The Who, What, Why and How of Supplier Rationalisation (part 2)

More from Daniel Ball of Wax Digital and John Martin on supplier rationalistion – part one is here.

What’s best practice in this field?

Supplier rationalisation best practice requires the procurement team to achieve a good level of engagement with operations. While it’s important that supplier relationships aren’t owned by individual functions or even individuals themselves, procurement must work with departments to ensure that rationalisation decisions are not at odds with their requirements. Otherwise rationalisation has the potential to work against the business’ goals and objectives and become a damaging factor in its own right.

If departments are to hand over important commercial relationships they need to understand that procurement will not become obstructive to them meeting their targets and the role that its suppliers play in that. Category experts must also demonstrate to departments that they have in-depth and useful knowledge of the subject and the environment in which a suppler is utilised. It’s about demonstrating the capability of procurement, showing an effective methodology and achieving engagement across the organisation and all of its functional requirements.

In fact, rationalisation can actually be a way for procurement people to help departments improve the way they buy from their chosen suppliers. Informal departmental relationships with suppliers are often dogged by inefficient ordering and payment processes which impact the suppliers’ cash flow and relationship with the buying organisation. ‘Plugging’ these suppliers into a P2P system and giving departments access to intuitive buying platforms as part of a supplier rationalisation exercise can actually alleviate pressures for the buyer and the supplier.

How should suppliers deal with it?

Although supplier rationalisation isn’t necessarily about making cuts, the supply base should be ready and prepared to deal with the changes that can ensue. The key message for suppliers is really one of “don’t ignore it” – they’ve got to work with it. From the supplier perspective attempting to understand what rationalisation means to the customer organisation will at least help them to be ahead of the game in evaluating the risk, or indeed the opportunity, that it presents to the business.

Suppliers can address the risk by taking active steps to seek replacement business (or adapt its business to fit the customer’s new requirements). Where there may be an opportunity, early action and insight gives the supplier the maximum chance to adapt and develop its offering to fit. Of course, the smartest suppliers are actually rationalising their own business constantly. For example, rather than delivering niche services, a facilities management company could develop a fully outsourced offering that appeals to clients seeking to rationalise services in this category.

What are the key success factors?

1. Engage the business, as ultimately it is about helping it to operate more effectively. Procurement needs to demonstrate a thorough understanding of the business and its needs in terms of products (goods and services), quality and service expectations. From there it is easier to decouple the commercial and operational supplier management activities. This may require understanding across different business streams or functions.

2. Take time to understand where the opportunities for rationalisation are. Is it in your contracts, relationships, processes or product choices? What does your P2P system’s data tell you about your supplier portfolio?

3. Profile and consider the risks of rationalisation carefully. Understand what the effects of rationalisation will be in terms of challenges as well as benefits.

4. Does the effort of rationalisation outweigh the benefit or vice versa? Could rationalisation impact your organisation in far reaching ways, either positively or negatively, such as customer service, product quality, legal risks or sustainability?

5. Analyse, analyse, analyse – making rationalisation pay is about making detailed decisions about individual suppliers, not mandating blanket policies across the entire supply base. This demands a strong foundation of data, usually sourced from Purchase to Pay systems and spend analysis.

6. Work with your suppliers, not against them. There may be opportunities for them and you, even where rationalisation seems to be closing the door on a relationship.

7. Don’t just think reducing suppliers – think about aligning suppliers to business needs.

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