Wax Digital on the who, what, why and how of Supplier Rationalisation
Written by Daniel Ball (pictured, right), Director at Wax Digital
What is supplier rationalisation?
In today’s terms supplier rationalisation is the optimisation and prioritisation of your supply base and as much about how you manage engagement with them as the number you have or the price they charge you. In truth the commonly held view that rationalisation simply means cutting suppliers is not the case. Mapping your supply base to business needs could actually increase the number of suppliers you work with as well as enhancing the opportunity presented to them. Visibility of information is critical as a basis for analysing your suppliers and leading to effective rationalisation; it’s ultimately about making changes based on knowing who you are buying from, how much you buy from them and critically how much it costs your organisation to do so. These questions need to be answered from the perspective of risk, process costs and sustainability. Ultimately rationalisation is about building a supply base that is the best overall fit for your organisation. This could involve very different decisions in regard to a high spend direct materials supplier than an ad hoc supplier of services to the business. With the former, the decision is driven by pricing and risk, while the latter is impacted by the relative cost to the business of dealing with that supplier.
Why are organisations doing it?
There are a number of different drivers for supplier rationalisation. The increase in return to private ownership for many mid-sized firms is one, as businesses seek to reduce costs in order to improve their bank balance and become attractive to inward investors. As a result rationalisation can become a focus across the business and procurement plays a key part in driving change. For others, it is the convergence of business cost control, risk reduction and sustainability measures leading to a desire to bring suppliers closer to the business, in terms of their strength of relationship and increasingly, their location. For example in the public sector local authorities must demonstrate social value by sourcing locally.
An organisation may equally be seeking to consolidate disconnected departmental spending across the business (which can lead to casual relationships with ‘unofficial’ suppliers becoming formalised). An organisation may also reorder its supply base around the ability of suppliers to meet new ethical standards or risk indicators. Through spend visibility it might also highlight what else it can buy from its trusted suppliers or where opportunities to consolidate purchases to one provider. Rationalisation through spend visibility could be used to create diversity too – in order to spread the risk or in the case of the public sector, contribute to social value. It’s as much about rationalising the design of your process and relationship with suppliers as it is about rationalising on numbers and costs.
How has supplier rationalisation changed?
The big change is that early supplier rationalisation was about solving the problem of not buying cost effectively, where maverick spend was high across departments who tended to have their own supplier relationships in place. In these situations the focus was often on reducing the number of suppliers in the pool, sourcing suppliers that can support the whole organisation as a prelude to bringing spend under control. Nowadays many organisations have gone through this process already and are looking at more dynamic ways of increasing supply efficiency and effectiveness. This is leading a second wave of supplier rationalisation, more focused on bringing order and logic to all aspects of the supply environment through many different and niche decisions. Information visibility through systems such as Purchase to Pay is essential in taking a step back to understand the requirements of the business first. This analysis provides a detailed picture of what can be done to rationalise – or improve – the relationship with them. Many questions arise, for example, do we need to renegotiate with this supplier? Can this one supply more to us? Do we need to focus on the buying process here? Is solving the problem with this supplier worth the cost and effort? Supplier rationalisation has become much more about in-depth analysis and segmentation and less about blanket changes and rules.
What’s best practice?
Supplier rationalisation best practice requires the procurement team to achieve a good level of engagement with operations. While it’s important that supplier relationships aren’t owned by individual functions or even individuals themselves, procurement must work with departments to ensure that rationalisation decisions are not at odds with their requirements. Otherwise rationalisation has the potential to work against the business’ goals and objectives and become a damaging factor in its own right. If departments are to hand over important commercial relationships they need to understand that procurement will not become obstructive to them meeting their targets and the role that its suppliers play in that. Category experts must also demonstrate to departments that they have in-depth and useful knowledge of the subject and the environment in which a suppler is utilised. It’s about demonstrating the capability of procurement, showing an effective methodology and achieving engagement across the organisation and all of its functional requirements. In fact, rationalisation can actually be a way for procurement people to help departments improve the way they buy from their chosen suppliers. Informal departmental relationships with suppliers are often dogged by inefficient ordering and payment processes which impact the suppliers’ cash flow and relationship with the buying organisation. ‘Plugging’ these suppliers into a P2P system and giving departments access to intuitive buying platforms as part of a supplier rationalisation exercise can actually alleviate pressures for the buyer and the supplier.
How should suppliers deal with it?
Although supplier rationalisation isn’t necessarily about making cuts the supply base should be ready and prepared to deal with the changes that can ensue. The key message for suppliers is really one of “don’t ignore it” – they’ve got to work with it. From the supplier perspective attempting to understand what rationalisation means to the customer organisation will at least help them to be ahead of the game in evaluating the risk, or indeed the opportunity, that it presents to the business. In the case of risk, it gives them the best chance of minimising that risk by taking active steps to seek replacement business (or adapt its business to fit the customer’s new requirements). Where there may be an opportunity, early action and insight gives the supplier the maximum chance to adapt and develop its offering to fit. Of course, the smartest suppliers are actually making rationalisation their business. For example, rather than delivering niche services, a facilities management company could develop a fully outsourced offering that appeals to clients seeking to rationalise services in this category.
What are the key success factors?
1. Engage the business as its ultimately about helping it to operate more effectively. Procurement needs to demonstrate a thorough understanding of the business and its needs in terms of products (goods and services), quality and service expectations. From there it is easier to decouple the commercial and operational supplier management activities. This may require understanding across different business streams or functions.
2. Take time to understand where the opportunities for rationalisation are. Is it in your contracts, relationships, processes or product choices? What does your P2P system’s data tell you about your supplier portfolio?
3. Profile and consider the risks of rationalisation carefully. Understand what the effects of rationalisation will be in terms of challenges as well as benefits.
4. Does the effort of rationalisation outweigh the benefit or vice versa? Could rationalisation impact your organisation in far reaching ways, either positively or negatively, such as customer service, product quality, legal risks or sustainability?
5. Analyse, analyse, analyse – making rationalisation pay is about making detailed decisions about individual suppliers, not mandating blanket policies across the entire supply base. This demands a strong foundation of data, usually sourced from Purchase to Pay systems and spend analysis.
6. Work with your suppliers, not against them. There may be opportunities for them and you, even where rationalisation seems to be closing the door on a relationship.
7. Don’t just think reducing suppliers – think about aligning suppliers to business needs.