Suppliers – ‘More is the Enemy of Better’
‘More is the enemy of better’ is the mantra when it comes to assessing suppliers – allowing the supplier base to grow without the full involvement of procurement results in increased administration costs and poor relationship management.
By focusing your spend on a lower number of suppliers, more attention can be allocated to establishing long-term relationships, shared goals and commitments and leveraging purchasing power. It is not enough just to cleanse the existing supplier data by removing duplicates and lapsed suppliers. You need to consider a broader strategy.
If you already have enough qualified suppliers for a given type of expenditure and are sure that no other can offer cost, quality or other advantages then rationalise your supply base. Consolidate spend with a subset of currently used suppliers and ensure that all relevant spend is directed to these suppliers. This works well for commodity items and larger supply bases. Be wary of chasing the apparent savings with the lowest purchase price supplier than giving more weight to a reliable partner. Consider ‘total acquisition cost’, which should include an assessment of risk. Remember that every change of supplier brings an element of risk.
Many public sector organisations have claimed to have reduced the size of their supply base only to have delegated control to their ‘tier one’ of suppliers. Building high-dependency relationships with fewer suppliers is admirable but it must lead to added value, efficiencies and cost reduction i.e. lowest total acquisition cost, secured supply, risk mitigation etc.
Equally, don’t blindly follow the supplier rationalisation trend without full assessment. You might award business in one category to a supplier who performs exceptionally in another category. Analyse your categorised spend, understand where your suppliers perform best and the amount of contingency you may need (a framework agreement may be the best option for business-critical goods and services so you have the assurance of qualified suppliers who have known capacity). Award business to suppliers who can deliver demonstrable savings in each category. This may not be a single source.
It may even be necessary to expand your supply base first to then reduce it. In some areas getting enough meaningful competition may involve adding more suppliers. This allows you to identify the best suppliers in the market before eliminating the poor performers. Be sure you are not jumping into unknown territory with new suppliers and subject them to regular review, allowing them time to prove themselves. The quality of suppliers is more important that the quantity of suppliers.