The Relationship-based Supplier Segmentation Model (FORT)

The relationship-centric approach to supplier segmentation

In our earlier post, we provided a comprehensive view of the theoretical and practical aspects of outsourcing. 

Recently, we came across a model to segment vendors by relationship types. It's not only sound in the context of outsourcing but may be applied to structure your supplier relationship management (SRM) strategy.

The traditional supplier segmentation model

The traditional approach to supplier segmentation as a part of the Supplier Relationship Management framework assumes the complex categorization by multiple attributes, e.g., spend volume, degree of core process dependency, risk profile, relationship maturity, and cost of replacement. 

Supplier segmentation

FORT (Four Outsourcing Relationship Types) Model

The FORT model (1996) considers outsourcing to manage relationships with service providers rather than a simple subcontract.

FORT Model

Consequently, we can construct our generic strategy and understand the intentions of our providers to move from one cell to another. The FORT model may serve as the classical Kraljic matrix used for supply base segmentation by risk and profitability. 

This model segments the outsourcing companies across two dimensions: the extent of substitution by vendors (i.e., the degree of outsourcing) and the strategic impact of outsourcing services.

When substitution is low, as in Support and Alignment relationships, clients invest little in service provider-specific assets. Low asset specificity (as we learned from the Transactional Cost Economics) and the competitive market for such services means a small risk of opportunistic behavior of vendors (especially SMEs and startups in the Support cell) and a cost-reduction emphasis.

Therefore, clients establish shorter-term contracts and don't elaborate on performance incentives.  

On the other hand, when the extent of substitution by service providers is great, service provider-specific investments by clients are also high. Clients become more dependent on leveraging the vendor's technology and competencies to achieve the projected business value. 

This results in a locked-in relationship and an increased risk of opportunism. 

A complex system of contractual incentives to reduce costs and performance penalties is required in the Reliance cell. 

Meanwhile, Alliance relationships entail a high mutual trust and commitment translated into vested contracts with shared business goals. Otherwise, high asset specificity leads to applying the hierarchy governance, i.e., insourcing.

Naturally, the service provider's business strategy is to move to the Alliance cell, while the Support ones are happy to get to any other cell.

FORT Model as the supplier segmentation best practice in the SRM context

This model can be applied beyond the realms of the BPO industry. For instance, it can segment your supply base in the context of the SRM.

The extent of substitution can be extended to the dependence on suppliers.

Alliance vendors will become ones on which your company is highly dependent over a broader scope of strategic services. 

Reliance vendors will provide niche services, where your company depends on them significantly, and so on.

This model could streamline SRM adoption due to its simple and intuitive nature.

P.S. This content is the most recent part of my research summarized in the Udemy course "Foundations of Contracts and Outsourcing."

P.P.S. If you appreciate hundreds of hours invested in researching and writing this blog, you can buy me a coffee or subscribe for the membership by following this link. Thank you!

Buy me a coffee

                                          https://www.buymeacoffee.com/ukrsedo

Follow this blog banner
To keep receiving new insights and research, please subscribe here. 


More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s of hours spent on research, analysis, and content creation for the most demanding professional readers.
The Technology Procurement Handbook front page
 

Comments

Post a Comment

Popular Posts

The Importance of Supply Chain Collaboration

Image
  Why is supply chain collaboration essential? Once, I was asked what makes the supply chain important to a company. Our profession may not be rocket science. Other peers around the company overlap with us in their functions - Technology tends to manage suppliers , Finance owns the demand planning and budgeting , and Sales and Marketing monopolize the end-customer value chain.  These and other colleagues do not always appreciate us; some believe they are even better at our job.  Shadow procurement, supply chain, and logistics have become standards for many companies.  However, some critical differentiators - like collaboration - justify the very existence of our profession!  The supply chain is the most collaborative function in the business.  We find peers everywhere, even behind enemy lines. We welcome any opportunity to form a cross-functional team with anyone who can bring business value through supply chain strategies, sales  and operations planning,  inventory management,   B
Read more

The Discovery of Procurement Value

Image
Procurement value demystified Unfortunately, " procurement value " became another buzzword – everyone tells us to generate, capture, and sustain it.  This post attempts to provide the most comprehensive view on procurement value and practical methods of its realizations compared to many other web sources replicating slogans and mystifying logical and straightforward concepts.  The meaning of value Value is not substantive. It is rather adjectival. It characterizes something or results from the application of something. It doesn't exist in its raw form; it's being created. It's a universal differentiator between good and bad things or actions. This 1914 philosophical article defines value  as the object of proper judgment . How easier does it make the explanation of value? The value is equally apparent for those who know the truth.  Therefore, we will give different definitions, not pretend to have found the unilateral value formula. Value is paramount t
Read more

The New Looking of Industrial Buying

Image
Industrial buying has been subjected to research for over a half-century.  Instead of treating the act of buying as a spontaneous event, researchers viewed it as a series of patterns explained by the nature of actors, demands, and relationships.   Such a new looking provides a relationship-centric context of industrial buying instead of superficial product characteristics shaping the entire process. Buygrid Framework : An Introduction to Industrial Buying Theory  The Buygrid Framework  (1967)  classical procurement theory analyzes the industrial (B2B) buying behavior and business processes.  It presents industrial buying not as a single event but as an organizational decision-making process where multiple individuals decide on a purchase.  The framework comprises a matrix of " buyclasses " and "buy phases." Buy phases Buy phases pretty much remind the steps of the source-to-contract cycle: identification of needs, establish specifications, Search for alternatives, e
Read more