Why Rationalize Your Supplier Base

Organizations that procure commodities or multiple services often find themselves with a range of suppliers. As organizations grow the number of suppliers may increase, large companies may have a supplier base of tens of thousands of suppliers and this “tail” can become increasingly complex to manage coupled with a relatively poor return from fragmented use of spending power.

A common fix to this issue is for the organization to undergo a supplier rationalization program – this targets the optimal supplier base for the company based on its requirements. Optimizing your supplier base can bring many benefits both from a financial and business process perspective.

Here we list 5 key benefits of undertaking a supplier rationalization program.

1/ Improved Leverage of spend

A common symptom of a poor supplier base is a fragmented spend profile. This is typified by the organizations spend being “spread” within the supplier – this often includes multiple suppliers for the same commodity and/or multiple branches of the same organization. This spend profile is likely to impact the bargaining power that the organization has with the supplier community. For example where a company procures Electrical consumables – if the annual spend is $100K but split over 10 suppliers then the bargaining power for each supplier is only $10K when combined, the spend attract better terms from the selected supplier(s).

2/ Decrease Waste in process

Having a large supplier base results in inefficiencies being built into the process. All suppliers require an overhead to manage and administrate- they require to be set up in IT systems (often both purchasing and financial)- require negotiation to take place. Where this is spread across multiple suppliers this takes up manpower and cost. An optimal supplier base is likely to have fewer suppliers requiring less overhead to manage – it’s also likely that sourcing needs will reduce (an optimizes supplier base is tuned to current and future needs). This facilitates an opportunity to manage suppliers in a different way.

3/ Better Management of suppliers – a change in the relationship

Rationalizing the supplier base often results in a change in the relationship with the supplier – With the improved process (see point 2) procurement staff can spend time managing relationships with suppliers- this often takes the form of managing key performance indicators or partnership programs to enhance the supplier/customer relationship. This often adds value outside of the financial terms – better processes – a better understanding of need for example.

4/ Suppliers in tune with business need

In reviewing your supplier base it is vitally important to ensure that suppliers are selected against business need and/or requirements – ensuring your suppliers have the right capability to service your needs will ensure your success in the future. When tuning your suppliers you should take into account not only your requirements against today’s need but also what you expect your business to be in months to come – for example are you bidding for a piece of work that may change your stocking requirements or type of supply – ensuring that this information is available during your optimization program will ensure that you have the right supplier profile going forward.

5/ Improved visibility

With a more defined supplier pool and spend profile – it soon becomes more apparent on what the organizations funds are being spent on. Viewing spend against requirement profiles is a key management tool – through effectively segmenting suppliers into capability or commodity groups – reporting can be simplified – and the resultant information used on further optimization programs or re-tendering activities.