Supplier Preferencing is a method of assessing how a supplier perceives a buying organisation. The suppliers perception of the buying organisation has a major affect on how that supplier will perform. Supplier preferencing is a powerful tool that should be used across the life-cycle of a supplier relationship to continually assess whether the supplier relationship or contractual performance may suffer due to a change in their perception of the buying organisation.
Supplier preferencing is a powerful method of assessing a supplier’s perspective of the buying organisation. It is important to recognise that whilst a supplier may be strategic to the buying organisation this is not necessarily the case for the supplier itself. Equally, the perspective of the supplier changes in line with their own performance, so to ensure the right supplier management strategy a supplier preferencing activity should be completed on a regular and consistent basis relative to their supplier segmentation.
The Supplier Preferencing Matrix
The Supplier Preferencing model aims to define how the supplier perceives the buying organisation by assessing the relationship through 2 lenses:
Lens 1: The 'Attractiveness of the Account' to the Supplier
The first lens to look from is how does the supplier view the buying organisations account? There are several reasons why and account may or may not be attractive in the eyes of a current or potential supplier.
Attractive
- The buying organisation is well recognised in the market. Their logo may have a material effect on the marketability of the supplier’s organisation.
- The buying organisation may be growing rapidly indicating high account growth potential.
- The buying organisation has limited contract management in place that allows a supplier to take advantage by growing the account or increasing pricing one under contract.
- The size of the potential contract is high from the perspective of the supplier
- How long the buying organisation has been established for indicates a potential long-term client.
Unattractive
- The buying organisation has had poor financial performance that limits the potential of account growth.
- The buying organisation is known for having draconian governance processes that add significant cost to managing the account and limit speed of account growth.
- The buying organisation has a poor history of paying invoices on-time.
- The buying organisation is too large or too small compared to the supplier organisation.
- The size of the potential contract is low from the perspective of the supplier.
Lens 2: The ‘Relative Value of Business’ to the supplier
The second lens to view the buying organisation from is the relative value of the business to the supplier. This aims to assess whether the contract or potential contract is important to the supplier or not. The main areas that influence this are:
- Size of contract value
The size of the potential contract is usually the most important way a supplier assesses the value of the business. The relative size of the contract t other customer contracts will have a major impact on the strategic value of the account to the supplier. - Industry of the buying organisation
If a supplier is trying to gain traction in a particular industry or market, then a customer in that industry will have more strategic value than just the contract value itself. Proven delivery with those customers will allow for more growth in those industries and therefore they are likely to focus more on ensuring a successful contract delivery. - Brand of the buying organisation
Buying organisations that carry a well-regarded brand are also of strategic value to a supplier. This again helps them push their services to other potential accounts through using that brand as an anchor for a sales conversation. As such the strategic value is more than just the contract value. - Initial customers
For suppliers in a start-up position any potential new customer is going to be regarded as strategic as it potentially allows the start-up to continue as a going concern but also may prove the supplier’s business model to potential investors.
Understanding the Supplier's Perspective
Once the assessment has been completed the suppliers an then be position in one of 4 quadrants on 2×2 matrix. This positioning can provide a good indication of the suppliers strategy with the buying organisation.
Nuisance
A nuisance customer for a supplier is one that can be lost at relatively little cost. Therefore, the supplier doesn’t need to focus on delivering the best service to the customer as there is no real impact if losing them as a customer. Expect suppliers to drive high prices and to be difficult when agreeing service level agreements or similar. The account management is very likely to be light touch and slow.
In cases like this it is necessary for the buying organisation to try and understand how they mitigate against this reality or try to move the supplier into a higher account attractiveness if possible.
Exploitable
In some cases where the value of the account is high for the supplier, but the account is relatively unattractive the supplier will see this as a potential to obtain as much value from the relationship as quickly as they can. Expect the supplier to push premium pricing and focus on short-term gain. It’s likely the account manager will be responsive but only in areas related to extending the financial performance of the contract.
Develop
For accounts with high attractiveness but lower business value, a supplier will aim to develop and grow their services within the buying organisation or within the same industry. The supplier will put a high number of resources and their best resources into ensuring the account is well delivered and that there is a major focus on account growth. A develop customer is the most important to a supplier as it allows the opportunity for growth
Expect account managers to be highly responsive and understanding to the needs of the buying organisation. However, also note that the supplier will be actively trying to obtain as many contacts as possible within the buying organisation to aid growth of the account in the buying organisation and more broadly in that in industry.
There must be a recognition that suppliers that are new players in that industry will have an aim to service potential competitors to the buying organisation so any risks around this should be mitigated in supplier management activities.
Core
Suppliers with both high attractiveness and high value are the most important to suppliers for revenue consistency and business security. Whilst they are not the most important to the supplier, they will get high attention to ensure contract security.
Expect the supplier to provide high levels of account management and service that focuses on account consolidation. The supplier won’t put their best resources on the account, but they will ensure that the account is well delivered and managed through a hierarchical mechanism.
Conclusion
Supplier preferencing is a valuable method of assessing a supplier’s perspective of the buying organisation. It is very accurate in defining the likely supplier view and what that could indicate in terms of managing the supplier.
Supplier preferencing should be applied to all strategic suppliers to ensure that the right supplier management activities are identified and assigned to obtain the best outcomes from the suppliers.
