BENChMARKS

The Value of Supplier

Category Management
Supplier category management programs add value in
many ways, as the best-practice companies have shown.
Shorter lead times and closer supplier relationships are just
the beginning.

Supplier category man- technology solutions for the energy industry.

agement programs involve These organizations use supplier category
the strategic development, management programs to provide value to the
assessment, and monitor- business that goes beyond simply purchasing
ing of procurement and materials at the lowest cost.
supplier performance in
specific supplier catego- Effects on Procurement
ries. In these programs, Procurement metrics reveal that there are both
each category maintains its positive and negative aspects to adopting a sup-
own market intelligence, plier category management strategy. Data from
sourcing strategies, and APQC’s Open Standards Benchmarking in pro-
supplier relationship man- curement indicates that, at the median, orga-
agement programs. nizations that have initiated supplier category
The ultimate goal of supplier category management programs have 78 percent shorter
By Becky Partida,
Knowledge
management is to establish deep relation- supplier lead times than organizations that have
Specialist-Supply ships with suppliers to gain maximum benefit not initiated such programs (see Exhibit 1). This
Chain Management, from sourcing. However, the effects of adopt- significant difference may be related to the clos-
APQC ing supplier category management can extend er relationships with suppliers created through
beyond the focus of the sourcing and
EXHIBIT 1
procurement function of an organiza-
tion. APQC’s recent study Supplier Average Supplier Lead Time (in Days)
Category Management: Driving
30
Value Through the Procurement 28
Organization identified three organi-
zations that have used supplier cate-
19
gory management programs to obtain
benefits that support organizational 14

strategies:
• ATMI, a provider of technolo- 6
4
gies for the semiconductor, life sci- Top Performer Median Bottom Performer
ence, and display industries.
• Merck, a pharmaceutical Has Initiated Category Management
company. Has Not Initiated Category Management
• FMC Technologies, a provider of

82 Supply Chain Management Review • July/August 2012 www.scmr.com

 BENChMARKS (continued)
supplier category management programs. Stronger rela-
tionships mean that organizations can develop improved
communication with suppliers, which allows them to bet-
ter address problems with supplier performance and ulti-
mately achieve superior results.
Closer relationships with suppliers do mean an addi-
tional cost, however. APQC’s data shows that organizations
with supplier category management spend more to appraise
and develop suppliers per $1,000 in purchases than organi-
zations that do not engage in supplier category management
(Exhibit 2). At the median, the difference in cost between
the two groups is $0.96 per $1,000 in purchases. For an
organization making $1 billion in purchases annually, this
translates into an additional cost of $960,000 per year.
The ultimate goal of supplier category
management is to establish deep relationships
with suppliers to gain maximum benefit from
sourcing.
Although the effects of supplier category management
on procurement efficiency and cost metrics are important
to consider, organizations should evaluate the value of
these programs using a wider view. The best-practice orga-
nizations featured in APQC’s recent study derive signifi-
cant benefit from adopting specific practices in their sup-
plier category management programs that may balance out
additional costs. Each of the best-practice organizations
has used supplier category management to obtain benefits
that align with enterprise strategies.
Practices that Provide Value
Below we describe ways in which supplier category man-
agement practices can provide value to the enterprise.
Connecting Supplier Segmentation and Value
All three best-practice organizations base their supplier
category management programs on supplier segmenta-
tion that is grounded in business imperatives and driven
by the potential to deliver strategic value to the organiza-
tion. FMC Technologies classifies its suppliers based on
an evaluation with regard to safety, quality, delivery, and
cost—four strategic areas of focus for the organization.
Merck segments its suppliers based on the amount Merck
spends with each supplier, the value each supplier pro-
vides, and whether Merck’s view of the supplier matches
the supplier’s view of Merck. ATMI classifies its suppli-
ers based on the influence they have or could have on the
entire organization’s success. ATMI purchases more from
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the suppliers with the most influence.
The best-practice organizations also engage their pro-
curement functions in the full value chain by focusing on
customer needs. This ensures that procurement does not
occur in a vacuum. Merck, for example, ties strategies for
supplier categories to market- and customer-focused initia-
tives. ATMI’s procurement group is always mindful of the
quality of components sourced from its suppliers. In the
semiconductor industry, variations in product quality can
have serious repercussions, so ATMI focuses on the qual-
ity level expected by its customers.
A natural extension of procurement’s involvement in
the full value chain is its contribution to the product devel-
opment process. In this process, the procurement func-
tion can evaluate proposed materials for new
products and potential sourcing countries based
on factors such as the duty rates for potential
sourcing countries or whether the potential
sourcing countries have free trade agreements
with the United States.
For some organizations, it may be possible
for the procurement function to suggest similar
materials for a product that lead to a lower total
cost or a more reliable sourcing location. Merck goes one
step further and uses the strong relationships developed
through its supplier category management program to cre-
ate opportunities for innovation in products and services.
Innovation efforts by suppliers can result in a competitive
advantage for Merck as well as its suppliers.
Implementing Risk Management
The best-practice organizations in APQC’s study imple-
ment risk management programs to monitor external risks
at the market or category level. ATMI has established risk
EXHIBIT 2
Total Cost to Appraise and Develop Suppliers
per $1,000 in Purchases
$4.13
$3.00
$1.75
$1.02
$0.16 $0.79
Top Performer Median Bottom Performer
Has Initiated Category Management
Has Not Initiated Category Management
• July/August 2012 83
 BENChMARKS (continued)
management strategies for its supplier categories that are
tied back to the organization’s overall business goals. The
deep relationships ATMI has created with its suppliers
have led to the development of a maps and alerts system
for possible supply chain disruptions.
The foundation of the system is information provided
by ATMI’s suppliers and the suppliers’ suppliers. The sys-
tem includes the geographical coordinates of the facilities
at multiple levels in the supply chain. Whenever an alert is
released by an agency such as the U.S. Geological Survey’s
National Earthquake Information Center, the system refer-
ences the geographical coordinates of the event against the
coordinates of the facilities. The system then alerts ATMI
with a list of the facilities that may have been affected by
the event so that procurement staff can immediately assess
the situation and, if necessary, find alternative sources of
materials to minimize any disruption. The system works
well enough that ATMI has notified a supplier of an event
before the supplier received word from its facilities.
Creating Symbiotic Relationships
The best-practice organizations in APQC’s study
Adopting and maintaining supplier category
recognize that efficient and reliable supply chains management does require additional
require strong suppliers. They thus understand that
investment during the supplier assessment and
it is both in their best interest and in the best inter-
est of their suppliers to support supplier develop-
ment. During the initial sourcing and contracting
development process
process, these organizations identify suppliers that have the
potential to develop into valuable partners. The organiza-
tions regularly assess current suppliers to quickly identify
any need for performance improvement. They acknowledge
that being better customers to their suppliers can result in
better support from the suppliers.
For example, ATMI provides its top-tier suppliers
with self-scoring mechanisms so that they can assess
their performance between regular reviews. If, when
assessing a supplier’s performance, ATMI determines
that the supplier is at risk, procurement staff consider
whether to find an alternative supplier, invest more in
developing the supplier, procure and hold extra inven-
tory for the supplier, or work on a continuous improve-
ment process with the supplier. Because of the special-
ized nature of the materials provided by its suppliers,
ATMI can incur significant cost when transitioning to
a new supplier. Therefore, a plan to address an at-risk
supplier must be carefully developed. If ATMI decides
to provide assistance to the supplier, it benefits from the
supplier’s stability—and the supplier benefits by regain-
ing stability and not losing a customer.
84 Supply Chain Management Review • July/August 2012
Developing Effective Category
Management Programs
Supplier category management programs clearly have ben-
efits that extend beyond procurement performance to affect
organizational outcomes. Companies that have not yet initi-
ated category management programs or have yet to fully
develop these programs can learn from the practices of the
organizations featured in APQC’s study Supplier Category
Management: Driving Value Through the Procurement
Organization. Other important points to consider:
• Has the organization clearly defined a strategy for
category management? How is it linked to the enterprise’s
overall strategy?
• How effective is the organization’s supplier segmenta-
tion in driving the categories forward?
• Does it have a robust risk management program that
is capable of monitoring external risks at the market or cat-
egory level?
• Does the organization’s sourcing activity include a
review of the suppliers’ current and future capabilities? Are
these aligned to its current and future needs?
• How does the organization invest in building strong
suppliers?
• Do the organization’s supplier performance tools fos-
ter a symbiotic relationship with its key suppliers?
Adopting and maintaining supplier category manage-
ment does require additional investment during the sup-
plier assessment and development process because of
the detailed evaluations that are conducted and the pos-
sibility that the organization will need to provide addi-
tional assistance to at-risk suppliers. However, supplier
category management should be viewed in light of the
bigger picture. Organizations need to move procurement
programs beyond a narrow focus on the lowest cost for
a product or service to provide true value aligned to
strategic goals.
About APQC: A member-based nonprofit founded in 1977,
APQC is the leading resource for performance analytics, best
practices, process improvement, and knowledge management. For
more information, visit www.apqc.org or call 713-681-4020.
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