Procurement & supply base rationalization

For quite some time, the theoretical underpinning for vendor consolidation and its potential rewards has been known. Nonetheless, many businesses still struggle with their supply base in terms of the number of suppliers.

What is vendor rationalization?

Supply base rationalization, or supplier/vendor rationalization, is the practice of?reducing the number of active suppliers to streamline an organization’s spend.?Rationalizing the supply base entails using the appropriate number and kind of vendors. Historically, supply base rationalization focused on lowering the number of suppliers, limiting the organization's supply base to foster supplier competition and gain higher cost savings. However, with the emergence of tail spend technologies and analytics, supplier rationalization has evolved into a value generation process rather than a cost-cutting exercise.?Many businesses have far too many suppliers to keep track of. However, rationalizing the portfolio begins with establishing the value of doing so.

Why is it important to keep a manageable supplier base?

Key reasons include:??

1. Cost management.?Companies can reduce costs by obtaining greater price concessions from a fewer number of providers and decreasing the administration expenses of managing suppliers. When making this argument, emphasize how money will be saved rather than how much savings are anticipated.
2. Lower risk. Each supplier introduces new risks, especially if the supplier was selected by a business user who does not follow procurement processes. These risks can include, among other things, information security, the supplier's financial stability, and quality issues. Concentrate on compliance and risk management, as well as how a smaller set of essential suppliers will make risk monitoring easier.
3. Better service and value. By consolidating spend with fewer suppliers, you become more important to each remaining one. While it is not realistic to have one supplier for each category, consolidating spend among a smaller set will increase your importance and therefore will increase the level of attention and service that those suppliers give you.?
4. Better supplier management. Having less suppliers, vendor managers, or stakeholders can spend more time managing those fewer relationships.
5. Increased speed. With a smaller list of pre-approved suppliers, any competitive process will be easier to manage and pre-selecting whom to send a request to is much faster.

However, you need to find the right balance, if you rationalize to too few, you run some risks:

1. Increased maverick spend: end users will not always find what they are looking for and will work around procurement processes.
2. Weaken Procurement’s negotiating: avoid single source and narrow your options to similar types of suppliers.
3. Reduced Supplier diversity, flexibility, and innovation: You don't want to miss out on opportunities created by a diverse supplier base.
4. Balance the consolidation effort vs. the expected benefit. Often, I like to measure spend consolidation in addition to the number of suppliers to avoid falling into endless consolidation efforts.

How do you reduce/control it?

Several logical phases to follow to minimize work and maximize the impact:

• Form a team who will oversee and execute the rationalisation and help build the ongoing process to ensure that you don't start adding new suppliers again as soon as you completed the initial consolidation.
• Analyze your current situation for each category & holistically: historical spend, number of suppliers, spend consolidation (80% of the spend with xx% of your supply base), vendor performance, category specific needs, innovation areas, onboarding process,...

• Develop your strategy for each category: product/service standardization, supplier consolidation criteria (performance, compliance, relationship, prices,..), elimination of once-off suppliers, and identify the ones who can offer multiple products/services to consolidate?with them. Approach it with clear ambitions ("no more than 2" key suppliers, 20% reduction, etc...).
• Set ambitious objectives for each category, report on progress, and make it visible.
• Create a proactive demand management program: One reason for continuously?expanding your supply base is the lack of knowledge, understanding and acceptance of the?consolidation need. To avoid wasted effort, create a demand management program. This includes explaining to key business stakeholders why it is important and getting their support to consolidate to?the right one.
• Finally, build a process ensuring?that stakeholders are guided to use the right suppliers and discourage adding new ones (i.e. make easy doing the right things?vs. difficult to add new "unneeded" suppliers).

One question likely to come up during this phase is "what’s the right number of suppliers?"

Some key factors should be considered:

• Level of maturity of the products/services. How many vendors supply the same products/services? You can consolidate mature products/services among existing suppliers more easily while innovative or emerging offerings will require you to use multiple players.?
• Level of importance to the company. Understand the strategic relevance to your company. Don’t ruthlessly start combining mature product groups, even if you think they are commodities, without knowing whether those products are of high value to your business. Critical goods and services, even if you can easily purchase them from one player, may require multiple vendors simply to avoid the risk of not getting the volume or price that you need.?
• Stakeholders' preferences. Take into account the human experience of users who work with those suppliers. Make sure to get their input into the current supplier base, as well as ask for new suggestions.

Managing your suppliers professionally is one of many procurement objectives. It starts by having a right sized supply base. In an earlier post, I talked about structured category management. The supplier reduction should form part of the thinking and is one of the elements to consider.?