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How many suppliers is the right number?

22 November 2010 |
Posted in: Purchasing, SRM

On Twitter, Jamie Napper, RSA’s global SRM excellence manager, has posed the question “just how many suppliers is too many?” in response to the news Carillion wants to cut 20,000 vendors from its supply base.

This is not a particularly new trend, but it seems to have picked up steam in recent months. Over the next three years, Premier Foods want to get to below 5,000 suppliers from its current 7,000, and getting rid of 20 per cent of Siemens’ 113,000 vendors is one of the key targets for CPO Barbara Kux.

There is a paradox inherent in Jamie’s question. If a supplier is not actively working for you, are they even your supplier? Many companies have databases with thousands of vendors they do not currently use, and in fact never intend to contract with in the future. Are these vendors suppliers to the organisation? How long does it take since a supplier did work for you to stop being your supplier? Two years? Five years? Indefinitely?

You could argue that the “right” number of vendors is the number you need to perform work for you – all the rest are just “potential suppliers”. But if a potential vendor is there to provide competition for the incumbent, it could be (indirectly) helping your organisation get a better deal, and they do have value to your organisation.
Many businesses could reduce their “supply base” dramatically just by getting rid of those potential suppliers. But the real impact on the company would be minimal, making any reduction target pretty ineffectual.

This also raises a further question: where is the inefficiency in having too many vendors? If it is taking you hours to search through the database, or inviting 200 to tender with accompanying PQQs, then fine – but I don’t believe that happens. I believe when a buyer goes out to tender they’ve probably got an idea of the four or five firms they expect to bid already, with the expectation they might end up with a couple of surprise entrants.

The right number of suppliers is the number you need for a competitive process – the rest aren’t your suppliers.

7 Responses to “How many suppliers is the right number?”

  1. The answer is probably ‘fewer’. However, the real determinant is your sourcing strategy – which might dictate that more suppliers are used in a highly competitive environment, or that business is consolidated and leveraged or any number of other approaches, depending on the competitive nature of the market and the company’s ability to manage its supply base.

  2. Supplier database rests upon the actual role individuals play. Buyers have to identify if they are manufacturers or wholesalers or even retailers. It is paramount retaining as many manufacturers as possible. Moreover, it is only the latter two middlemen who take up most of the database. Middlemen only add costs making goods or service dearer.

    After all, manufacturers may not be interested to supply unless the order size is great enough to offset the production costs. That’s why wholesalers get more orders in real life. We cannot exclude retailers as they can entertain piecemeal orders.

    All in all, in going lean for supplier database, retailers come first followed by wholesalers and manufacturers by 70:20:10 resembling Pareto’s Analysis.

  3. I suspect that there is a risk of missing the transaction cost point which normally lies behind such initiatives.

    In multi-site organisations, it is often (in my experience) the case that there is a bloated tail of local or historic vendors with relatively low spend, all of which involve purchasing departments in raising orders and accounts departments in processing invoices without the opportunities to implement streamlined processes that the higher value strategic sources lend themselves to.

    Reducing the supplier base then becomes a valid strategy in itself, without undermining competition in the relevant supply markets.

  4. My namesake raises some interesting and important points. There are others to consider as well. Many companies think they have saved money when they reduce their supplier base and then the size of their purchasing department (as there are fewer suppliers and contracts to manage). They do indeed reduce their department costs but the “lost opportunity” costs are often much, much, higher. Fewer suppliers usually means more levels in the supply chain as items will be sub-contracted (with margins added) down several levels. Reducing supplier numbers is not necessarily a good thing

  5. You need enough suppliers to ensure healthy non-oligopolistic competition and that there is sufficient capacity available if one gets into trouble for whatever reason.

    Half the problem is suppliers having capabilities possibly of interest to buyers/commodity managers elsewhere in the organisation who may be unaware of them and who are hence using other suppliers.

  6. Id stress that “Supplier” and “Vendor” are not the same thing.

  7. Supply base numbers cannot arbitrarily be decided upon, so it is to be hoped that organisations such as Premier Foods and Siemens have gone through a formal evaluation process to arrive at their targeted supplier numbers. Such an evaluation process dictates that the following questions are addressed for each of their spend categories:

    1.How many suppliers do you need for each category and what role should each supplier play?
    2.What current and future supplier capabilities are required/need to be developed and where should the supplier be located?
    3.Which particular suppliers do you want to keep and why?
    4.Do you want to lead and/or manage supplier networks at the Tier 2 and 3 levels?
    5.Which suppliers do you want to collaborate with each other and why, and how can you influence/manage this collaboration?

    Unless a highly evolved procurement function exist, companies are unlikely to arrive at carefully evaluated answers to these questions. An integrated approach to Category Management, Strategic Sourcing and SRM are certainly required as is a detailed understanding of the business strategy and how procurement will support it.

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