SUPPLIER RATIONALIZATION: PART 1 - CONSOLIDATING SUPPLIERS WITHOUT COMPROMISING VALUE
Sourcing Consultant
Lead Consultant
We live in interesting times. Current economic and business environments do not leave us wanting to be stock traders, for certain. And given the changing dynamics created by mergers and acquisitions, we're not sure that being sourcing professionals is much better. There are always challenges in assuring your business is well-positioned with the goods and services necessary to run an efficient and effective operation. But this need has only increased.
Savvy companies are modernizing their business systems to give them the necessary competitive advantage that a dynamic marketplace demands. This requires you to make certain that you have the right solutions with the right suppliers – and at a competitive price. Easy, right?
Our Seprio Summer Series articles on managing AI risks made the case for assuring we are protecting our organization through risk awareness and management in supplier contracts. Now let’s look at how we can maximize the value we receive from our suppliers through the process of supplier rationalization. The concept here is to streamline your organization’s spend by driving your purchase activity to fewer suppliers. Contracting with fewer suppliers can help you achieve better value by increasing leverage and creating strong relationships.
These are some key questions you may ask yourself to begin the process:
Have you taken a look at your supply base lately?
Does it resemble a scattershot approach to supplier management with a little something from everyone, or is it a honed approach that identifies suppliers on a set of well-defined criteria, so you know who your most strategic suppliers are?
Do you have a program to ensure that you are maximizing your leverage and buying power by concentrating your spending through suppliers that are ‘intended’ relationships and not ones that found their way into your organization by chance?
And are you able to capitalize on the value you receive from these key suppliers because they value your business and don’t want to lose it?
Over the past dozen or more years, suppliers have consolidated with larger companies buying smaller ones, or possibly worse yet, have been acquired by a joint venture firm focused on profit maximization. You, no doubt, have experienced this with your suppliers when you received notice that a software solution you have come to depend on is now under the control of a larger company that cares less about your company’s technology needs and more about drawing increased revenue from your licensing. Your contribution to your supplier’s revenue stream has just been minimized because the larger company’s revenue stream is much bigger. Add to this the fact that many of these acquiring companies wait until the last possible moment to alert you of unexpected changes because they know that you have little (or no) time to make a move to another solution. In the very least, they will have you for a one-year term, or longer if the time to transition exceeds a 12-month period.
The practice of supplier rationalization allows you to build leverage for not only price concessions but also to have your company’s needs considered when the larger supplier builds their roadmap to future development.
Too often, an isolated or incremental approach is taken to solving a business need with a particular product, rather than look at how this need can strategically be applied to a supplier relationship that you may already have. In essence, when you condense your supplier pool by focusing on key suppliers, you gain leverage by giving these suppliers a bigger piece of your business…one they can’t easily walk away from.
Supplier rationalization can be used in other ways, too, to make certain your money is spent wisely. A careful review of how you are currently spending your money may identify areas where you have product redundancy - multiple product solutions essentially doing the same thing being used by different (or even the same) segments of your company. (You would be surprised how often this is the case.) Pulling all usage into one solution can give you additional leverage with a key supplier. Additionally, rogue spend may also come to light where your workforce is buying unrelated product solutions that could be aggregated with an existing supplier that has a like solution.
In Seprio’s Supplier Governance model we focus on analyzing your current spend and supplier base as an initial step to assuring you have maximum value from your suppliers.
Please join us next week as the 2025 Seprio Summer Series continues the discussion and explores how to avoid being left flat-footed if a supplier becomes complacent with your business, especially when working with a condensed supplier list.
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