Traditionally, procurement organizations have been advised to consolidate their supplier base (with the handful of suppliers with the greatest percentage of purchases), negotiate strong contractual discounts and encourage their employees to purchase from these preferred vendors at the prenegotiated pricing.
On the surface, rationalizing an organization’s supply base can seem like an effective way to improve procurement performance. By rationalizing the number of suppliers that enterprises work with, procurement leaders can reduce costs, improve quality and save the time of procurement teams who are too often lost in the arduous process of managing indirect tail spend. However, due to the rise of more advanced B2B e-commerce platforms and highly volatile pricing fluctuations for products, the supplier consolidation strategy is quickly becoming outdated.
In reality, supply base rationalization results in many inefficiencies. In fact, such an approach can be the enemy of effective indirect spend management. To understand why and select the appropriate strategy for your organization, here are five reasons supplier rationalization may lead to missed savings, weaker supplier relationships and more.
- Ignores the Positive Savings from Price Dispersion
- Leads to Increased Maverick Spend
- Weakens Procurement’s Negotiating Position
- Increased Risk of Price and Product Creep
- Reduced Supplier Diversity, Flexibility and Innovation
Labeling supplier rationalization as an ineffective approach to spend management may seem counter intuitive. But technology has changed the equation for determining the ideal supplier count.
New e-procurement solutions are emerging that can connect businesses and their partners in real time, facilitate quick and easy supplier management, and provide real-time competitive purchasing dynamics that lead to improved user adoption, lower costs, compliant shopping and easier (and more valuable) supplier collaborations. Consequently, supplier rationalization is quickly becoming a strategy of the previous decade.
Click the image below to download the Spend Matters white paper: 5 Reasons Supply Base Rationalization Can Be the Enemy of Effective Procurement Spend Management.