Strategic Sourcing Lessons

I was recently asked this question: "Shouldn’t we set an objective for the number of suppliers that we want our supply base to shrink to?"

I know that in some circles it is popular to make public pronouncements about the degree to which a company plans to reduce its supply base. For example: "Company X announced today that it plans to reduce its supply base from 30,000 active suppliers to 5,000 within the next 18 months."

I’ve always wondered what the executive was trying to accomplish by making such a pronouncement. Perhaps it is part of the same logic as announcing internal layoff targets—trying to signify seriousness and suggest a degree of cost reduction. 

But the problem is that simply reducing the number of suppliers doesn’t guarantee good results. The appropriate number of suppliers—in a category of spend—is the outcome of using a robust strategic sourcing process. Without an excellent process, you won’t obtain optimum results (either negotiated, or—where it really counts—implemented). 

Certainly, offering more business to fewer suppliers tends to create the potential for good economics for the buying entity—if you approach it properly. But you can take that too far, and come to rely entirely on one supplier, or a few distant offshore suppliers—and increase your business risk substantially. A good sourcing process explicitly balances: (a) the benefits from concentrating more business with fewer suppliers—with (b) the risks of relying on fewer suppliers (or more distant suppliers). Assessing that tradeoff, with an awareness of their company’s risk aversion attitude, is what supply management leaders are paid to do—not blindly reducing the supply base.