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Corporate Boards - Wake Up To Streamline Chaotic Supply Bases

CK _Supp.jpg
One CPO indicated the root cause of chaotic supply base is -"First, we let anyone and everyone become our supplier and then we keep complaining that we are losing our sleeps working with so many of them".


This post should benefit corporate boards in general and CPOs, CFOs, CROs in particular. Is it on your agenda to avert loss of investor wealth and supply risks proliferation due to the sheer number of suppliers you have? Whether yes or no, stay invested. Here are some facts. I did some research on the topic "do the large number of suppliers appear as a topic on your corporate boards' discussion agenda?" and almost all the answers were in the negative. This just goes to justify what a recent Harvard Business Review article titled "Stop Wasting Valuable Time" cited "Our findings support what many executives have long suspected--namely, that they spend too much time discussing issues that have little or no direct impact on company value".

So do these findings provide reason enough for inclusion of this topic into board agendas? Look closely on the number of suppliers any firm has by spend categories. Most likely what you will find is a higgledy-piggledy supplier distribution across spend categories fitting the theory of chaos postulates. Results? Boards start expecting the unexpected e.g. suddenly getting into media spotlight for the poor social practices of some supplier, or finding that their company purchasing costs are higher than that of their competitors, or they keep hearing that their employees spend a disproportionate amount of time to transact with so many suppliers rather than focus on business etc.

That leads us to another question. How many suppliers are enough? Hackett, CAPS studies have reported "best in class" firms having ~4,000 suppliers for $1 Billion indirect spend. I think that's too high. If UNSPSC (The United Nations Standard Products and Services Code®) has 100 odd segments (spend categories) and any typical firm (except resellers) spends across not more than 20 categories, should a maximum 100 suppliers or 5 per category not be enough? Don't firms target such ratios for direct spend categories? A few large suppliers do exist who can supply everything that a firm needs but still setting such standards get missed out.

One CPO indicated the root cause of this situation to me through a seminal quote - "First, we let anyone and everyone become our supplier and then we keep complaining that we are losing our sleeps working with so many of them".

What are your thoughts? Join the conversation!

Comments

Good question CK. What is the right number of suppliers indeed?
Next to the spend there is also a dependency on # of company locations a has or the business it is in. The more locations/geographies a company is in the more suppliers are required especially if the company is active or dependent on real local supplier. markets.

Brilliant rendering. Suppliers are friends and foes.

Valid thoughts CK.

However, let’s look at it from an end user’s point of view. Restricting number of suppliers leads to “not-so-good” user experience and may result in non-compliance of process and system. Specially in today’s world where for B2C purchases, there are plenty of choices available on fingertips through marketplaces like Amazon and e-bay.

For corporates, the need is to find a middle path that leverages the concept of marketplace but still delivers the benefits of a smaller supplier base. Many firms are already using Uber and Airbnb for their official travel and hotel requirements. The core problem is not buying from a large supplier base (that’s actually good for price competitiveness), but “letting them get into the supplier master and then dealing with them individually”, as rightly pointed out by the CPO in the article.

While there are benchmarks available around count of vendors, I believe there are lot more factors that may have to be looked at and analysed in addition to pure vendor count including:
A.Number of locations and kind of countries/cities where such operations exists
B.Kind of machinery/plant setup in operations at different locations
C.Type of industry the client is in, how much of revolution is happening in that space, technology changes happening

Diversity in suppliers as well as targets taken by companies towards diversity also play a major part in this.

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