- Why do we want to downsize the supply base?
- What long-term goals do we hope to achieve from supplier consolidation?
- How many suppliers are too many?
- What performance metrics do we hope to influence through the effort?
Fundamental Truth? Less (Suppliers) is More
If you’re just joining this series, I’ve been writing about the importance of procurement being able to challenge our own fundamental truths. Last month, I focused specifically on the assumption that larger spend categories automatically have a higher level of importance. In this post, I am turning my attention to supplier consolidation.
Supplier consolidation enjoys a status as one of the most frequently applied spend management strategies. Does it deserve this status? The question is not whether it is a common or frequent strategy, but rather if it is one that consistently produces long-term value such that it is (appropriately) a significant, go-to procurement strategy.
I’ve come across more than a few CPOs and consultants who believe supplier consolidation is the cure for all enterprise ills. In their opinion, if the number of suppliers a company works with can be significantly cut, it will reduce a company’s spend. And the more volume procurement can leverage with a given supplier, the more influence procurement has with them and, consequently, the more savings it can deliver.
While I agree that solid savings can be realized through supplier consolidation (it has been a go-to strategy for me at various times in my career), slashing away at the supply base can be risky if done too broadly. A more effective approach is to strategically consolidate a supplier here and a supplier there. It may take longer, and the savings figure may not be as high, but it is the right thing to do for long-term stability and supplier relationship management.
Here are some questions to ask when considering supplier consolidation:
Companies may consolidate suppliers to reduce transaction costs, risk or spend, but the reality is that all these reductions actually increase total costs and risks over time.
Two factors to consider in a supplier consolidation include volume and the types of costs that represent a majority of the expenses in the category being sourced. Fixed costs, cost-to-serve and investments can be amortized by a supplier over much larger volumes. As a result, they may be willing to effectively “buy” business to secure a stronger position in the market.
Economies of scale exist, of course, yet everything has its limits. I have successfully reduced costs by consolidating spend with five medium-spend suppliers into contracts with one or two larger suppliers. The difference in the number of suppliers doesn’t need to be measured in the tens or hundreds to have a measurable impact. What matters most is why supplier consolidation has been chosen as a strategy for that category of spend.
While we naturally focus on the positives, the negative impacts of supplier consolidation are often overlooked. Are we becoming an innovation roadblock by impeding a stakeholder’s ability to experiment with supplies and iterate on ideas? Is the trust between us and them being eroded by forced supplier consolidation? Are we actually increasing risk by creating a single point of failure or by contributing to a supply market monopoly?
I bring up these concerns not to suggest that supplier consolidation should be removed from procurement’s toolkit, but as a reminder to always challenge every assumption. Any strategy procurement chooses must deliver enough benefit to overcome potential risks. Supplier consolidation has to do the same, regardless of how long it has been a standard practice, how often it has been applied or the first order savings it produces.
In my next post, I will take on what may be the most embattled procurement truth: RFPs are the most effective way to compare and select suppliers.