Do You Have Too Many Suppliers?

Maybe. But maybe you should also be asking Do You Have Too Few? Many organizations assume that just because they have 20K, 30K, 50K, or even 100K suppliers that they have too many. And while that’s probably the case, the question is much more complicated that. First of all, just because a supplier is in your system, that does not mean that the supplier is still being used. Secondly, if you have 100 locations and always use local providers for janitorial, security, (bike) messenger, floral, etc. then you could have 1,000 providers for small services that cannot be consolidated due to business rules or just lack of suppliers. As a result, sheer number of suppliers alone does not mean there is a problem — at least not a serious one.

Secondly, for some categories you want multiple suppliers. If the product is critical, if one supplier cannot (always) meet all the needs, if even minor disruptions in supply could be costly, and so on, you need multiple suppliers. Sometimes more than the minimum number. Risk Management might believe two suppliers is enough, but if one goes out of business, how long will it take to find a second, and start receiving viable products and services. If you have a third supplier, even providing minimal amounts of the products or services, it’s a lot easier to shift demand to that supplier in an emergency. So sometimes extra suppliers are good.

Plus, the ultimate goal of (category) sourcing is to receive the best value — typically defined as the lowest cost award that meets the organizational need. Sometimes the best value will come from assigning all of the award to a single supplier, other times it will require splitting the award between six suppliers — depending on product costs, shipping costs, import/export tariffs, and so on. So, supplier count alone is not a good metric.

As you can see, if you want a truly optimized award across a category, sometimes the organization will have too few suppliers. The right number of suppliers is the number that the organization ends up with after every category is optimally allocated across both the strategic spend and the tail spend. While it will usually be less than the number of (active) suppliers in the supplier database (as most organizations that do not do sourcing across all categories will end up buying from more suppliers then they need to), it won’t always be significantly less. You can’t always cut your supply base in half just because you think you have twice as many suppliers as you need. You properly source each category, and when all is said and done, the suppliers you have selected represent the proper pool size. Any remaining suppliers that aren’t absolutely essential for a non-sourced product or service get cut and then you have a properly sized supply base as it was properly designed. 10K vs 20K vs 50K is irrelevant. Only so much value comes from consolidation alone. Remember that.

And that’s why, in his response to Sydney’s questions on What’s the Cost of Having a Long Supply Tail, and How Do You Determine the ‘Right’ Supply Base, the doctor noted that the size of the supply base is totally irrelevant. The right size is the size that gives you the most value for every category you source. That will vary by company and there is no fixed size, or even formula, to compute it.

And, as the doctor noted on Twitter, your only concern should not be how long the tail is, but how many rats are in the supply chain. Those are the only parties you should be in a rush to stomp out.

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