The Who, What, Why and How of Supplier Rationalisation

We're pleased to have a guest post from Daniel Ball, Wax Digital and John Martin, a former CPO.

Scour the LinkedIn profiles of procurement professionals and consultants and you’ll find frequent references to supplier rationalisation. The immediate implication is that this process is about cutting or reducing your supply base. In modern terms it’s become far more sophisticated than this and could, amongst other things, lead to increasing supplier numbers.

What is supplier rationalisation?

In today’s terms supplier rationalisation is the optimisation and prioritisation of your supply base and as much about how you manage engagement with them, as the number you have or the price they charge you. In truth the commonly held view that rationalisation simply means cutting suppliers is not the case.

Mapping your supply base to business needs could actually increase the number of suppliers you work with, as well as enhancing the opportunity presented to them. Visibility of information is critical as a basis for analysing your suppliers and effective rationalisation; it’s ultimately about making changes based on knowing who you are buying from, how much you buy and critically how much it costs your organisation to do so.

These questions need to be answered from the perspective of risk, process costs and sustainability. Ultimately rationalisation is about building a supply base that is the best overall fit for your organisation. This could involve very different decisions in regard to a high spend direct materials supplier as opposed to an ad hoc supplier of services to the business. With the former, the decision is driven by pricing and risk, while the latter is impacted by the relative cost to the business of dealing with that supplier.

Why are organisations doing it?

There are a number of different drivers for supplier rationalisation. The increase in return to private ownership for many mid-sized firms is one, as businesses seek to reduce costs to improve their bank balance and become attractive to inward investors. As a result, rationalisation can become a focus across the business and procurement plays a key part in driving change.

For others, it is the convergence of business cost control, risk reduction and sustainability measures leading to a desire to bring suppliers closer to the business, in terms of their strength of relationship and increasingly, their location. For example, in the public sector, local authorities can demonstrate social value by sourcing locally.

An organisation may equally be seeking to consolidate disconnected departmental spending across the business (which can lead to casual relationships with ‘unofficial’ suppliers becoming formalised). An organisation may also reorder its supply base around the ability of suppliers to meet new ethical standards or risk indicators. Through spend visibility it might also highlight what else it can buy from its trusted suppliers or where opportunities to consolidate purchases to one provider.

Rationalisation through spend visibility could be used to create diversity too – in order to spread the risk or in the case of the public sector, contribute to social value. It’s as much about rationalising the design of your process and relationship with suppliers as it is about rationalising on numbers and costs.

How has supplier rationalisation changed?

The big change is that early supplier rationalisation was about solving a cost problem, where maverick spend was high across departments with their own supplier relationships in place. In these situations the focus was often on reducing the number of suppliers in the pool, sourcing suppliers that can support the whole organisation as a prelude to bringing spend under control.

Nowadays many organisations have gone through this process already and are looking at more dynamic ways of increasing supply efficiency and effectiveness. This is leading a second wave of supplier rationalisation, more focused on bringing order and logic to all aspects of the supply environment through many different and niche decisions.

Information visibility through systems such as Purchase to Pay is essential in taking a step back to understand the requirements of the business first. This analysis provides a detailed picture of what can be done to rationalise – or improve – the relationship with them. Many questions arise, for example, do we need to renegotiate with this supplier? Can this one supply more to us? Do we need to focus on the buying process here? Is solving the problem with this supplier worth the cost and effort? Supplier rationalisation has become much more about in-depth analysis and segmentation and less about blanket changes and rules.

More to come in part 2

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