Developing Supplier Classification Model in a Forest Industry Company

Abstract

Strategic importance of purchasing has grown in the last decades, as companies are increasingly outsourcing their non-core activities to suppliers. This has led to closer cooperation with the suppliers, and the company's supplier relationships have become important for achieving the overall business objectives. Supplier relationship management is concerned with defining the optimal supplier base and collaborating with suppliers to create mutual value for both parties. This Master’s thesis focuses on supplier segmentation, an SRM activity which aims to categorize company's supplier base into distinct categories based on a pre-defined set of criteria, in order to manage each class with differentiated supplier strategies according to their specific characteristics and requirements. The main objective of this study is to develop a model for classifying the suppliers in the case company. In this study the background and motivation for developing supplier segmentation practices are explored and important segmentation variables are identified in order to con-struct a solution, the segmentation model and process, as an answer to the central research problem. This study was conducted as a qualitative singe-case study with design science approach. The focal firm in this research is a large forest industry company, where the centralized procurement function provides services to the different business areas. The empirical part of the study consists of semi-structured interviews and workshops carried out remotely within the case company. Interviewees as well as the workshop participants consist primarily of employees from the case company’s procurement function. The empirical data was utilized to explore the current state of category and supplier relationship management processes and to identify the development needs regarding supplier segmentation in the company. Several motivators and targeted benefits behind the supplier segmentation model development were identified, and important criteria to distinguish between the suppliers were collected from a large sample of interviewees. Based on the analysis and the conducted workshops, a segmentation model consisting of two stages was proposed for the case company. First part of the model consists of segmentation of purchases on the category level with a portfolio matrix, followed by supplier classification based on the segmentation results and supplier assessment against a set of nine classification criteria, carried out on the supplier level. As a result, suppliers will be classified into different classes that were identified in this study, and they are to be managed according to differentiated supplier governance structures. This study supports the views that in addition to the purchased item’s characteristics, supplier and the relationship characteristics are also important when segmenting the suppliers. The study contributes to the growing supplier segmentation literature by presenting one way to link the category and supplier strategies together within the same model. Future development should be targeted at testing the practical implementation and performance of the designed solution, as well as developing the model and supportive tools further.