Cutting the supply base isn't always such a good idea
By Paul Teague, Editor in Chief -- Purchasing, 8/13/2009 2:00:00 AM
Here is a question purchasing professionals could debate for hours if not days: Does it make sense, at a time when many companies are going bankrupt, to reduce your supply base?
Supplier consolidation has been a mantra within the purchasing profession for a long time, and for good reason: Reducing the number of suppliers you deal with gives you more clout with the ones who make the cut, and enables you to spend more time developing closer relationships with those suppliers. In concept, that would be a best practice in anyone's book.
But there are certain realities that become very clear during a rough economy such as we have had for the last year. Among those realities is the heightened risk of supplier financial instability. Nearly 20% of respondents to one study said they had suppliers who were unable to meet their supply levels. Companies that depended on those suppliers for key materials probably had to scramble to avoid the kind of supply chain disruptions that can cripple manufacturers.
Tom Linton, chief procurement officer for LG Electronics, believes having too few suppliers can result in a loss of competitive advantage. "I don't worry about increasing the number of suppliers," he recently told Senior Editor Jim Carbone (Page 59), "because it increases competitive bidding opportunities."
To get a better idea of how other purchasing professionals feel about the issue, we posed a question on our online community website www.purchasingbizconnect.com. We asked if there is an optimum number of suppliers for a given commodity that enables suppliers to compete for business. One purchasing manager wrote that there is no magic number, but warned that suppliers who regularly respond to requests for quote but don't get orders will eventually quit allocating resources to your account.
Another purchasing professional says his practice is to develop a basket of similar products furnished by similar suppliers once a year and consolidate the spend for those products with one supplier. He suggests changing the supplier each year.
One other supply chain manager said what most everyone would agree with: It all depends on the commodity being purchased and the risk.
More important than controlling the size of the supply base is ensuring that you work with the best suppliers, share technical roadmaps with them and make sure you get their best talent working for you on your projects. Additionally, purchasing should work with engineering closely in a manufacturing company to make sure that group doesn't deliver product designs that lock the company into dependence on just a few select suppliers. Sourcing for custom parts when off-the-shelf parts would meet the functional requirements of the design is costly and could lengthen lead times.
Let us know what you think about supply base reduction. You can join the conversation at www.purchasingbizconnect.com
The best background for managers
Another interesting topic to debate is what professional background best prepares people to run organizations. I recently talked about that with a colleague, who said engineering was the best preparation because engineers know how to solve problems. Another said knowledge of the law is the best preparation because we live in a litigious society. I think they're both wrong. Purchasing is the best preparation, in my opinion, because it exposes people to all parts of an organization and teaches them to both collaborate and negotiate, skills essential in a complex business world. Let me know if you agree or disagree.
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