It’s costly and time-consuming to manage too many suppliers. It also introduces risks and has a negative knock-on effect on staff retention and revenue. Uncontrolled supplier proliferation is a red flag that generally operational processes and governance across the company may not be up to scratch. Fixing these issues could be a matter of life and death for an aspirational fast-growing large SME. So, what can you do about it? Read this blog post to find out.
Everyone has too many suppliers… at some point
Doing business with a seemingly excessive number of suppliers is something most companies experience at some stage. On their journeys from start-ups to Small & Medium Enterprises (SMEs) to large companies, almost all experience this phenomenon. The first time it usually happens is when companies are at the large SME stage, ready to transition to the next level. Having many suppliers provides flexibility. But there is a flip side to that. At some point, the size of the supplier base becomes a liability, rather than an asset.
Expensive complexity
That’s because an excessive number of suppliers represents unnecessary complexity, which in turn means unnecessary costs. An excessively large supplier base also introduces unnecessary risks because it becomes very challenging to monitor and risk manage so many suppliers. While the issues of an excessively large supplier base typically first emerge as a company grows from SME to mid-sized, large companies aren’t immune to these issues. In fact, some large companies have hundreds of thousands of suppliers.
How do I know I have too many suppliers?
Companies that find themselves in this position risk losing control of their supply chain. And some already have lost control, to the extent where they don’t even know the number of suppliers they have, as pointed out in this Forbes article. So, how many suppliers should companies have? There is no absolute number, but these are tell-tell signs that you definitely have too many:
- Not knowing how many you have
- Numerous suppliers that supply the same or similar goods or services
- The supplier proliferation is not a conscious strategic decision. It “just happened”
The last point is worth unpacking a bit. If your supplier base has exploded due to a lack of procurement strategy, process and governance, you have the worst of all worlds – complexity, high costs, high risks and counter-productive flexibility.
How supplier proliferation damages your business
Counter-productive flexibility? Yes, that’s right. What was initially a positive thing has now drowned in “noise”. Rather than having just that extra supplier that can pick up the slack when your first choice doesn’t have the capacity, you now have 10, 15, 20 or more suppliers to choose among. Which one do you pick when you are under time pressure?
And if you are a large SME with a not-yet-developed Procurement function, all that complexity and trivial sourcing activities are pushed on to your core staff. This, of course, ties up the valuable resource of people who were supposed to dedicate their time and intellect to growing your business. So, this has real consequences, both for top line growth and staff retention.
Most non-Procurement staff would rather stick pins in their eyes than spend their precious time on trivial sourcing tasks – it’s not what they signed up for and it’s not why you hired them. Less than optimal staff retention means higher staff turnover, which in turn means unnecessarily high recruitment and training costs.
Grow or crash?
If, as a large SME, the root cause of your supplier proliferation problem is lack of procurement strategy, process and governance, there are probably cracks appearing in other areas of the business as well. So, strategy, process and governance likely need a boost throughout. This may not have caused problems in the past, but as a large SME grows, its leadership risks losing control of the company if this is not addressed.
The reason is obvious – sub optimisation, ineffective approaches and inefficiencies get magnified as the company grows. Better to fix issues while they are still manageable, rather than waiting until the train comes off the tracks.
What to do about uncontrolled supplier proliferation
You need to approach this systematically. Haphazardly cutting the number of suppliers could cause even more damage. Instead, I suggest you take the following steps:
- High level view. Analyse your spend data to find out how big the problem is. Identify which suppliers you have, what you buy from them, who in your organisation spent the money and who the users of the item / service are. You will likely see patterns in the data that suggests where improvements can be made. Any hypotheses made at this stage will need to be tested with stakeholders in step 2 below. See the article How Spend Data Reveals Opportunities to Unlock Hidden Value for more details of how to do a spend data analysis and what the many benefits are.
- Deeper insights. Now that you know who the key stakeholders are, it’s time to talk to them to understand their views of:
- Where the opportunities for supplier base consolidation lie. Which are the top performing suppliers and why? Which suppliers could add more value and how? Which suppliers would it make sense to develop strategic relationships with if the time and resources were available? Which suppliers do we definitely not need? Also, test any assumptions/hypotheses made on the basis of the spend data analysis.
- What has led to and/or contributed to the supplier proliferation and the impact on them and the business. A number of points will likely be raised and if you can establish a cause effect relationship among them, you should be able to identify the root causes of the problem. It is worth investing some effort into this, because if you don’t properly address the root causes of the supplier proliferation, any supplier base consolidation you do will quickly become undone.
- Solving the problem. With the insights from the previous steps, you will need to create some solutions to fix the immediate supplier proliferation problem. These solutions may involve supplier re-negotiations, tail spend management through a third party, as well as tendering bigger and more attractive deals.
- Preventing the problem from resurfacing. This involves putting in place effective processes, controls and governance with respect to how the company selects, interacts with and manages suppliers. This will include things such as: a) establishing who can add new suppliers and under what circumstances; and b) ensuring compliance with the reduced supplier base. A new way of working vis-à-vis suppliers is now required. It’s a change. For example, if most staff members were previously allowed to engage whichever supplier, this autonomy will likely not be there going forward. Some people will resist this. So, clear communication and change management is essential.
Can a better procurement approach deliver other business benefits?
It certainly can. A more strategic approach to sourcing, that is carefully designed to support your corporate strategy, will deliver huge benefits throughout the organisation. Here are some of them:
Competitive advantages
An empowered Procurement function can enhance your competitive advantages or create new ones by simultaneously:
- Controlling total cost
- Getting value for money; and
- Leveraging supplier innovation
Controlling total costs, rather than narrowly focusing on price, is about seeing the full cost picture. Sometimes paying more for an item or service actually removes disproportionally more costs elsewhere in the organisation. So, the more “expensive” option may lower total costs. See the article, When Saving Money Costs You More.
Getting value for money is achieved in two key ways. Firstly, by leveraging negotiation skills to create win-win outcomes with suppliers and then, secondly, actively managing the contract once it has been signed. This often-overlooked activity of managing the contract adds tremendous value
Leveraging supplier innovation is about working very closely with selected strategic supplies to ensure early access to innovation that has the potential to make a significant difference to your ability to compete. These innovations lie outside the core competencies of most companies. Procurement is well placed to source or license these innovations and technologies. The article How to Leverage Technology to Achieve Business Growth tells the stories of companies that have gone down this route.
Corporate Social Responsibility
CSR related issues at a supplier, more often than not, also affects that supplier’s clients. A classic example is Nike, whose reputation was tainted by extremely poor working conditions at its suppliers’ factories in Asia. Starbucks had a very different experience. The company created a reputation for itself by making CSR a core part of its strategy. One of the company’s achievements is to ensure that 99% of its coffee is ethically sourced. Focusing on CSR has paid off financially as well, as the company realised a 1,252% share price growth over 10 years.
Digitising the supply chain
Gaining visibility of what goes on in the supply chain is a challenge for most companies. Digitising the supply chain gives a level of visibility that was previously unheard of. This translates into significant benefits for companies that have taken the plunge. Procurement plays a key role in driving or supporting supply chain digitisation initiatives.
Mergers & Acquisitions
Buying another company is likely the biggest investment a company will make. So, it pays to do some serious due diligence. A suitably skilled Procurement function can help explore the following aspects of the target company pre-merger:
- Identification of opportunities for improving working capital and cash flow.
- Assessing relationship with suppliers and risks in the supply chain.
- Identification of problematic supply contracts.
- Ensure appropriate technology licenses are in place.
- Assessing the target organisation’s procurement capabilities.
Read more about the above points in the article The Key to Achieving Growth through Mergers and Acquisitions.
In addition to growth, “synergies” are often cited as a benefit of a merger or acquisition. These synergies often involve restructuring the cost base to lower total costs. Since companies’ external spend can account for 60% of costs or more, Procurement is well placed to turn those forecasted synergies into reality. More about that in the article, How the Procurement Function Creates Business Value When Companies Merge.
Is having too many suppliers an issue for your company? Then click to get in touch, so we can start solving that problem for you.
