Strategic Sourcing and Driving Spending with Small Businesses Don’t Have to be in Conflict

Washington Technology and recently published an article that raised an interesting question on the use of one procurement strategy: Does strategic sourcing hurt small businesses? Mark Rockwell, the author, cites the case of Walmart and its usage of strategic sourcing to build strong relationships with all suppliers – an argument I would not necessarily agree with – and then contrasts it with the federal government, whose approach to strategic sourcing has become more about buying as leverage and "limiting the number of companies that might be able to compete.”

Rockwell continues on in writing that “unclear regulations from the Small Business Administration concerning how smaller businesses can partner with larger ones to vie for large contracts add to the pressure.”

Regardless of whether it’s public or private sector, I would argue that the basics of strategic sourcing (i.e., aggregate and consolidate spending with fewer suppliers to create leverage in negotiations and more strategic relationships overall) are in conflict with the drive to encourage supplier diversity. But they don’t have to be.

Here’s why: strategic sourcing does not only have to focus on demand aggregation and sourcing strategies based on driving down price with tier one suppliers. RFPs and contract requirements can also include the need for tier one suppliers to work with small business, including target numbers or thresholds, as a major element of measuring overall value and performance. In addition, many tier one suppliers are more suited for implementing supplier diversity programs than larger organizations. For example, in the contingent labor category, a larger staffing firm or MSP is often better equipped to work with diverse and smaller staffing firms (and will know who they are in given areas).

Strategic sourcing and supplier diversity/small business spending programs do not have to be in conflict in either the private or public sector. But when reducing costs becomes the only target through strategic sourcing programs, private sector companies and public sector agencies and departments face risk in such programs reversing the progress that has already been made in the area of encouraging SMB spending.

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Voices (4)

  1. kris colby:

    Excellent points. And Peter’s right that economies of scale are not a cure-all. A larger pool of available, engaged suppliers is an excellent way to ensure that you are tapped into the supply market and can stay aware of changes.

    1. Peter Smith:

      Thanks Kris. And the more I think about it, the more I feel”economies of scale” is a real procurement blind spot. We should be the professional experts on that topic, yet most procurement people couldn’t draw you a basic scale curve I suspect, let alone discuss how it might differ for different spend categories / products / services. Your “larger pool of available, engaged suppliers” is a great way of putting it – you may spot that phrase in my presentations and webinars in the future, I should warn you…!

      1. kris colby:

        I’ll send you the address for royalty payments offline.

  2. Peter Smith:

    When I worked with the UK government on this issue, we came up with this slogan “aggregating demand does not have to mean aggregating supply”. So you do “strategic sourcing” to get your arms around the TOTAL spend – but that doesn’t mean you then source purely through mega-contracts. And the benefits of economies of scale are much exaggerated in most spend categories, by the way.

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