Why Rationalize Your Supplier Base

Organizations that obtain commodities or multiple sets 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 complicate to manage coupled with a comparatively poor return from fragmented use of spending strength.

A shared 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 course of action perspective.

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

1/ Improved Leverage of use

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

2/ decline Waste in course of action

Having a large supplier base results in inefficiencies being built into the time of action. 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 course of action (see point 2) procurement staff can use time managing relationships with suppliers- this often takes the form of managing meaningful 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 chosen 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 kind of supply – ensuring that this information is obtainable 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 use profile – it soon becomes more apparent on what the organizations funds are being spent on. Viewing use against requirement profiles is a meaningful management tool – by 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.

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