THE current volatile business environment has witnessed organisational profits being squeezed to the point of disappearing.
Often times, this kind of squeeze ordinarily forces supply chain professionals into a panic mode to scout for sources of cost savings from all over the shore.
Coupled with this, the world business landscape has witnessed a significant change of consumer habits and tastes. The change process is unfortunately becoming even more complex in the years ahead of us.
It is not an exaggeration to point out that long term organisational survival will belong to the organisations with the best supply chains and lean operations.
It is an unspoken truth that the traditionally-known concept of cost-cutting was largely achieved through the seemingly easiest way out strategies of staff rationalisation, budget minimisation and downsizing production.
Such old age strategies have since seen the last mile and cannot and will not continue to generate any further cost savings.
Most procurement professionals have also since acknowledged that aggressive cost reduction demands from vendors can overtime result in cutting into the bone of the supplier’s performance capabilities, which can negatively affect future business performance and profitability.
Yes, it is true, supply chains make the world run. It is often said that supply chain professionals have not had a moment’s rest in years.
- Optimising firm’s profitability through value chain analysis
- Supplier rationalisation strategy procurement’s best-kept secret
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Like the proverbial ostrich, supply chain professionals cannot bury their heads in the sand and pretend that supply chain problems will go away.
These words are as relevant today as when they were first spoken. It has been said, and rightly so, that as hard dollar savings become ever more challenging to squeeze, there is need to have a change of tactics.
The onus is cast upon procurement professionals to prove their relevance by adopting procurement strategies that were previously out of reach.
The question that most procurement managers could profitably ask is how they can achieve a cost competitive advantage while at the same time maintaining long lasting mutually beneficial relationships with suppliers.
The answer may be as close as your nearest suppliers through supplier rationalisation strategies. Procurement leaders are now best placed than ever before to step out of their shadows and acknowledge that beyond the quick wins and the low hanging fruits of cost cutting, there are a myriad other procurement strategies.
These include supplier rationalisation, which can be implemented to bring a lot of value on the table.
Supplier rationalisation will enhance supplier collaboration, which ordinarily promotes a greater bias for action oriented approaches to supply chain management, thereby, bringing the greatest opportunity to implement potentially game changing opportunities.
Supplier rationalisation is about building the right supply chain network for the business and not the lowest cost network. Where the business focusses too much on the least cost supply chain network, such a strategy may turn out to be a procurement slippery slope.
It often forces the business to return to the old ways of proliferation of many suppliers without due regard for the bigger picture. In the near term, a multitude of suppliers provides the comfort of having many options and fall back positions but over long term this procurement structure invariably complicates the execution of procurement best practices.
It is practically impossible to create significant cost savings where an organisation deals with too many suppliers since there is no time spent developing relationships that focus on value addition strategies.
To gain the next wave of growth, procurement professionals are now expected to utilise the supplier rationalisation concept since it will give the supplier the leverage to exploit economies of scale.
Developing profitable supplier relationships is only possible where the supply chain professionals make a conscious effort to identify and streamline the supplier base to a manageable few.
Managing a few suppliers will result in less administrative costs, especially procurement costs and supplier switching costs. A reduced supply base enables management to focus time and resources on developing deeper supplier relationships with the significant few.
Procurement practitioners should make it a standard procedure to streamline the number of preferred suppliers and only remain with those with complimentary capabilities which will assist the business to drive value.
Working with a few select suppliers will facilitate business initiatives such as supplier development strategies, early supplier involvement in product development, just in time sourcing and development of cost based pricing agreements with suppliers.
According to the newly-received and accepted procurement wisdom, suppliers are readily available to offer new suggestions on how to reduce process costs or product complexity as relationships develop over time.
What appears plentiful at first sight may hold no actual utility value. Having too many suppliers in the system can actually turn out to be dysfunctional.
Close business relationships can only be developed with a relatively small manageable supply base where trust and cooperation replace competition and opportunism.
Such collaborative business relationships will be foundational for creating a conducive breeding ground for value creation. It is considered as a company’s functional answer in pursuit of sustainable competitive advantages.
Supplier rationalisation has recently been hailed as a game changer because a select small number of suppliers make it easier to automate interactions with the supply market which in turn drives down the process costs and frees up staff to more strategic roles.
Enhanced communication through automation will result in improved requirements satisfaction, reduced error rates and reduced non-compliance.
It will be much easier to hold suppliers accountable to a broader set of performance requirements, which are both multi-year and multi-pronged where the procurement practitioners are managing a lean and compact supply base.
Supplier consolidation has often been accredited for a significant headcount reduction since having fewer suppliers to deal with will mean that there is a corresponding proportional decrease in headcount for both the procurement and the accounts payable sections.
The other benefits of supplier rationalisation include improved bargaining power to reduce costs due to economies of scale and scope.
A select number of preferred suppliers will also result in a decreased effort to track supplier performance and managing the interface with a select few.
Supplier rationalisation can also provide the much-needed platform for improved innovation and design collaboration, improved plan synchronisation and information exchange, which will in turn result in improved supplier responsiveness.
Where there are a few select suppliers, repeated high volume of business transactions generate mutual dependence between two trading parties and this motivates companies to integrate their functional activities for mutual gain.
Volume consolidation can result in “economies of integration by reducing transaction costs, such as finding, selling, negotiating, contracting, monitoring and resolving disputes and enhancing communication and knowledge integration”.
It has often been hypothesised that volume consolidation is positively co-related to supplier development and growth profitability through innovation.
There is a strong nexus between supplier rationalisation and strong supplier development, which for all intents and purposes is a welcome foot forward for procurement professionals.
Procurement practitioners have since realised that too many suppliers can pose a serious administrative burden since every supplier comes with an administrative overhead.
This can emanate either from too many quotations to process and/or too many purchase orders to place, which will result in too much work on the part of those who do the leg work. It does not end there.
It will result in too many contracts to manage and too many invoices to handle. This comes at a significant cost to the business. Apart from that, it will create an interminable paper trail that will require more ‘busy bodies’ in the procurement and accounts payable sections, thereby negatively contributing to a slow-down of the entire procurement to pay process.
Some procurement professionals have often found themselves saddled with the legacy of too many suppliers, which has often contributed to the delivery of poor-quality products.
Maintaining a large supply base has resulted in increased variability, which is the greatest enemy of supply chain quality. A fragmented approach of having too many suppliers with a fractured volume can also lead to inaccurate budgeting and forecasting due to a lack of visibility necessitated by too many transactions at any given point.
The need for visibility to enable the forecasting of future sales is very important since it will act as a precursor to efficient planning of the supplier for shared benefit.
In conclusion, while a large number of procurement professionals are fully aware of the importance of supplier rationalisation, it would appear there seems to be a world of difference between their strategic intentions and tactical realities, especially when they are now required to put theory into practice.
The business landscape we face today is defined by change that is rapid, relentless and unpredictable. Supply chain professionals are fully aware that any slack along the way, your competitors will begin to eat your lunch.
The future belongs to those supply chain professionals who show up every day. It belongs to those who raise their hands every day. It belongs to those who do what needs doing, creating a dynamic future-ready supply chain.
It is generally acknowledged that when you are committed to the process the results will take care of themselves, winning the hearts and minds of stakeholders.
Supply chain professionals will continue to hold the power to rewrite the rules as and when necessary. It is a pathway to break through ideas. After all, the procurement rule book was never cast in stone in the first place.
- Nyika is a supply chain practitioner based in Harare. — charlesnyika70@gmail.com
