Cutting to the Core

Feb. 10, 2009
Consolidating suppliers can help manufacturers add value to their supply chain, but not without a good plan to make it work.

Manufacturers need suppliers to help them innovate, change and improve specifications and, ideally, to become an integral part of their supply chain. However, having extended their supply base to a point of diminishing returns, many have started consolidating -- reducing their number of suppliers to regain the leverage and synergy that tends to get lost when too many are involved.

According to Bill Michels, CEO of consulting firm ADR North America, more companies are realizing that it doesn't make much sense to retain five different suppliers for the same category. Having fewer suppliers is not only easier to manage, but it can also help drive down costs over the long term. That said, you still need a focused strategy to achieve the desired results.

"Rationalizing the supply base is not an easy job; you can't just whittle it down," Michels says. "It takes a lot of work in terms of evaluating all of your suppliers in a given commodity -- their capacity, their finances, and their ability to provide cost and value improvements over the long term."

This frequent overabundance of suppliers often stems from not having a strategy in place when an acquisition or a merger occurs, but it also happens under normal circumstances. Whatever the cause, a company's supply base will continue to grow until someone is finally tasked to make sense of it all and get things under control. When that day finally comes, Michels offers the following suggestions:

  1. Set meaningful goals.
    Most companies start out simply by eliminating unnecessary redundancies. However, goals should extend beyond decreasing the supply base by a certain percentage. Rationalization should help focus your company's volume and narrow opportunities for preferred supplier relationships. "At that point you can start weeding out the pile," Michels says. "No company can dramatically reduce their number of suppliers without a plan. Some are so eager just to hit a number, they get one supplier to buy components from three others just to say they only used one supplier. Not surprisingly, you don't get any value from that sort of approach."
  2. Update any relevant documentation.
    In taking work away from an existing supplier, companies often discover unique capabilities or special services a supplier offered, but somehow went undocumented. During a consolidation, take the time to find out which suppliers provide something special. Be aware of any unique tooling or specialized product knowledge, and make sure your technical specifications are up to date. "Some companies have quoted jobs to new suppliers after a rationalization, only to see that the finished parts didn't match the drawings," Michels explains. "This often occurs when a manufacturer has had a long relationship with a supplier, but never clearly documented whatever design changes might have taken place over the years."
  3. Focus on relationships.
    The thinking behind supplier relationship management (SRM) is more common for manufacturers these days, but it can be difficult when too many parties are involved. "Companies rationalize their suppliers to focus their volume and build a base that can be better managed," says Michels. "They also want to get into a position where they can work with suppliers and have good relationship management to drive costs down in the long run." Current economic conditions point out the importance of these relationships, he says, because with only so much business to go around, suppliers will be inclined to grab all the volume they can to keep their plants running.
  4. Consider industry capacity.
    In addition to your own volume, don't neglect to take industry capacity into account. Understand where your own volume falls in the grand scheme of things, and how rationalizing could affect an industry's capacity in the future. "What impact will you see if you take out your volume from one supplier, then your competitors all do the same? If the whole industry rationalizes the same suppliers, you run the risk of shortening up capacity and creating problems down the line," explains Michels. "You risk losing some of them forever, so you need to be careful in making those calls."
  5. Keep your bridges intact.
    In some cases, one manufacturer can account for a significant percentage of a supplier's business, so decisions need to be carefully managed. Understand the impact you will have on a supplier if you choose to end a relationship. Most ethical companies won't take away all of their business at once, leaving the supplier to struggle with what might be a significant capacity loss. Instead, give them a 'ramp-down' period, in which orders are reduced every quarter until the end of the year. "Even then you never want to close the door," Michels adds. "You always want to have the supplier briefed properly so they can compete for your business again in the future."

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