Figure 4.31 Supplier categorization
Suppliers are based on assessing the risk and impact associated with using the supplier, and the value and importance of the supplier, and the value and importance of the supplier and their services to the business, as illustrated in Figure 4.31.
The amount of time and effort spent managing the supplier and the relationship can then be appropriate to its categorization:
Strategic: for significant ‘partnering’ relationship that involves senior managers sharing confidential strategic information to facilitate long-term plans. These relationships would normally be managed and owned at a senior management level within the service provider organisation and would involve regular and frequent contact and performance reviews. These relationships would probably require the involvement of Service Strategy and Service Design resources and would include ongoing specific improvement programmes (e.g. a network service provider, supplying worldwide networks service and their support).
Tactically: for relationships involving significant commercial activity and business interaction. These relationships would normally be managed by middle management and would involve regular contact and performance reviews, often including ongoing improvement programmes (e.g a hardware maintenance organisation providing resolution of server hardware failures).
Operational: for suppliers of operational products or services. These relationships would normally be managed by junior operational management and would involve infrequent but regular contact and performance reviews (e.g. an internet hosting service provider, supplying hosting space for a low-usage, low impact website or internally used IT service).
Commodity: for suppliers that provide low-value and/or readily available products and services, which could be alternatively sourced relatively easily (e.g. paper or printer cartridge suppliers).
Strategically important supplier relationships are given the greatest focus. It is in these cases that supplier managers have to ensure that the culture of the service provider organisation is extended into the supplier domain so that the relationship works beyond the initial contract. The rise in popularity of external sourcing and the increase in the scope and complexity of some sourcing arrangments has resulted in a diversification of types of supplier relationship. At a strategic level, it is important t0 understand the options that are available so that the most suitable type of supplier relationship can be established to gain maximum business benefit and evolves in line with business needs.
To successfully select the most appropriate type of supplier relationship, there needs to be a clear understanding of the business objectives that are to be achieved.
A number of factors, from the nature of the service to the overall cost, determine the importance of a supplier from a business perspective. As shown later, the greater the business significance of a supplier relationship, the more the business needs to be involved in the management and development of a relationship. A formal categorization approach can help to establish this importance.
The business value, measured as the contribution made to the business value chain, provides a more business-aligned assessment than the pure contract price. Also, the more standard the services being procured, the lower the dependence the organisation has on the supplier, and the more readily the supplier could be replaced (IF necessary). Standardized services support the business with minimal time to the market when developing new or changed business services, and in pursuing cost-reduction strategies. More information on this subject can be found in the Service Strategy publication.
The more customized those services are, the greater the difficulty in moving to an alternative supplier. From a supplier perspective, tailored services may decrease their ability to achieve economies of scale through common operations, resulting in narrowed margins, and reduced capital available for future investment.
Standard products and services are the preferred approach unless a clear business advantage exists, in which case a strategic supplier delivers the tailored service.