How To Avoid A Supplier Cull?
The culling of suppliers continues unabated. Indeed, those organisations that have not consolidated both suppliers and SKU’s are clearly out of line with best practice. So, as a seller are you at risk and, if so, how can you avoid a supplier cull?
Creeping Supplier Proliferation
It is a truism that the list of suppliers and products / materials bought (sometimes referred to as SKUs or stock keeping units) tends to expand over time. This happens where orders are placed with a wide variety of suppliers, with a lack of coordination across departments, or business units.
Are some of your customers using a proliferation of suppliers?
Each manager or department has their own preferences as regards supplier and long standing supplier relationships have been established. On the surface everybody is happy, with the exception of procurement however. It knows that the proliferation of suppliers simply does not make sense, economically or otherwise.
Here is the bottom line: It is crazy to have lots of companies supplying the same parts, products, or services. If these companies are supplying lots of variations of the same products, or parts it is even more crazy still. There comes a time when a cull is needed.
The procurement free for all has come to an end in most large organizations. Managers and their departments are under increased regulation in terms of procurement. They are losing their discretion regarding not only what can be bought, but also who it can be bought from. To make this retrospective organisations are re-evaluating all existing supplier contracts.
The Cost of Supplier Proliferation
A proliferation of suppliers means that the organisation is failing to leverage volume by aggregating and consolidating purchases with a limited number of selected suppliers to achieve maximum savings.
Would it make sense for some of your customers to reduce the number of suppliers?
Not only does too many suppliers cheat the company of real savings, it drives cost in a plethora of ways. That is because more suppliers means:
– More money tied up in inventory, warehousing, logistics, etc.
– More supplier correspondence, meetings, reviews, etc.
– More administration (purchase orders, payment processing, handling queries, etc.)
– Higher financial / banking costs
– More testing and inspection
– More time on supplier selection, supplier performance management, contract compliance, etc.
To reinforce the point that ‘fewer is better’ some procurement executives have calculated (using variables such as the above) the nominal cost of adding an extra SKU, or Supplier. The underlying maths works like the following:
– 18,000 suppliers
– 160,000 purchase orders
– 160,000 electronic payments
– 5,000 credit notes
– 24,000 SKUs (product variations)
Proliferation has other negative implications too. It makes spend analysis and tracking more difficult. So too with contract management and supplier performance management (examined below).
What is the cost of your customer of taking on another supplier, or SKU?
The cost of supplier proliferation are compounded by the fact that more suppliers typically means more SKUs (product variations / complexity).
Why does supplier proliferation happen?
Here are some of the main reasons why organisations, if left to their own devices, don’t naturally concentrate their supply base:
– Individual preferences and end user demand for choice
– Existing relationships with suppliers (‘they know us, we know them’)
– Preference for local / national suppliers (‘they can be onsite in just hours’)
– Fear of choosing the wrong supplier
– Desire to get the best prices by pitting suppliers against each other
– A particular supplier’s product has been designed into the specification
– No strategic suppliers, or the lack of a partnership mindset with respect to suppliers
– The absence of centre led procurement.
As we will examine later supplier consolidation can be quite a change initiative for procurement to lead. However, there are few procurement success stories that don’t involve some element of supplier concentration. For example, The Incredible Payback recounts how John Deer Corporation went from almost 2000 suppliers to just 20 in 6 months! With that in mind lets see how it is done.
The Consolidation Triad
It is a logical next step for organizations that have set about cutting spending to also set about cutting the number of suppliers too. This typically involves a triad of strategies as follows:
1. Consolidation of suppliers. A short list of preferred or approved suppliers is created – the rest are ‘cut loose’.
2. Consolidation of SKUs – that means fewer products and product variations. For example if a new SKU is to be added then one or more needs to be retired.
3. Aggregation of purchases – combining all purchases (across the organisation) into a longer term supply contract, or framework agreement.
So if, as a seller, you see a customer moving on one of the above then expect to see movement on the others too.
Consolidate First, Then Strengthen
You cannot strengthen the supply base, without consolidating it first. In particular supplier proliferation mitigates against investing in supplier development and can result in more shallow supplier relationships.
It is not all bad news, because if you are one of the suppliers that makes the cut you should receive more attention, longer term contracts and larger orders.
Would you customer be better off sticking with a smaller number of key suppliers?
Any organisation can only have limited number of key strategic suppliers. With too many suppliers to manage the organization cannot, invest time in suppliers, engage them in problem solving and innovation. It cannot work with them to identify ways of stripping out extra costs to everybody’s benefit.
The Steps To Consolidation
First step is to create a list or database of all suppliers and products materials SKUs, including quantities and costs. Start with the most important (or perhaps the easiest) categories first. Use this information to present the business case for change and ensure buy-in as required from senior managers.
Will you make the short list if your customer decides to cut supplier numbers?
Supplier performance evaluation and contract review. Start by selecting strategic, or mission critical suppliers – the ones that really matter by means of their complexity, value, etc. Complete a report card for each supplier, evaluating performance in terms of quality, delivery, cost and other relevant variables. Based on the evaluations assign suppliers to ‘keep’ and ‘cull’ lists, with a 3rd list for those upon which opinion is divided.
The concentration of suppliers is a major change for any organization. It must be explained to the organization and have the buy-in and support of senior managers. There must be widespread consultation in the evaluation and short-listing of suppliers in order to ensure wilful compliance later.
Has your sponsor got enough power and influence to shape the cull decision?
It is too easy to cull suppliers on the basis of size, for example keeping the biggest and letting the smaller ones go. But be sure to leave room on your list for the smaller rising stars – these companies are often more flexible and more innovation led.
Some suppliers will be easy to remove, others may be embedded in the product design and will need to be value engineered out.
It is important to approach supplier concentration from the supply chain mindset. That inevitably means taking a more strategic or long term view, looking in particular to the future strength and resilience of the supply chain.
Implications for Sellers
Here are some of the implications for sellers who may be facing a supplier cull.
– Don’t get taken by surprise. Find out how many suppliers your customer has. Look out for the early warning signals of a cull and be prepared.
– Make yourself more strategic – find ways of making sure that you matter to the organization.
– Supply more than one plant or division and supply a wider range of products or services to the customer (including those of sub-suppliers).
– Develop your relationships with procurement and with other influential managers.
– Ally with a bigger or more strategic supplier.
– Find out how the customer evaluates your performance and more effectively communicate your performance to the customer.
– Know the qualification that could disqualify suppliers in the future (e.g. a particular quality standard).
– Align yourself with the future shape of the organisation’s supply chain.
– Seek opportunities to partner with the supplier in areas such as process improvement, innovation and ongoing learning and development plans.