AVL segmentation part of CPO strategy for competitive supply chain management

By Ping Wang

ACTIVELY MANAGING SUPPLIERS and vendors in your approved vendors list (AVL) is fruitful for the long run

How many suppliers do you have? And how well do you know each vendor? How will your future cooperation with each vendor evolve over time? How can you make sure your vendor management effort pays off in the long run?

Supplier segmentation will help you to achieve success in a structured way.

Your decisions made for each vendor on particularly long AVLs can be even more important when it comes down to your overall purchasing and procurement strategy.

Learning to balance between focusing on short-term v. long-term benefits is important. The cheapest price for one purchase does not guarantee the same long-term gain.

As a competitive chief procurement officer (CPO), you should govern and leverage your AVL in structured and strategic ways.

Supplier segmentation is meant to help you setup this structure to able to design and execute different strategies for different vendors and suppliers.

Three vendor segmentations are typical from a geographical coverage perspective: global, regional and local suppliers.

Next, your three segmentations from a product coverage perspective are: core, emerging and niche suppliers. From this series of segments identified, using simple statistics you come up with nine supplier segmentation types (or combinations), three variations each for global, regional and local.

For instance, for global suppliers, we have: global core suppliers, global emerging suppliers and global niche suppliers. For regional suppliers, you have: regional core suppliers, regional emerging suppliers and regional niche suppliers. For local suppliers, you have: local core suppliers, local emerging suppliers and local niche suppliers. (See Figure 1)

 

Fig. 1: Supplier segmentation combinations

AVL Segmentation diagram

 

Understanding your vendors and implementing supplier segmentation
Your global suppliers have the depth in capability and mature branches around the world to provide the products you need regardless of the region or country where you purchase. Your regional suppliers are typically strong in covering a cross-country region (e.g., Asia Pacific or Europe). Your local suppliers only focus on in-country sales while they are also normally very strong at local services and can offer very competitive procurement pricing.

A big portion of your material spend goes to core suppliers who provide you with mainstream products in the markets you source. Emerging suppliers are your potential supplier stars of the future. Their products are empowered by next generation technology and they have potential to evolve with a good chance to dominant the market in the coming future.

For example, today desktop and laptop computers dominate the personal computing market. But, given the eventual maturing of cloud computing, companies developing and manufacturing thin client terminal devices are emerging and could be your potential core suppliers in the future.

Niche suppliers offer products that satisfy specific market needs and such needs, while they do not generate economies of scale, they also cannot be overlooked.

Having this knowledge in mind, you will find you will be more easily able to make the right decision for an individual purchase to better improve your chances of maximizing both short- and long-term gain.

When a local supplier sells the same product in the same price as your ‘global / core’ supplier, which supplier would you purchase from? What if the price as not the same and, in fact, the local supplier sells your product for a lower price?

When a local, emerging supplier appears in your sights, how do you react? Will it become a regional or perhaps even a ‘global / core’ supplier in the near future? How do you find balance between global / core and local / core suppliers?

By engaging with your core supplier on a global level, you consolidate your purchasing volume across the globe as you leverage your power over negotiations.

Looking at a simple purchase in-country, local suppliers may seems to offer the best price, however, considering the total volume worldwide, you could possibly be able to receive a greater volume discount, or rebate, from your global / core supplier on an annual basis.

The management of your AVL should be closely linked with your company’s business strategy. If your company strategy is geo expansion over the next five years, you may want to diligently develop your regional / core suppliers’ utilization rate since they help you resolve all country-specific processes and regulations. Meanwhile, they offer competitive prices in the long run.

On the other hand, local suppliers are efficient in supporting your urgent in-country products and service requirements.

To strive toward developing a more competitive supply chain for your company, you should design a development strategy for each supplier considering its current segmentation and also its future potential. Look at your individual procurement purchasing practices cautiously with this strategy in mind.

In most cases, your suppliers may not be number one in their respective market, but they are likely the best suppliers that fit into your specific need requirements – including not only price, but also commercial and legal terms, plus their willingness to cooperate with you.

You must cherish these relationships and grow (together) with your suppliers.

Effective AVL management does not mean to replace one supplier with the best supplier but, instead, to find the most harmonious and balanced way to cooperate with your suppliers for your long-term strategic business objectives and goals.

 

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