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How To Improve Purchasing Performance By Categorizing Suppliers

Feb. 20, 2013
Michael Scarborough

supplyAA030148As mentioned earlier, one of the most useful pieces of guidance that ITIL provides relates to the categorization of suppliers. ITIL describes four categories of suppliers:

Strategic Suppliers

These are suppliers that provide goods and services that are a key aspect of the purchasing organization’s overall delivery of services. Strategic suppliers are very important to the purchasing organization’s ability to remain competitive and effective and are more closely managed. Purchasing organizations should work very closely with strategic suppliers

Tactical Suppliers

Tactical suppliers are those with whom an organization conducts a significant amount of business activities but, due to having a lesser impact on the purchasing organization’s services, they are likely to be managed at a lower level in the organization. Similar to strategic suppliers, tactical suppliers are likely to be regularly managed and subject to a program of ongoing improvement of their quality.

Operational Suppliers

These suppliers provide services that are of less value and importance than either tactical or strategic suppliers. Operational suppliers are likely to be managed less stringently than strategic and tactical suppliers and at a lower level in the organization.

Commodity Suppliers

Commodity suppliers provide services that are of low value or are easily replaced with other offerings in the market. ITIL recommends that suppliers should be managed according to their levels of risk and impact as well as their value and importance.

Most organizations deal with dozens, if not hundreds and sometimes even thousands of different suppliers. In the information technology industry, we regularly depend on various types of vendors of everything from application software to Z-cards for internal announcements. Rarely does an organization have the manpower to manage every supplier equally.

Because we deal with so many suppliers and resource constraints, it is useful to have a method of categorizing suppliers. ITIL recommends grouping suppliers into the four previous mentioned categories: strategic, tactical, operational, and commodity. Organizations will benefit by defining scope around the different categories of suppliers and conducting supplier management activities with respect to the type of supplier.

Fundamentally, this categorization establishes clear scope around supplier management activities. Organizations are likely to have many strategic suppliers, but the list of suppliers that are truly strategic is probably somewhat limited. Consider those suppliers that an organization would have difficulty functioning without. Truly strategic suppliers are suppliers that provide some component of a service that is so crucial that providing the service would be impossible or extremely difficult without that supplier.

Strategic suppliers get more attention from the purchasing organization and therefore should consistently work with the purchasing organization to improve their performance. The direct attention paid to strategic suppliers brings a closer alignment with the purchasing organization’s needs and expectations, often resulting in improved supplier performance. On the other hand, commodity suppliers can be easily replaced with little impact to the business. To keep their revenue stream, commodity suppliers must look for ways to improve their services with respect to other competitors in the market.

Organizations regularly establish scope to manage those suppliers that have the most value and impact on their business. One common technique is to define a “top ten” list of strategic suppliers. Usually this is defined in terms of risk, impact, value, importance, and sometimes includes the amount of money that the purchasing organization spends on the supplier’s services. Such a list allows the organization to focus the bulk of their activities on those suppliers that are most critical for their business.

Next week I'll discuss the fourth simple thing, establishing clear accountability.

Reproduced and available for download from Global Knowledge White Paper: Supplier Management: Five Simple Things Your Organization Can Do to Improve Supplier Performance

Related Courses
ITIL® Foundation
ITIL® Service Capability: Service Offerings and Agreements
ITIL® Service Lifecycle: Service Design