This is the second of a two-part series. In case you missed it, the first section focused on Supplier Performance Scorecards. This second blog will explore Supplier Stratification.
Supplier performance scorecards and supplier stratification modeling are related concepts, but very different in how they should be used. A supplier performance scorecard program should be used between an organization and its suppliers as a means of evaluating the performance of the suppliers against mutually agreed upon or accepted criteria. Supplier stratification should be an internal metric, where an organization takes other criteria (one of which can be the scorecard metric) and combines them to rank its suppliers (traditionally in an ABCD type model). The information below will help guide anyone wanting to implement either concept in their organization. Successful implementation of these concepts will have a positive impact on supplier relationships, operational efficiency, and improvement of EBITDA.
Stratification is the process of categorizing all suppliers based on a defined set of criteria to gain an understanding of your supply base and its critical aspects, and adjusting resource allocations in response to the findings.
Why stratify your supplier base?
There are myriad reasons why an organization would and should want to stratify its suppliers:
- Too many suppliers
- Time spent per supplier is little or untraceable
- Difficulty or inability to analyze supplier base
- Difficulty or inability to reduce supplier base
- Suppliers are too easily added (maverick effect: Where suppliers are added for one-off purchases, never to be purchased from again)
Stratifying the supplier base of an organization allows for collaborative partnerships to be formed through the segmentation of the supplier base into smaller and more manageable categories. This feeds directly into the concept of strategic supplier relationships, in which you will be able to identify the suppliers your organization targets to do business with, the ones the organization must do business with, and the suppliers that the organization could likely do without.
Best practices criteria
Many organizations that attempt to stratify their suppliers do so based on only one or two factors (usually landed cost and cost of goods sold). A more comprehensive methodology is a combination of taking the final rank from the supplier scorecard exercise and then adding a few more factors, as shown below.
This is a simple calculation of overall profitability of each supplier’s products. This allows an organization to determine who really has the pricing power (the supplier or the organization), and can assist the organization with establishing goals for improvement.
This is the scorecard ranking already discussed above. Use a supplier’s known performance (based on these and other metrics) to help guide the stratification process.
From a distribution standpoint, the question of whether or not the supplier is exclusive frames this criterion. From an end user perspective, the scoring can be done by asking, from how many other suppliers can the organization purchase the brands currently bought from the supplier being scored.
This is related to the level of support an organization must provide for less than cost to drive sales of a supplier’s product. This includes any ancillary items such as technical support, warranties, repair, or other services that can often cost more than the customer is willing to pay.
Understanding that not every organization is a distributor, there are many other criteria that can be used to stratify the supplier base. One manufacturer of gases and chemicals used the following criteria to successfully stratify:
The key is to find valid data points that are measurable and whose variance can have an impact on your organization’s bottom line.
Scorecarding and stratifying the supply base can result in many powerfully compelling benefits, from ensuring optimal allocation of time and resources (which are already limited and sometimes compromised), to creating opportunities for strategic partnerships. Implementing these concepts will have a direct impact on your organization’s EBITDA and cost savings, and allow for maximizing of value for the organization as well as its customers.
If you would like further insight into how to best score and stratify your business suppliers, contact the Epicor Business Consulting Services team. Members of this group are authorities in distribution and manufacturing best practices, ERP management, project management, change management, and business process re-engineering. Visit www.epicor.com.