Supplier categorization is two concepts:. Categorization and classification.
Categorize first. This is merging common procurement objects and setting up dedicated procurement, technical and quality teams to manage. This is also what we usually call “category management”. For example, cartons, paper bags, packaging boxes, etc., have commonalities and belong to the packaging material category; aluminum parts, stainless steel parts, and plastic cutting parts are inseparable from machining, so they are classified as machine-added parts. These two procurement items are quite different, and the required business and technical knowledge are also different.
For example, packaging materials, you should not underestimate this category. Every time I buy a mobile phone, whether it’s Apple, OPPO or Vivo, what I like most is not the phone inside, but the box outside (have you heard of “buying a casket for a pearl”? I’m the modern version of it). And to make the box so beautiful, whether it is material or craftsmanship, it has a high technical content. The so-called category knowledge refers to the accumulation of knowledge about the process, materials, and business of packaging materials, such as where suppliers are mainly concentrated, the latest materials, and the common production processes. Category teams used by Amrep Inspect, are where this knowledge and experience come together. Quality Assurance Provider.
A core category management team can include the following:
- A purchasing manager.
- Several supplier engineers.
- Several technicians mainly design such products.
- Peripheral buyers of this category.
This is a typical cross-functional team. Under the organization and coordination of the purchasing manager, it formulates the category strategy, decides which suppliers to do business with and which not to do business with, and regularly updates the category strategy, such as annual or semi-annual adjustments. If the supplier has major quality or technical problems, this cross-functional team is also responsible for supervising and helping the supplier to improve.
After the categorization, let’s talk about classification. Suppliers of different categories are not comparable. For example, for sheet metal, Supplier A may be the preferred supplier; but for machined parts, it may be the eliminated supplier. But in the same category, suppliers of different levels are comparable. For example, Vanke divides suppliers into three levels: front-line, regional, and group procurement. Front-line suppliers can only do business with front-line companies. Regional suppliers can serve specific regional companies, while group suppliers have no geographical restrictions. Regarding capability, the region is stronger than the first line, the group is stronger than the regional suppliers, and the group suppliers can participate in most projects. With the improvement of capabilities, the advancement of cooperation depth, and successful historical performance, suppliers can gradually improve their level to obtain more business from Vanke.
Different industries and companies may have different classifications. It doesn’t matter; what matters is that the taxonomy is objective, consistent, simple to understand, and recognized across functions such as design, quality, and procurement. The classification and classification of suppliers is an important communication tool that can tell everyone the company’s strategy for a specific supplier, what to pay attention to in cooperation, and, more importantly, which suppliers are for new business.
Here we introduce a common taxonomy in North America that divides suppliers into five categories based on their performance:
- Strategic supplier (determines the life and death of the company, and it is difficult to replace);
- Preferred suppliers (suppliers with good performance, but there are alternative suppliers);
- Unqualified suppliers (new suppliers without verification or old suppliers on “School Probation”);
- Negatively eliminate suppliers (not for new business, but continue to do old business);
- Actively eliminate suppliers (not only do not give new business but also remove old business).
According to Amrep Inspect, strategic suppliers make or break a company because they have a unique technology, product or process. They may be the only supplier, or there may be replacements, but replacements are costly, risky, and have a long cycle. Of course, any supplier is replaceable, given the time. However, as long as a supplier cannot be replaced in your “lifetime” – a job is generally done for two or three years; if it can’t be eliminated within two or three years, you probably have to deal with it as a strategic supplier. Supplier Production Management.
Strategic suppliers are crucial to the company’s survival and development, just like the Monkey King in the Tang Monk team: Monkey King leaves Tang Monk, although he has no spiritual pursuit, he can live a sluggish life, and Tang Monk leaves Monkey King, he will become The monster’s plate lunch. Therefore, cooperation is a win-win situation for such suppliers, and separation is a lose-lose situation. We should focus on the long-term and cultivate long-term relationships.
It should be noted that the “strategy” here is purely based on irreplaceability, not the definition of some companies – those companies think that if you give me x points of cost reduction this year, they are my “strategic suppliers”; next year If you don’t cut costs for me, the title of “strategic supplier” will be removed.
Strategic suppliers are not easy to mess with; they are typically “capable, but also temperamental”. Is it very sad to have some strategic suppliers on the stall? It looks like it is, but it is not: if there are no strategic suppliers, this industry’s entry barrier is very low. The catering industry is a typical example. You will face a red sea of competition, and your life is destined to be more difficult. That said, industry barriers largely depend on strategic suppliers. So, cherish your strategic suppliers.
Preferred suppliers perform well but are substitutable. Companies prefer to do business with them because of their good performance. Amrep Inspect helps to know about machining parts. Still, the company chooses supplier A first and gives new business to this supplier based on A’s overall performance. There is a fundamental difference between a preferred supplier and a strategic supplier: the status of a strategic supplier is innate—they have irreplaceable technologies, products or processes; while the status of a preferred supplier is earned; they must be in the price, quality, delivery, service and other aspects are outstanding.
