Supplier Preferencing

What is it

Procurement teams may invest significant amounts of time and money undertaking spend analysis of all procurement expenditure to gain a complete view of how the organisation expends money and on what groups of commodities and services and with which suppliers. The identification of these categories will enable the procuring entity to embark upon a category management strategy designed to segment suppliers into these categories and then decide upon appropriate procurement strategies.  

All of the above is undertaken from the procuring entity’s perspective to safeguard and optimise the supply situation. What about the supplier’s view of us as a customer? How do we rate in the supplier’s eyes when compared to its other customer? How do we become its preferred customer or “customer of choice”?  Supplier preferencing is the process of categorising customers into types and then applying suitable operating strategies. Procurement professionals need to take a 180 ⁰ position and view themselves from the supplier’s perspective. This will help them to understand how suppliers rank their own organisations as customers and then identify ways to improve their attractiveness to suppliers.      

The supplier preferencing model

A similar four box matrix to Kraljic’s matrix – with two matrices a) account attractiveness and b) relative value of the current business - is used to categorise customers. On these bases the supplier will allocate customers to one of the quadrants and develop appropriate strategies for dealing with each customer.

Supplier preferencing considers how attractive our account is to a supplier based upon factors such as high spend, profit margin, payment terms, future opportunities and ease of doing business. It also considers the value of our account relative to the supplier's overall turnover. This will determine the supplier’s degree of interest in us and how much effort it will put into working on improvements. The correlation between the attractiveness of the account and the revenue will drive the supplier’s management of that customer.

Development – the supplier sees this customer as one with future business potential and allocates its best staff to the account and puts considerable effort into increasing business. Supplier interest is very strong and it uses its best resources to drive improvements and innovations and collaborates well with the procuring entity.

Core – the supplier sees this customer as a major account with an established relationship and will ensure it is well serviced and supported. Supplier interest is strong and it uses resources to drive improvements and innovations and collaborates well with the procuring entity.

Nuisance – the supplier is prepared to lose this account (as it may be a legacy account with low profit) but will attempt to maximise revenue. The procuring entity will receive little support.  Supplier interest is none. The risk is that the supplier may use poor performance by the procuring entity as a reason to cease supplying.

Exploitable – the supplier will do the minimum necessary to continue supplying but is keen to maximise profit.  The procuring entity will only receive basic support. However, a price increase may risk losing the customer. Supplier interest is very little. Any effort beyond fulfilling basic obligations will only happen if the supplier believes it is worthwhile.

Becoming a more attractive customer

A crucial factor in becoming a more attractive customer to the supplier is the establishment of an effective and equitable communication strategy so that the supplier will have confidence in what a procuring entity says and what it does.  These are some of the approaches and measures that a procurement professional can employ in strengthening that relationship:

• share knowledge with the supplier to demonstrate it is a valued member of the procuring entity’s supply base;
• always be consistent and courteous in responses to the supplier;
• ensure all communications are clear and to the point to avoid any risk of misunderstanding;
• be direct and to the point in discussions and avoid meandering from the topic;
• encourage a teamwork approach where the supplier’s contributions are valued;
• all feedback to the supplier must be fact based and the customer’s expectations are clear;
• always employ a professional approach when dealing with supplier staff

Actions to be taken by the procurement team to enhance the perception of the customer by the supplier include;

• optimising/rationalising the supplier base to identify increased volumes and provide the opportunity for suppliers to increase the level of business;
• regular and realistic forecasts of requirements and immediate advice to the supplier if volumes change;
• consistent messages from all parts of the organisation and this should form part of the communication strategy;
• a firm but fair approach to suppliers and, where appropriate, ensure all suppliers are treated in the same way;
• prompt payment – this is one of the most common reasons suppliers give for not participating in tenders and will have a negative impact on the supplier’s perception;
• encourage suppliers to be proactive in proposing innovations, alternative products/materials and reviewing specifications
• encourage suppliers to give early warning when it faces potential disruption to its supply sources or production;
• ensure the procuring entity’s ethical code is enforced and no procurement staff attempt to introduce corrupt practices.

Benefits

Increased focus is being placed on supplier relationship management in organisation’s procurement strategies, including supplier preferencing. Putting yourself in pole position with your suppliers is becoming a strategic imperative with benefits for you and your supplier.

This increasingly complex global supply market dictates that procuring entities should develop good relationships with their suppliers, fostering a level of trust and the opportunity to grow and flourish. Current practice embraces proactive engagement and collaborative working with the supplier which can position the procuring entity as a preferred customer.

Benefits that can accrue from becoming more attractive to your supplier include:

• lower prices and reduction of costs
• shorter lead-times and lower inventories
• improved quality levels and zero cost of non-quality items
• priority call for supplier capacity

Understanding supplier preferencing is a useful adjunct to a procurement professional’s range of skills and knowledge.