Supplier Indexing sometimes referred to as the Dutch Windmill is a method of analyzing buyer-seller interdependence by combining the buyer's purchasing perspective of the supplier and the supplier’s perspective of the buyer. The method results in 16 different business-to-business relationships, each detailing different supplier and sourcing strategies.
Supplier Indexing combines the Kraljic Matrix and Supplier Preferencing matrix to define 16 distinct types of buyer-seller relationships. These relationships are derived by assessing the level of interdependence between buyers and suppliers. The inherent idea is that using a purchase perspective alone is not sufficient to develop sourcing and supplier strategies. In fact, acknowledgement from both buyers and suppliers was necessary to form the correct buyer / supplier relations.
The Supplier Indexing Window
The Supplier Indexing Window is an excellent way of simplifying sourcing and supplier strategy development and standardizing supplier strategies across the procurement function. From the supplier preferencing matrix, there are 4 supplier perspectives
- Core
- Exploitable
- Development
- Nuisance
These four perspectives are then be combined with each quadrant of the Kraljic Matrix.
- Strategic
- Bottleneck
- Leverage
- Non-critical
Bringing together these two matrices creates 16 strategies that can be applied to Suppliers.
The 16 Strategies
The coming together of the Kraljic Matrix and Supplier Preferencing results in 16 Supplier strategies that create a standardized way of managing suppliers within an organization.
Strategic suppliers are the most important suppliers to assess using Supplier Indexing. The review can identify suppliers relationships that may be high risk but equally highlight suppliers where innovation may be more likely.
Assessing leverage suppliers with Supplier Preferencing can help identify which suppliers can deliver the best return in minimal time. Procurement should be always trying to gain leverage in this quadrant so the supplier relationship will always be secondary to gaining beneficial contractual terms.
Procurement can understand the risk of certain bottleneck suppliers through a Supplier Preferencing assessment. It will help identify the highest risk suppliers that may have a significant impact on the business if they aren’t managed closely.
Non-critical Supplier segmented suppliers are not major issues for an organization so they are not the most important areas to focus on. Procurement should focus on enabling as much value out of the supplier relationship as possible to take advantage of their position.
Conclusion
Supplier Indexing is an excellent way of identifying buyer / supplier relationships. It is an essential tool in all situations when dealing with suppliers in an organization from sourcing to risk management. It can provide a way of standardising procurement activity and helps focus on the highest risk relationships, but also allows to identify the most likely innovative relationships.
Key Takeaways
The key things to remember when using Supplier Indexing:
- Always review from the organizational perspective. There will be significantly less value derived if the tool is used using non-specific general information rather than specific to the organization viewpoint.
- Each of the 16 types of B2B relationships should be linked to a specific supplier or category management strategy to ensure resources are used in the most efficient way.
- Review the relationships every 12 months to ensure that the deployed strategies are aligned with the business needs.