Your Supply Base Is Too Big – But That Does Not Mean You Should Consolidate

You should right-size, but right-size doesn’t mean down-sizing the supply base like consultants in the 90′s used the term right-size when they wanted their customers to down-size their work-force. It means identifying the right number of suppliers for the category, and the right suppliers to fill those slots. If you are sole-sourcing or dual-sourcing a category, and the one or two suppliers are risky or in at-risk regions, you might need more.

The right number of suppliers is not a magic number, it’s the right number of suppliers you end up with after you have identified the right suppliers for each category. For a large organization, that has 60,000 suppliers, that’s probably a substantially smaller number (by a factor of 2 or 3), but it’s not consolidation and cutting across the board.

The reality is that most of the unnecessary supplier proliferation is in the tail spend, not the strategic spend that is analyzed every few years. There are a few extra suppliers in the strategic spend, particularly when organizational units or individual buyers go rogue and don’t buy off of contracted or preferred suppliers, but the majority of needless supplier sprawl is in the tail spend. (Where, as we noted earlier this week, you should be auto-buying.)

So how do you go about right-sizing? First of all, for each product or service in the tail spend, select preferred suppliers and make sure that they are only suppliers available in any and all solutions the buyers can use. Then, make sure that the organization puts in place a no PO, no pay policy and communicates that to all suppliers, and, in particular, the suppliers that are no longer preferred suppliers. This will minimize the suppliers who will respond, especially if the organization refuses to pay invoices that are unmatched to POs.

Then, use auto-class solutions on the transactions to try and identify products or services that could come from the same supplier and try to reduce the supply base further by eliminating those suppliers that can only supply one product or service when there are enough suppliers that can supply that product or service that can also supply other products and services.

And then stop there. While this won’t necessarily get down to the optimal number of suppliers, or ensure the optimal supplier is in each category, it will likely reduce the number of suppliers in the tail by a factor of 2 or 3 and make the tail a lot more manageable. And that’s what’s key – manageability, especially when you want your auto-buy to work quickly and efficiently and eventually consolidate enough volume that you can negotiate with the supplier in the future if you need to.