- Strategic importance: Impact on business operations or competitive advantage
- Supply risk: Availability of alternatives, switching costs, supply disruption impact
- Complexity: Technical complexity, customization requirements, integration needs
- Relationship maturity: Length and depth of the relationship
- Performance: Historical performance and reliability
Pro tip: Review and update supplier segmentation annually. Suppliers can move between categories as business needs change, spend volumes shift, or supplier capabilities evolve.
Supplier Performance Management
Supplier performance management involves measuring, monitoring, and improving supplier performance against defined criteria. It ensures suppliers meet expectations and identifies opportunities for improvement.
Key Performance Indicators (KPIs)
Common supplier performance KPIs include:
Quality Metrics
- • Defect rate or first-pass yield
- • Customer complaints related to supplier
- • Returns and rejections
- • Quality certifications and compliance
Delivery Metrics
- • On-time delivery percentage
- • Lead time accuracy
- • Complete order fulfillment
- • Shipping accuracy
Cost Metrics
- • Price competitiveness
- • Total cost of ownership (TCO)
- • Cost reduction achievements
- • Invoice accuracy
Service Metrics
- • Responsiveness to inquiries
- • Problem resolution time
- • Communication effectiveness
- • Innovation and improvement contributions
Performance Scorecards
Supplier scorecards provide a structured way to evaluate and communicate supplier performance:
Figure 2: Supplier performance scorecard framework
- Define metrics: Select relevant KPIs based on supplier category and requirements
- Set targets: Establish performance targets and acceptable ranges
- Collect data: Gather performance data from systems, stakeholders, and suppliers
- Calculate scores: Weight and calculate overall performance scores
- Review regularly: Conduct quarterly or monthly performance reviews
- Share feedback: Communicate results to suppliers and discuss improvement plans
- Track improvements: Monitor progress on improvement initiatives
Performance Review Process
Regular performance reviews are essential for maintaining supplier relationships:
Prepare
Gather performance data, review scorecards, identify issues, prepare agenda.
Conduct Review
Meet with supplier, present performance data, discuss issues, gather supplier feedback.
Develop Action Plan
Identify improvement areas, set goals, assign responsibilities, define timelines.
Follow Up
Monitor progress, provide support, adjust plans as needed, recognize improvements.
Example: A strategic supplier has 95% on-time delivery but quality issues causing 5% defect rate. Performance review identifies root cause, supplier commits to quality improvement plan with monthly check-ins. After 3 months, defect rate drops to 2% and relationship strengthens.
Supplier Risk Assessment
Supplier risk assessment identifies and evaluates risks associated with suppliers. It helps you proactively manage risks and ensure supply chain resilience.
Types of Supplier Risk
Financial Risk
Supplier financial instability, bankruptcy risk, credit issues.
Indicators: Credit ratings, financial statements, payment delays, layoffs
Operational Risk
Quality issues, delivery failures, capacity constraints, technology failures.
Indicators: Performance metrics, capacity utilization, quality trends
Compliance Risk
Regulatory violations, ethical issues, environmental concerns, labor practices.
Indicators: Compliance certifications, audit results, news reports
Strategic Risk
Supplier dependency, single-source risk, market changes, competitive threats.
Indicators: Market share, competitive position, strategic direction
Geopolitical Risk
Political instability, trade restrictions, currency fluctuations, natural disasters.
Indicators: Country risk ratings, trade policies, weather patterns
Risk Assessment Process
Figure 3: Supplier risk assessment framework
1. Identify Risks
Assess supplier across all risk categories. Review financial data, performance history, compliance status, market position.
2. Assess Impact and Likelihood
Rate each risk by potential impact (high, medium, low) and likelihood (high, medium, low).
3. Calculate Risk Score
Combine impact and likelihood to determine overall risk level. High impact + high likelihood = critical risk.
4. Develop Mitigation Plans
For high-risk suppliers, develop mitigation strategies: alternative suppliers, insurance, contracts, monitoring.
5. Monitor Continuously
Regularly review risk indicators, update assessments, adjust mitigation plans as needed.
Risk Mitigation Strategies
- Diversification: Avoid single-source dependencies. Maintain multiple qualified suppliers.
- Contracts: Include risk mitigation clauses: force majeure, termination rights, performance guarantees.
- Insurance: Consider supplier default insurance or business interruption insurance.
- Monitoring: Set up early warning systems: credit monitoring, performance dashboards, news alerts.
- Contingency planning: Develop backup plans for critical suppliers: alternative sources, inventory buffers.
Common mistake: Ignoring supplier risk until a crisis occurs. Proactive risk assessment and mitigation prevent disruptions and protect your business.
Supplier Relationship Management (SRM)
Supplier Relationship Management (SRM) is a strategic approach to managing interactions with suppliers. It focuses on building collaborative partnerships that create mutual value.
SRM Framework
Effective SRM involves different relationship strategies based on supplier segmentation:
Figure 4: Supplier Relationship Management (SRM) framework
Strategic Partners
For strategic suppliers: Build deep partnerships, joint planning, collaborative innovation, risk sharing, long-term contracts.
Focus: Innovation, competitive advantage, strategic alignment
Preferred Suppliers
For leverage suppliers: Maintain good relationships, regular communication, performance reviews, volume commitments.
Focus: Cost optimization, quality, reliability
Transactional Suppliers
For routine suppliers: Efficient transactions, standard processes, minimal relationship management.
Focus: Process efficiency, automation, cost
SRM Best Practices
- Regular communication: Schedule regular meetings, share business plans, discuss challenges and opportunities.
- Transparency: Share relevant information: forecasts, requirements, performance feedback, strategic direction.
- Collaboration: Work together on improvements, innovation, problem-solving, joint initiatives.
- Fair treatment: Treat suppliers fairly, pay on time, honor commitments, provide constructive feedback.
- Recognition: Recognize and reward good performance, celebrate successes, build supplier loyalty.
- Conflict resolution: Address issues promptly, fairly, and constructively. Focus on solutions, not blame.
Building Strategic Partnerships
For strategic suppliers, focus on building true partnerships:
Joint Planning
Share business plans, forecasts, and strategic objectives. Align goals and plan together.
Innovation Collaboration
Work together on new products, processes, or solutions. Share ideas and resources.
Risk Sharing
Share risks and rewards. Long-term contracts, investment commitments, performance incentives.
Governance Structure
Establish governance: steering committees, regular reviews, escalation processes, decision-making frameworks.
Pro tip: Not all suppliers need strategic partnerships. Reserve deep SRM efforts for strategic suppliers. For others, efficient transactional relationships are more appropriate.
Supplier Development & Improvement Programs
Supplier development involves helping suppliers improve their capabilities, performance, and competitiveness. It creates mutual value and strengthens supply chains.
When to Invest in Supplier Development
Consider supplier development when:
- Supplier has potential but needs improvement in specific areas
- Limited alternatives exist (bottleneck or strategic supplier)
- Supplier is willing to invest and improve
- Development investment is justified by long-term value
- Supplier is critical to your competitive advantage
Types of Supplier Development
Quality Improvement
Help suppliers improve quality: training, process improvement, quality systems, certifications.
Example: Six Sigma training, ISO certification support, quality audits
Capacity Building
Help suppliers increase capacity: equipment, technology, facilities, workforce.
Example: Technology transfer, equipment loans, capacity planning support
Cost Reduction
Help suppliers reduce costs: lean manufacturing, process optimization, waste reduction.
Example: Lean training, value engineering, cost reduction workshops
Innovation Support
Help suppliers innovate: R&D collaboration, technology sharing, joint development.
Example: Joint R&D projects, innovation challenges, technology partnerships
Supplier Development Process
1. Assess Needs
Identify improvement areas through performance reviews, assessments, and supplier input.
2. Develop Plan
Create development plan with goals, activities, resources, timeline, and success metrics.
3. Execute
Provide support: training, resources, expertise, access to tools or technology.
4. Monitor Progress
Track improvements, measure results, adjust plans as needed.
5. Sustain
Ensure improvements are sustained, provide ongoing support, recognize achievements.
Example: A strategic supplier struggles with on-time delivery. Development program includes: capacity analysis, process improvement training, technology implementation support, and monthly progress reviews. After 6 months, on-time delivery improves from 75% to 95%, and relationship strengthens.
Supplier Diversity & Inclusion
Supplier diversity and inclusion programs promote procurement from diverse suppliers, including minority-owned, women-owned, veteran-owned, and small businesses. These programs create social value and often business value too.
Benefits of Supplier Diversity
Innovation
Diverse suppliers bring different perspectives, ideas, and approaches that drive innovation.
Competition
More suppliers in the market increases competition and can improve pricing and service.
Risk Mitigation
Diverse supplier base reduces dependency on single suppliers or supplier types.
Social Impact
Supports economic development in diverse communities and creates opportunities.
Compliance
Meets regulatory requirements and corporate social responsibility goals.
Supplier Diversity Categories
Businesses owned by racial or ethnic minorities (typically 51%+ ownership)
Businesses owned by women (typically 51%+ ownership)
Businesses owned by military veterans
Businesses meeting size standards (revenue, employees)
Businesses owned by LGBTQ+ individuals
Businesses owned by individuals with disabilities
Building a Supplier Diversity Program
- Set goals: Define diversity spend targets and objectives
- Identify diverse suppliers: Use certification databases, diversity organizations, supplier networks
- Remove barriers: Simplify processes, provide support, offer mentorship
- Track and measure: Monitor diverse spend, track progress, report results
- Provide support: Offer training, networking, mentorship, capacity building
- Recognize success: Celebrate achievements, share success stories, build momentum
Pro tip: Supplier diversity should be part of your overall sourcing strategy, not a separate program. Integrate diversity considerations into all sourcing decisions.
Supplier Exit Strategies
Sometimes supplier relationships need to end. Whether due to performance issues, strategic changes, or other reasons, managing supplier exits professionally is important.
When to Exit a Supplier
Common reasons for supplier exits include:
- Performance issues: Consistent poor performance despite improvement efforts
- Strategic changes: Business direction changes, category no longer needed
- Cost: Supplier no longer competitive, better alternatives available
- Risk: Supplier risk becomes unacceptable, compliance issues
- Consolidation: Reducing supplier base, consolidating spend
- Relationship breakdown: Irreparable relationship issues, trust lost
Exit Planning Process
Assess Impact
Evaluate impact of exit: current commitments, transition requirements, alternative suppliers, timeline.
Develop Transition Plan
Plan transition: identify replacement supplier, transfer knowledge, migrate systems, manage inventory.
Review Contracts
Review contract terms: termination clauses, notice requirements, obligations, penalties, IP rights.
Communicate
Notify supplier professionally, explain reasons, discuss transition, maintain relationship where possible.
Execute Transition
Manage transition: knowledge transfer, system migration, inventory management, final deliveries.
Complete Exit
Finalize exit: complete obligations, close contracts, settle accounts, document lessons learned.
Best Practices for Supplier Exits
- Be professional: Treat suppliers with respect, even when ending relationships
- Provide notice: Give adequate notice per contract terms, allow time for transition
- Be clear: Explain reasons for exit clearly and honestly
- Honor commitments: Fulfill contractual obligations, pay outstanding invoices
- Document: Document exit process, reasons, lessons learned for future reference
- Maintain relationships: Where possible, maintain professional relationships for future opportunities
Common mistake: Abrupt supplier exits without proper planning or communication. This can damage relationships, disrupt operations, and create legal issues. Always plan exits carefully.
Course Complete
You've mastered supplier management and relationship strategies. Ready to explore other Academy modules or start applying these concepts?