By: Ipsita Suman -- Lead Analyst, Procurement and Finance Business Services
15 September, 2017
Supplier Rationalization is one of the most strategic yet enduring activity in a procurement organization. Most of the organizations are at a stage where they have very little visibility into their supplier base.
Supplier rationalization can be broken up into a four stage activity - Preparatory Phase, Framework Development Phase, Supplier product and Data Analyzing Phase, and Implementation and Evaluation Phase. Each stage has challenges which can be dealt with proper reasoning and collaboration with business users. Key challenges include:
The four step approach to Supplier Rationalization would give organizations a clear guide to implement and maintain the rationalization process in-house. It is also important to sign long term contracts or undertake collaboration exercises with selected suppliers to achieve full potential of the suppliers.
Supplier rationalization, also known as supply base reduction [SBR] is the process of shrinking the supply base by reducing the number of active suppliers. The primary agenda of supplier rationalization is to streamline the organization’s spend to fewer suppliers and driver better value from those relationships.
Supplier base reduction may not be a new purchasing concept, but it is an enduring, challenging, and strategic one. The benefits of Supplier Rationalization are immense.
Having fewer suppliers simplifies process automation which in turn reducing P2P costs. However, procurement team faces a constant challenge when it comes to reduction in the number of suppliers.
Below is the Best-in-Class Supplier Rationalization process identified in the industry.
Source - Metropolia
Stage 1- Preparatory Phase
Establishing a Cross-functional team
Conducting Spend Analysis
Defining Supplier Base Reduction approach
Key challenges faced - Procurement can face issues from the business users as many times they feel that reducing the number of suppliers reduces the competition among a company’s suppliers rather than enhancing it.
Solution – Focus on Rationalization approach if any of the criteria holds good
Stage 2 - Framework Development Phase
Identifying supplier elimination criteria
Identifying supplier selection criteria
Some of the key criteria considered for selecting suppliers are as follows:
Targeting suppliers for elimination
The elimination criteria are applied to the supplier database. The outcome of this step are as follows:
Source – Metropolia, Accenture
Key problem faced – In Directs category, stakeholders do not want to enter into long-term contracts with suppliers on commodities because of the possible downward market fluctuations
Solution – Procurement can focus on the key differentiating point for each category/ sub-category. The must have characteristics can be analysed and evaluated.
Stage 3 - Supplier Product and Data Analyzing Phase
Identifying common suppliers across business units
The list of suppliers that pass through the initial selection criteria along with targeted suppliers that require further detailed product and service analysis are considered for analysis in this step.
Analyzing the products
Identifying and comparing contracts of key suppliers
The contracts of key suppliers falling in the Core and Leverage quadrant are compared to identify suppliers of core and leverage products.
Some of the main points considered while comparing the contracts of key suppliers are:
Key challenge faced – Procurement might face challenges in terms of gathering inputs from business users while analysing the suppliers.
Solution – Holding periodic meetings and involving business users while determining key suppliers is crucial. There are times when suppliers have to be evaluated subjectively rather than objectively. Procurement should be open for such situations.
Stage 4 - Implementation and Evaluation Phase
Targeting suppliers for consolidation across categories and service areas
Suppliers for specific categories are consolidated as follows:
Evaluating the results of Supplier Base reduction process
The aim of this step is:
Conducting evaluation exercise on a continuous basis
The Supplier Rationalization Process is executed each year to classify key suppliers for specific categories such as Strategic, Collaborated, Standard and Conditional.
Key challenge faced – There might be instances where the selected supplier might not fare well in the future. There might be issues with selected suppliers and business users for challenge other than quality.
Solution – Procurement can re-evaluate and bring the parameters which created issue in the next iteration of the exercise. Procurement must be open to conducting this exercise on a continuous basis with business users’ support.
Timeframe of Implementation
Supplier Rationalization is an on-going process. However, the first phase of implementation takes around 22 - 24 weeks. The timeframe by sub-process is given below.
Source - Beroe Analysis
Do’s and Do not’s in implementing Supplier Rationalization Process
Best practice is to have a well-defined supplier evaluation system to reward selected suppliers with long-term contract
Receiving inputs and ensuring the participation of other departments is critically important for the implementation phase of the supplier rationalization program
When moving from larger volumes of suppliers to fewer suppliers, companies need to ensure that the selected suppliers have the capacity and capability to support larger volumes and meet the requirements in terms of quality and lead-time which are the most important criteria
The changes that result from the supplier rationalization program such as new suppliers list needs to be communicated to internal users directly or indirectly affected by the program
Reducing the supplier base without establishing contractual relationships with suppliers could disrupt the supply of products
Companies should not give high priority to price criterion in the initial phase of supplier elimination
Case Study- SMRT Corporation’s in-house approach to reduce supplier base
Case Study- A freight transportation company’s combined approach to reduce maverick spending and reduce supplier base
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