Procurement Myths – supplier reduction is a good thing

Here's the latest in our series of myth-busting posts, designed to provoke and stimulate...

You see it again and again in self-promotional press releases and conference speeches. A CPO proudly announcing,

"We've reduced out supplier base from 10,000 to 2,000."

The implication clearly being, "aren't we clever".

But the big question should be, "exactly why have you done this"?

If the reduction is the outcome of a carefully thought out set of category strategies, where implementing the best approach has consequentially led to fewer suppliers, then fine. But too often I have seen it become an end in itself; often because it is one of the few procurement metrics that is easily measurable - compared to real 'savings' for instance.

Clearly, leverage is a powerful procurement tool and using that appropriately may well mean fewer suppliers, as buyers look to concentrate volume and get a cost reduction in return.  But other justifications for cutting supplier numbers are often somewhat spurious; the real administrative savings (as opposed to the claimed) from simple reduction in numbers is limited, and the 'management focus' argument is weak; it doesn't matter I would argue whether you have 10,000 or 2,000, you'll never really 'manage' more than a couple of dozen suppliers.

And the negatives? Forcing suppliers into moving down the supply chain to work through a Prime Contractor relationship which actually adds cost (the Prime's margin for a start) just to be able to claim a 'supplier reduction'. Reducing competition and increasing reliance on a small number of suppliers.  Kicking out potentially valuable, innovative suppliers. And a wider issue; an old colleague of mine emailed me the other day - he's now working at a large bank who are pursuing a supplier reduction strategy. His view -

"this will inevitably lead to many smaller companies being removed from the list of suppliers – when SMEs are supposed to be the engine of economic recovery.."

So how many suppliers do you need? You need the appropriate number of suppliers. OK, that is probably fewer than you have now. But that may not be the case for all categories.  The most important point though is that supplier reduction in itself is a really bad objective and measure of success.

Voices (6)

  1. Alun:

    Blindly following any KPI has to be a bad thing. Once we met a client that had set objectives on the number of auctions run by the buyers, taking focus away from quality and savings. The last auction they had run was to mow the lawns at the US HQ! However, at Rolls-Royce where there were real issues around the time and cost related to supplier audits, rationalisation really brought in some keys benefits. Although I can also relate to your points. There was a massive drive at RR just to end up with a few big suppliers in each category which in some cases left you with little negotiation choice and also you lost the flexibility required by using local suppliers for a quick turn around. In short the KPI’s around rationalisation need to be specified in terms which also demonstrate a vision of where you are heading so it does not just become a mantra in the organisation.

  2. bitter and twisted:

    There are lies, damnable lies, and kpi’s

    Vendors and Suppliers are different things

  3. Christine Morton:

    Agreed Peter – reminds me of another place/another time – where the head of corporate procurement had a KPI of the “number of procurement cards issued.” Useless, pointless KPI… but hey it made for a pretty graph…

  4. Charles Dominick, SPSM, SPSM2:

    This is a topic I love, Peter. I wrote about it in January, saying that supplier consolidation only truly benefits organizations when at least one of three results is achieved: headcount is reduced, the consolidated spend is leveraged and lower prices are negotiated, or work billed on a per-supplier basis is reduced. Often supplier reductions happen WITHOUT any of these results and thus are wastes of effort. You and your readers can check out the full article at:

    http://nextlevelpurchasing.com/articles/supplier-consolidation.html

  5. Pietro:

    Peter,
    fully agree with you. A reduction in the supplier itself makes the administrative quite easier but, do we want to “think” administrativ or strategic? From a strategic point of view, depending on the category itself since I might say this is a very important aspect to be considered, I’ll say that the programm “help” loosing transparency including not least more complexity and perhaps distance from the supplier itself once we would replace a tender or similar. Also, I am convinced that to 80% such a programm helps only the administrative team as well the contract management, not the aim of the company.

    regards
    Pietro
    italconsor procurement services

  6. john mardle:

    Totally agree with the fact that reducing suppliers has to be done utilising a very specific and well communicated/coordinated strategy. Granularity is key and can be anything and everything from critical success factors, critical products/services being delivered, through net margin provided by that supplier through to future strategy of the entity re market penetration, sector growth/stablisation, new offerings, new merger acquisistions etc etc.
    Processes are key from an internal standpoint and linkages to the external strategies are required to ensure efficiency is delivered by capable, capacity and maturity of the employees, the function, the company and the group.

Discuss this:

Your email address will not be published. Required fields are marked *