Finding New Suppliers and Right-Sizing the Supply Base – Sensible Procurement Objectives

The myths around economies of scale continue to hold procurement functions back from achieving real strategic contribution in their organisations. In the recent Deloitte CPO survey, we saw “consolidating spend” still at the top of the list of the levers CPOs say they will focus on in 2017. If you quiz them further, many I’m sure will say that this consolidation will generate ”savings” because as you concentrate spend on fewer suppliers, economies of scale will result.

Yet how many CPOs or indeed category managers understand the economy of scale curve for the category, product and suppliers they are considering? How many even think about that as an issue? In many cases, we see dis-economies of scale beyond a certain point, and modern technology has made traditional mass-production economies much less important.

Linked to the consolidation aspect, we also still see “reducing supplier numbers” as a key objective for procurement. Now we do understand that on some occasions this makes sense, but once you have reached a certain level of what we might call procurement maturity (i.e. the organisation is not in a state of anarchy in terms of the procurement process), then it becomes less sensible.  Indeed, there are many cases where organisations have reduced their supply base in certain spend areas to the point of real risk.

We would suggest two more sensible objectives and approaches that organisations and CPOs should adopt:

  1. The objective should be to have the appropriate or optimal number of suppliers, by category and geography. That number should reflect risk factors, the diversity of requirement, and the dynamicism of the market.
  1. A more meaningful objective for procurement would be around identification of new suppliers (new to the organisation that is) that can add real value. The whole point of procurement – in the private sector at least – is to deliver competitive advantage from the supply market, so finding different suppliers who might provide that edge should be high on the list of priorities.

Too often, consolidation and supplier reduction programmes lead to a stale stasis, with the same old suppliers, probably the dominant firms in the industry, providing reasonable service year after year without doing anything different that might help the client really drive their own business value.

That is one of the reasons we liked Koble (formally SpendLead) when we first heard about it. We would like to see far more emphasis on procurement being out in the market, searching for those great suppliers, often newer or smaller firms, who can produce competitive advantage. As Koble grows in terms of the number of firms on the platform, it is becoming a more and more useful tool for those buyers who want to stand out from the crowd. If you haven’t taken a look at it yet, please do.

But in any case, our advice is this. Don’t pursue supplier reduction for the sake of it, don’t over-estimate economies of scale – and do think about what you’re trying to achieve and how procurement can really drive strategic value through the appropriate number of innovative suppliers.

First Voice

  1. Greg Tennyson:

    Peter – Good points about the importance of supplier rationalization and diversification. In the past, there was too much of a ‘3 bids and a buy’ mentality driving supplier selection and award. Switching from the incumbent supplier was an uphill battle, and yet in order to contribute to the bottom line, procurement has had to exercise various strategies to drive the right business outcomes. Now, however, we see a much greater opportunity at hand: making sure we have the right suppliers in place (not just the right number of suppliers). Strategic supplier discovery and differentiation is about finding the best suppliers of a product or service rather than just finding suitable competitors to the incumbent(s).

    I just had the opportunity to chair one of a series of roundtables hosted by tealbook, a supplier discovery and knowledge management platform. The feedback we heard from industry-leading procurement executives was that immediate access to credible, actionable market intelligence is as core to procurement’s success as any other asset at our disposal. It is the only thing that allows us to empower our stakeholders, increase access to small/diversity suppliers, prioritize our efforts by material impact rather than spend dollars, and contribute to collective innovation in the procurement community.

    Depending on the organization and initiatives, speed-flexibility-agility-time to market are defining procurement’s value. Access to intelligence that is actionable, SMART is an enabler for an agile procurement organization that helps play a key role in setting the direction of the company by introducing the right supplier partners for each opportunity.

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