Supplier Management: Strategic vs. Critical

One interesting thing about running a SaaS business is that it gives you a unique perspective on supplier management.

A specific example: we host all of our application infrastructure on Google Cloud Platform. So Google is a pretty important supplier for Vendorful!

Looking at it from the other side, is Vendorful an important customer for Google? Ha. We might be an important customer to our account rep, but not to Google’s overall business.

But here’s the interesting wrinkle: I wouldn’t want to host our infrastructure on any cloud platform where we were an important customer. It would expose us to too much risk should something change about their business or ours.

It’s an interesting dynamic, but not unique to software. If a manufacturing operation is reliant on one supplier of a critical input, and that supplier only has one customer, then that means they don’t have any extra capacity should something go wrong, and the manufacturer has no obvious alternatives to draw from.

On the other hand, some companies have very successfully forged mutually beneficial relationships where both sides are critical to the other. Red Bull and Rauch come to mind.

This is all hinting at a pretty important distinction for optimizing your supplier relationships: a strategic supplier, vs. a critical supplier.

Strategic importance vs. criticality

A strategic vendor is one whose relationship can be a source of competitive advantage to your company. A critical vendor is one where a disruption would have a material negative impact on your business. Those are not necessarily the same thing.

In the case of Vendorful, Google is a critical supplier. A major outage at Google wouldn’t necessarily be disruptive to our customers because of our disaster recovery setup, but it would certainly be disruptive to our business – we would have to invest significant effort to remove all business process dependencies and get completely off of Google.

But Google certainly isn’t strategic to our business – we aren’t likely to get any particular competitive advantage in the marketplace by using Google over (say) AWS.

An example of the opposite – a strategic but not necessarily critical relationship – might be a high-end beef supplier to a restaurant. Odds are very high that the restaurant will be able to find alternative supply on short notice, but if the branding and menus are built around specific locally sourced beef then a disruption to the relationship will have longer-term implications to the business.

Where does spend fit into supplier management?

Let me pause here to make an observation: I haven’t mentioned “spend”. Not one time.

There is a good reason for that – spend might be a proxy for strategic importance or criticality, but it’s only a proxy. And frequently a poor one.

From my perspective, this is the crux of the matter. Spend is just one metric that describes a supplier relationship. It is not the metric. Too many companies are prioritizing their supplier management programs by spend, and not by strategic importance or criticality.

The reason for prioritizing SRM and SXM in this way is simple: it’s easy. Just sort your spreadsheet and off you go. But the suppliers you spend the most with aren’t necessarily the hardest to replace on short notice, nor are they always the ones who can give your company a competitive advantage.

A new approach to segmenting your suppliers

A true strategic supplier is one that can help your company be more successful. They might provide a unique product or service, or they might have some kind of competitive advantage in their market. If they aren’t providing your company with a specific and differentiated source of value vs. their peers, then they are a tactical supplier, not a strategic one.

A critical supplier, on the other hand, is one where a disruption or other incident would have a material negative impact on your business. They might be a supplier of a critical input, they might be the only vendor that can provide a particular service, or they might handle sensitive customer data. If they don’t pose that kind of risk to your business, then they are non-critical.

So instead of thinking in one dimension – spend – I suggest that you segment your suppliers along three dimensions: strategic vs. tactical, critical vs. non-critical, and (of course) spend. This will give you much clearer criteria for understanding your relationships and your supplier management priorities. Then you can direct your limited SRM resources towards measuring and managing those relationships more effectively.