Supply Chain Management: Supplier Consolidation Vs Sourcing

In a Sourcing team meeting at a client I recently worked for, a senior Sourcing Manager lamented that instead of “Sourcing” they were merely consolidating suppliers. A pretty insightful statement! And it is true for many organizations where the central focus of “Sourcing” is just to achieve greater volume leverage during negotiations, and using that leverage to get a better purchase-price from a subset of incumbent suppliers. This pure ‘purchase-price reduction by supplier consolidation’ approach does have its merits, but is this what sourcing is all about?

The best-in-class Sourcing organizations do not think so. For them, Sourcing starts way early, with an analysis of spend by categories, and the creation of a sound organizational sourcing strategy which also places emphasis on factors like cycle times, standardization, compliance etc., rather than just purchase price. This is followed by prioritization of sourcing categories, supplier prospecting, and an RFx process that adheres to the sourcing strategy. The result being that such organizations are able to identify and establish a long-term, high-benefit relationship with suppliers which helps achieve lowest total cost, and gives best results on product development, quality and services. The pure purchase-price saving on goods and services is just one of the many benefits.

The client that I quoted earlier, is already on its way to become a “sourcing organization”. Using simple IT tools, they now have a clearer understanding of their spend categories. This has led to a better prioritization of categories for sourcing. An emphasis on long-term supplier relationships has opened up opportunities for collaboration in new product development while inclusion of non-cost parameters in RFx scoring has ensured that quality and compliance are not compromised upon. And yes … the pure purchase-price savings are getting better too.

Comments

Sameer, one size does not fit all. Based on market complexity and resource criticality, commodities or spend can be categorised into non critical , leverage, strategic and bottleneck.

Supplier proliferation is allowed only for the non critical spend.

The sourcing process described is a typical "Strategic Sourcing" process which is economically viable typically for the strategic and bottleneck spends. Supplier consolidation is just one of the strategies for improving leverage for these spends. These however need to be approached in a highly structured program with an assessment of long term relationships and impact than just striking off the rolls.

There are huge impacts of not consolidating the supplier base tail. Imagine having to manage performance and risks of a supply base of 20K suppliers.

Can you share more details of this client industry and the issues?

Posted by: Pradeep T Y | April 7, 2009 3:26 PM

The risks associated with indirect commodity spend are fairly low. Generally, this is non mission critical spend and the impact of poor performance will be avoidable costs and inconvenience. Supplier proliferation is unsustainable, but in the short term it is generally more important to establish a tiering strategy and governance structure to focus resources on the mission critical categories and relationships that have the greatest impact on the business.

Posted by: Bill Huber | April 8, 2009 1:33 AM

Thanks for the comments Pradeep. I absolutely agree with you that “Supplier Consolidation is just one of the strategies for improving leverage for these spend”. It is an important strategy and as you say, should be part of a highly “structured program with an assessment of long term relationships”. If this implies that the numbers of suppliers need to go from say 10 to 2 that is great. The point I wanted to make is that “Strategic Sourcing” is more than just consolidating suppliers to achieve purchase-price reductions.

The client I refer to is in the redistribution business, and has a highly fragmented supplier base. An exclusive focus on achieving the lowest purchase price during negotiations, without a clear long term strategy led to supplier and cost issues later on.

Posted by: Sameer Prashar | April 10, 2009 6:03 AM

Thanks Bill for sharing your thoughts. I am in complete agreement with you that it is important to identify the high impact categories and relationships. The strategy and thought process for these high impact categories and relationships needs to be at a greater level of detail to ensure that maximum business benefit is achieved.

Posted by: Sameer Prashar | April 10, 2009 6:04 AM