It's Time You Broke Some Procurement Rules

My of my favorite bosses once told me “if you’re not breaking the rules at least once a week, you’re not doing your job.” Those words were empowering, and his advise has served me well.

He didn’t mean that I should do anything that would get me (or him) thrown in compliance jail.  What he meant was, challenge assumptions, understand the intent of the law (not just the letter of the law), and when time is critical, don’t waste time asking permission (or feel the need to CYA) if you know you are doing the right thing for the business.

Here’s one rule I am breaking these days; it has been the mantra of Strategic Sourcing, from time immemorial, that fewer suppliers is better.  I say it is time we throw that rule away.

The philosophy behind that thinking is that supplier consolidation enables you to maximize volume discounts, while simplifying administration.  Let me challenge those two assumptions.

Volume discounts follow a curve, and those curves typically start to flatten out at some point.   Once you reach critical mass, there are diminishing marginal returns.   Understanding that curve is critical.   When you get close to that flat part of the curve, consider spreading the wealth. 

It’s an old joke that when you come across a bear in the woods, you don’t need to be faster than the bear, you just need to be faster than the person standing next you. The concept also applies to suppliers. If you have high volume discounts with one supplier, the other suppliers are compelled to compete with those higher discounts.  Those who don’t are left behind. Smaller suppliers will want to have a seat at the table, and will match the larger competitor's discounts, in return for the opportunity to gain a larger share of your business over time.

The “fewer is better” rule critically fails to consider the important benefits of a larger supplier portfolio.  Rarely is anything we buy a pure commodity. There is usually some degree of differentiation, and innovation is constant.   The supplier who won that RFP six months ago might not win it today.  

By having a diverse portfolio of suppliers, we maintain real-time access to the innovative thinking throughout the market, which has substantial value.  Often times, your smallest “under the radar” supplier today is your most valuable supplier tomorrow.

The second assumption I’d like to challenge is that a large supplier base is more difficult to manage.  That is generally true. But how much more difficult is it, really?   How much easier are you making your job, at the expense of your stakeholders?  That thinking matters in large, transactional buying environments, with hundreds or thousands of suppliers, and invoice processing sucking up administrative resources.   But in categories involving a relatively small number of your large, strategic suppliers, the costs/benefit math doesn’t play out.

What rules are you breaking?