Supply Base Rationalisation – Five Potential Negatives

There’s a great article on the Spend Matters US site from Nick Heinzmann of the US Spend Matters team, who is quickly developing into a very thoughtful and intelligent analyst in terms of looking at procurement practices and processes.

The article is titled “5 Reasons Supply Base Rationalization Can Be the Enemy of Effective Procurement Spend Management”.  It is a topic we’ve written about many time over the years, but Heinzmann’s analysis is very thorough and professional – he even gives references (give that man a Masters in Procurement immediately)!

It’s 2000 words too, much longer than our usual article length, so we’ll just give you a few highlights and suggest you read the whole thing. Here is the core of his introduction.

“On the surface, rationalizing an organization’s supply base can seem like an effective way to improve procurement performance. By rationalizing the number of suppliers that enterprises work with, procurement leaders can reduce costs, improve quality and save the time of procurement teams who are too often lost in the arduous process of managing indirect tail spend. However, due to the rise of more advanced B2B e-commerce platforms and highly volatile pricing fluctuations for products, the supplier consolidation strategy is quickly becoming outdated.

In reality, supply base rationalization results in many inefficiencies. In fact, such an approach can be the enemy of effective indirect spend management. To understand why and select the appropriate strategy for your organization, here are five reasons supplier rationalization may lead to missed savings, weaker supplier relationships and more”.

He then goes on to lay out the five issues.

  1. Ignores the Positive Savings from Price Dispersion 
  2. Leads to Increased Maverick Spend
  3. Weakens Procurement’s Negotiating Position
  4. Increased Risk of Price and Product Creep 
  5. Reduced Supplier Diversity, Flexibility and Innovation 

 

For some further flavour, here is some of his commentary under that final heading.

“As leading procurement organizations understand, internal B2B purchasing entails far more than lower pricing and the availability of stock. Ultimately, the suppliers that procurement chooses to collaborate with can also provide access to innovative new solutions …

A study by the Hackett Group showed the greater financial benefits of securing business relationships with diverse suppliers. Based on a study of 50 companies from both the service and manufacturing sectors, the research demonstrated that companies with a strong diversity focus generated an average of 133% greater procurement ROI than the average comparable business and drove an additional average of $3.6 million to a company’s bottom line.

As businesses and customers become more diverse, it makes sense that so too should an organization’s supply base. But this is not just about creating good PR or achieving internal diversity goals. Research shows that diverse suppliers tend to be smaller businesses that offer greater flexibility, better hands-on support, lower cost structures, more creative resources and patents on new, innovative problem-solving products.

A heavily optimized supply base will restrict businesses access to a wide variety of MBE, women-owned, environmentally-friendly and local suppliers. If the ultimate goal is to drive more value to your organization and stakeholders, then building a diverse, competitive supply base, facilitated by easier self-service supplier onboarding and management features, should be a top priority for procurement”.

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Very good stuff from Heinzmann – again, do read it all here. Under that last heading, I might stress the “innovation” aspect a little more, rather than simply diversity – noting that innovation can come from any supplier, or indeed firms that aren’t even suppliers at all at the moment! That’s why we have supported Koble, as an open but controlled platform to link buyers and sellers, big and small.

All in all, procurement as a conduit for bringing innovation from the market into the organisation has to be a key role for the “profession”, particularly as more routine tasks get automated and AI’d. That task will be far more important than our ability to “chop” suppliers, just to hit some notional and meaningless target.

 

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