One of the biggest problems I often see in otherwise efficient manufacturers is a bloated supplier base, where as many as 80% of the suppliers account for only 20% of the spend. As many as 40% of suppliers earn one or two purchase orders a year. This virtually guarantees inefficiencies in ordering and inventory management and usually means there are opportunities for substantial savings by consolidating suppliers.
Initiatives to reduce supplier bases often generate internal objections. Various individuals will argue that price, service capability, history with a supplier, or the perceived risk of switching suppliers make reducing the supplier base a no-go. Personal friendships between supplier reps and someone at the company can also create resistance.
However, those individual factors are outweighed by the savings from reducing your supplier base to one broadline, strategic supplier or an integrated supplier. In some cases, switching to a primary supplier plus a handful of selected secondary suppliers is also appropriate.
Reducing your supplier base can be intimidating but this 4-step process can ease the process, saving time and money.
Step 1: Understand your supplier base
Review your spend analytics. Stratify your current suppliers quantitatively by how much you’re spending with them and how often you’re purchasing. On the qualitative side, it’s important to assess suppliers’ performance, services, and ability to help you control total spending.
Step 2: Select suppliers based on your needs
Once current supplier analysis is done, decide which of them will remain a part of your smaller, more efficient base. Suppliers generally fall into one of four categories:
- Strategic, broadline suppliers
- Specialty, directed suppliers; sometimes products can be provided through a fulfillment model by a strategic, broadline supplier
- Commodity suppliers, based solely on pricing
- Integrated supplier that manages inventory it doesn’t directly supply
Use this to determine which primary supplier and small handful of suppliers you’ll retain.
Step 3: Develop a detailed transition plan
Most manufacturers will focus on their strategic and broadline supplier to transition as much spend as possible. Transition planning includes fixing part number differences, breaking existing relationships, and establishing new or expanded pipelines. A strategic supplier – particularly one that has done many of these transitions – can be a valuable planning partner. To manage and reduce overall supply chain risk, manufacturers should own the plan, and it should clearly lay out responsibilities.
Step 4: Closely manage implementation
A detailed plan will reduce risk, but execution is rarely perfect. Closely monitoring transition status throughout the process is key, and if something slightly veers off-course, step in quickly and correct it.
The transition to a supplier base governed by one process, one contract, one relationship, and a single business platform, can bring dramatic improvements to your business. Instead of reacting to multiple purchasing and inventory issues, you’ll be in control of streamlined supplier issues and able to approach them strategically.
MSC Industrial Supply Co.