‘It is always best to deal with as many suppliers as possible so as to improve the efficiency of supply chain management.’ True or False?

Introduction

Most companies have suppliers. For example, Volvo had 450 suppliers who provide parts for their vehicle range and additionally 3,000 suppliers who provide supporting products and services (Pathan & Momosterr?d, 2013). To take an example, for a typical car Volvo brings together approximately 2,500 parts from 300 to 400 direct suppliers (Pathan & Momosterr?d, 2013). Thus even considering just the first tier of vendors, Volvo has to deal with hundreds of companies to produce one of its products.

For any company, the suppliers help bring them the raw materials (possibly having been processed along the way) and allow the company to add value and sell the products on to their customers. To understand the importance of having as many suppliers as possible, it is first necessary to comprehend the concept of a supply chain and a definition of efficiency.

This background will start with an explanation of the supply chain to identify where suppliers fit. Although the concept of a supplier and customer would appear obvious, a case study will show when this is not the case and can be in flux. This will lead to supply chain management and then the concepts of having just one supplier (with its advantages and disadvantages) and many suppliers (with their advantages and disadvantages) and trends that are happening in the way that companies deal with suppliers. This will lead to the balanced result of whether it is “best” to deal with as many suppliers as possible in the light of the efficiency of the supply chain management.

Background

The concept of a supply chain is the progression, starting with raw materials and flowing through to an end product (Farahani et al., 2012). For example in figure 1 (below) where the goods move from left to right, and thus money moving from right to left (source: Sedislogic, 2011, n.p.).

Figure 1: Supply Chain centred on the final good producer

Companies traditionally dealt with their direct suppliers only (tier 1 suppliers). More recently a company has an interest in the companies who supply parts to their suppliers (tier 2 suppliers). Standards and contracts between a business and its direct suppliers now flow down to these suppliers so that quality can be maintained through the process (Gordon, 2008). If the company wishes to liaise with these tier 2 suppliers (and potentially tier 3 suppliers who supply to tier 2 suppliers) and onward to the raw materials, this potentially hugely increases the number of suppliers that the company maintains a relationship.

Supply Chain Management

A supply chain is “a set of firms that pass material forward” (Mentzer, et al., 2001, p. 3). There are many definitions of supply chain management. For example, Shah (2009) states that the supply chain is not just the production of goods from raw materials and their transportation to the final customer, but a supply chain encompasses all the activities that are involved in the process. This would include, for example, the flow of information and the movement of finances through the chain. However, Ross (1998) suggests that supply chain management may just be the application of operations tools to the management of logistics. 

As a typical company spends over half of its income on the materials it purchases from its supply chain (Leenders & Fearon, 1998), it is clear that the supply chain has to be as efficient as possible. The word efficiency, as a measurement for supply chain management, is defined as the ability to minimise inventories (Li, 2007). However, Burritt et al. (2011) states that efficiency is built up from cost savings and increased revenue. Clearly, these definitions are not contradictory, but both sets of benefits will be considered as measures of efficiency. Also, the research conducted by Sachin Modi and Vincent Mabert (2010) shows that there is a statistically significant relationship between the effectiveness of the supply chain of an organisation and the organisation’s innovation. Thus, it can be demonstrated that there are benefits from adopting an efficient supply chain beyond just the relationships between the supplier and the firm.

One supplier

The APICS definition of a single source supplier is “A company that is selected to have 100 percent of the business for a part although alternate suppliers are available.” (Apics, 2015, n.p.). Thus, one example of this would be the McDonald’s Corporation, who had for forty years procured the ketchup added to its burgers from H. J. Heinz Company (Baertlein, 2013). In 2013, after Bernardo Hees was appointed as the Chief Executive Officer of McDonald’s Corporation, he made the decision to change the supplier to other suppliers (Baertlein, 2013). As a result, McDonald’s did have Heinz as a single source supplier and when a company with a sole supplier makes the decision to change suppliers, the transition becomes much easier (Fill & Fill, 2005) and this was a benefit of having just one supplier.

To take a contrary example, a gas company in the UK had to buy its gas from Transco, who had a monopoly in both supplying and transporting gas to end consumers (Remenyi & Berghout, 2003). Under the APICS definition, from the viewpoint of a gas company, this was not a “single source supplier” as, even though all the gas supply came from one company, there were no other providers and thus the sole supplier was not a choice but dictated by the non-availability of other suppliers. In this situation, it is futile to discuss advantages and disadvantages of the one supplier as the company had no other option. To conclude, the single-supplier situation applies when a company has a choice of suppliers but decides to select only one supplier.

There are other advantages in maintaining a single supplier. Jespersen & Skjott-Larsen (2005) identify that single sourcing allows a better relationship to build between supplier and customer, with increased trust between the companies which can lead to sharing ideas and to joint development, where the supplier gains the experience from the company having a closer relationship with the customers down the line and can pass on their experience to the supplier knowing that the company will gain from the rapport. In addition, a long-term contract can be implemented which allows the supplier to invest in equipment and processes which are unique to their customer and even allows staff to move between the companies (Jespersen & Skjott-Larsen, 2005), for example, a technical specialist to move from the supplier to the customer to help support the client sales. Fill & Fill (2005) confirm that fewer suppliers also helps build a long-term relationship with the suppliers.

However, Weele (2010, p. 264) takes an opposing viewpoint and claims that having a single supplier is “fundamentally wrong.” The disadvantage Weele (2010) highlights is that, in order to strive for having no defects, there is continual demand from suppliers to provide better goods. If there is no competition and the company is tied into a contract with the supplier to supply all their requirements for specific parts, there is reduced pressure for the supplier to continually improve their products (Weele, 2010). These points indicate that multi-sourcing is vital as it allows competition and, as the requirements increase, various suppliers need to improve their provisions in order to be selected.

Another aspect, raised by the Chartered Management Institute (2015) is that reliance on one or very few suppliers can result on dependence upon them, which can lead to a lack of independence for the business.

One solution to the risks associated with a single supplier is for the company to merge or purchase the supplier (Gaughan, 2011). Gaughan (2011) identifies the advantages as a reduction of risk between the two companies as the alliance is stronger than just a contract. Such an acquisition has to be managed, as Hill (2012) identifies the risk that a competitor may acquire the supplier first, or for more money which could remove that supplier completely from the company’s supply chain. It might appear logical that the company would have had worked with the supplier before the takeover to build a relationship and understand the risks. However Kamp (2007) lists takeovers associated with the Volkswagen group of companies FASA-Renault in which many of the companies taken over previously had no prior relationship with their buyer. In these cases, the purchase was not based on experience, but on a tender process (Kamp, 2007).

Once acquired, this may remove risks, but means that the company now has an in-house supplier who cannot easily be changed. ReVelle (2002) recommends that suppliers are reviewed at least each year. For acquired suppliers, this means that the products supplied, and the method of supply also needs to be reviewed, but with a view to changing the supplier’s working practices rather than changing the supplier itself.

Multiple suppliers

One advantage of having a small number of suppliers is that a company can work much closer to them (Magrab, 1997). For example when Ford changed from paying suppliers when they delivered the parts to paying them when Ford actually used the parts, the suppliers had an advantage to provide parts to Ford just as they were needed (Magrab, 1997) which lead the suppliers to work with Ford's production schedule. Thus, both companies had a closer working relationship and storage was reduced.

Many companies have regular suppliers who provide the materials they need every day to make the products they sell on to their customers. However in some cases, for example in the world of selling art or other rare items, a company may maintain contracts with suppliers even though there are hardly any orders. Grasso (2011) outlines the example where the US Congress would have both contracts and guarantees from suppliers to supply rare earth elements to Congress if they determined a need for them. Thus, there is no regular supply, but the lines of communication must be maintained so that, when they do need the raw materials, the suppliers are in a position to supply them. In some service industries such as telecommunications, companies may have thousands of tier 1 suppliers (who may also have to be managed as customers) (Wheatley, 1999).

In addition to the main suppliers, companies also need to have contingency plans in case there are problems with their suppliers (Perkins, 2002). There could be any type of problem, from political to environmental to just going out of business. Sting & Huchzermeier (2010) address the methodology of companies to have a second tier of suppliers – backup suppliers. Their products may be less attractive than those normally bought – for example they may be more expensive – but they will allow the company to continue functioning, with minimal disruption to their own customers. They may also be used if the demand for their products exceeds the capacity of their main suppliers. Sting & Hichzermeier (2010) give the example of Kolbus. They have a range of local suppliers who can supply if needed. As compensation for these suppliers not having a regular source of income (as they are only called when needed), they are much higher recompensed when they are needed. This maintains the relationship and keeps the backup supplier with a working, if intermittent, relationship. Perkins (2002) identifies that reliance on a single supplier could be disastrous. In March 2000, when the Philips plant in Albuquerque in New Mexico caught fire, they had been supplying computer chips to Ericsson (and other customers) (Ramzi et al., 2014). As Ericsson was using this plant as a single source and had no other sources or backup, this means that all Ericsson production that used the chips had to be closed down and the total cost of lost sales amounted to $400 million (Ramzi et al., 2014), or approximately ￡250 million (xe.com, 2015). Although the fire could not have been predicted, the possibility of something happening in the plant, and the risk assessment would have identified that Ericsson had a considerable risk that additional suppliers (even if they were not regular suppliers) could have alleviated. Some companies adopt an “n+1” approach, where they require a number of suppliers “n” for a part and then work with one more supplier to minimise disruptions (Nicosia & Moore, 2006, p.13)

Another reason for having additional suppliers is for a company with multiple outlets to have local suppliers near to each of their outlets or warehouse. Thomas & Barton (2007) identify many advantages with this approach. These include reduced shipping costs, reduced storage on the route and reduced import duties as the products progress from country to country. All these costs together add to the total acquisition costs for the product. Another advantage of sourcing supplies locally is the cost of storage of stock (Golini & Kalschnidt, 2015). All stock of materials from suppliers must be stored before use. In an ideal situation, products would arrive just as they are about to be used. However, if supplies are being imported in large quantities from suppliers across the world, they may need to be stored in warehouses, ports and at international borders. Also, many factors, such as political activity and weather can delay shipments. Thus, the stock levels need to be high enough to allow production to continue until a delayed shipment arrives. As storing products costs money, the main stock and the additional contingency stock all reduces efficiency. However with local suppliers, it may be possible to contact the supplier and say that stock levels have dropped, and delivery will be needed tomorrow. Thus, storage is held by the supplier (at their expense) until needed and only arrives as it is required. The supplier can also plan to reduce stock in similar (or other) ways, and the end result is that no one is paying for storage when it is not necessary.

However, Thomas & Barton (2007) also identify disadvantages with local suppliers, including the difficulty sourcing products local to each outlet, a potential lack of ability to deliver the products to the standards required and the difficulty for each supplier to adjust as the market develops. With companies such as Motorola demanding that all of its direct suppliers are qualified to ISO 14001 environmental standards (Rock, et al., 2006). This makes it even harder for local companies to supply directly to these firms.

Too many suppliers

The question is raised as to whether it is possible to have too many suppliers. According to Agrawal & Nahmias (1997) there is a cost associated with acquiring each new supplier, as they are sourced, negotiated with, and contracts signed. In addition, having a large number of suppliers requires resources to manage each supplier. Jessica Treadwell’s blog on the Financial Force website (2014) adds that additional burdens are being laid upon companies as they (and their suppliers) are assessed on a range of criteria, from the use of child labour and fair pay through to how they operate environmentally. Thus as the number of suppliers increases, the cost increases and hence efficiency decreases. Gopalakrishnan (2010) identifies that allowing companies to self-certify themselves can reduce these costs. As a benefit of self-certification, if there is any fault with the product supplied by the supplier, the supplier can be contacted to accept full responsibility (Gopalakrishnan, 2010).

A report from the Chartered Management Institute (2015) identifies that a large number of organisations have too many suppliers and a reduction in suppliers can lead to the benefits listed above (reduced administration, better communication) and can result in additional benefits such as a better response to problem solving, which means that a potential problem could be solved by the company and their supplier working together. Gopalakrishnan (2010) also points out that too many suppliers mean that the suppliers are unsure of the future and thus exercise caution.

Companies should review their suppliers on a regular basis to ensure that they are getting quality and value for money from each of their suppliers. Gopalakrishnan (2010) points out that some companies have a preferred supplier (or a few preferred suppliers) but they still place orders with companies that do not pass their criteria simply to keep the business alive in case there is a problem with their main supplier. Thus, from time to time, they are placing orders for substandard goods, and this supplier realises that it is acceptable to supply these goods continually without needing to address the issues.

Another case study is in the area of materials that may be intended for military or nuclear usage, as discussed by Fitzpatrick (2007). In this case, the supplier may not have a relationship with the customer except through certain intermediaries, and thus there may be no relationship between the supplier and the purchaser. In addition, the purchaser may well want to keep all purchases covert, as the end customer may be a government that is not permitted to purchase such weaponry (Roberts, 1993), and thus more suppliers could increase the risk of exposure

Kotler and Caslione (2009) claim that best practice encourages companies to utilise fewer sources in order to focus and better manage them. This also allows the companies to streamline their own processes. Thus companies such as the Hong Kong Clothing sector, which could have any number of suppliers, has limited their suppliers to between three and eight which gives the companies a balance between being able to negotiate prices and redundancy / non-reliance on one supplier (Ellis, 2011). Larger companies have also trimmed their number of suppliers, with Sun Microsystems simplifying its supplier base by allocating 80% of its purchases to forty suppliers, allowing a closer relationship with them; and Apple reducing its final assembling sites to just 17 (Brennan, et al., 2007).

One last approach is that instead of dealing with all suppliers directly, a company can identify a limited number of direct (or tier 1) suppliers and build up a relationship with them, and allow the other suppliers to supply the tier 1 suppliers (Brennan, et al., 2007). As the products from the tier 2 supplier still eventually reach the company (via the tier 1 supplier), the company still needs to know that these products will arrive on time and to the required specifications. However, they can leave the policing of the tier 2 suppliers to the tier 1 suppliers that they deal directly with. Sarokin (2015) points out that there could be tier 3 companies supplying to tier 2 companies and so on.

More recently, suppliers have been accepted for a longer term (Trent, 2007). This means longer-term contracts that can cover both the purchase and supply of parts, but also has advantages such as mutual improvements in productivity and reduction in total costs between the companies (Monczka et al., 2011). The disadvantages of longer term contracts can be that one side could try to take advantage of the relationship at the expense of the other; and if there is another supplier who is better, there may be no way of changing the contract duration (Monczka et al., 2011). As a result, although there is a trend towards longer-term contracts, they are not without risks. The logical solution is to build contracts with periodic reviews at which points the contract could be renewed, reviewed and modified or cancelled. However the risk here is that the contracts could be seen as short-term contracts, and this could impact on the longer-term strategy of both companies.

Conclusion

To conclude, a company could have no choice of supplier (for example when they must get their resources from one place and there is no alternative), it may have chosen a single supplier, a limited number of suppliers, or it may have many suppliers (intentionally or through the type of company it is). There are advantages to having a single supplier, including working together in order to share knowledge, processes and even staff. However, there are disadvantages that multiple suppliers avoid, for instance, the repercussions of the failure of the delivery from a single supplier. A risk assessment should identify if there are any supplies that a company receives from just one supplier, and should enable plans to be put in place to prepare for a potential failure in this supplier, especially where having no plans in place could cost the company hundreds of millions of pounds in sales. The view from the various sources is that there is no single number of suppliers that works for all companies. A small number of suppliers enable a closer and long-term working relationship. Also, local suppliers, if available and meeting the standards required can increase efficiency. However, a company should have enough suppliers to maximise effectiveness in the short term and plans in place to avoid disaster if any of the existing suppliers should become unavailable. Having as many suppliers as possible is an approach that just overwhelms the company and the resources needed to manage all these suppliers, and that can hugely reduce efficiency. There are ways (such as tiering) to minimise the number of direct suppliers that a company deals with and some companies, such as Sun Microsystems and Apple which have done this. More recently, suppliers have been engaged for a longer period, and this has mutual advantages, but also brings risks. Thus a company should not have as many suppliers as possible, but maintain a body of suppliers that works for them, with regular reviews and plans for contingency.