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Tools and Techniques to Rationalise the Supplier Base

It is challenging for any organisation to coordinate and control relevant activities with a network of suppliers. Organisations must therefore undertake different approaches where product supply are continuously in demand and decide which suppliers are critical for the business operations. The appropriate tools and techniques can aid procurement teams to discern the needed product supplies and eventually rationalise their supplier base. This article discusses the different means for organisations to ensure that the appropriate amount of suppliers are realised. The tools and techniques discussed are potential means that could help organisations kick off initiatives to rationalise their supplier base. Theycan be useful with the trend of outsourcing and utilisation of resources from multiple third-parties among organisations.

Spend Analysis

Analysis of corporate spend data in the procurement team could help organisations pursue cost reduction and purposefully improve operational performance. It is a process to reveal how much an organisation spends, with whom and for what products or services. The first step will be data collection which could come from the purchasing system records or generating of expense reports. Next will be data clean-up such as removing duplicated entries, standardising the supplier names and removing unnecessary or wrong information. Data analysis could then be executed to determine crucial information. These includes number of engaged suppliers, purchasing volume for each supplier or figures to show historical consumption per product or categories. These insights could help organisations identify buying power with realised suppliers and start rationalising their supplier base.

Classification Matrix on Purchased Products

The Kraljic Matrix classifies products based on two dimensions – profit impact and supply risk – where each dimension is determined by values – low and high. From this matrix, identifying product categories with a set of differentiated strategies is possible.

Firstly, strategic product is one that is critical to profit and could have high supply risk due to instances such as scarcity. Collaboration with suppliers for new solutions or development of partnerships are usually means of sustaining the product supply.Secondly, leverage product is one that could generate great profit and is much readily available from varying suppliers. Such products may withstand a switch of supplier as the quality is standardised. Thirdly, bottleneck product is one with high supply risk because it is acquired from just one supplier and has limited impact to profits. Ordering for surpluses is recommended when these products are available and sourcing from multiple suppliers could be considered as well. Lastly, non-critical product is one that could be easily purchased and has a limited impact to profits. Hence, time and money spent on purchasing such product could be reduced by utilising automated purchasing methods from multiple suppliers.Based on the product categories, procurement team can decide on the entailed purchasing approaches. Additionally, by categorising the purchased products, the required number of suppliers can also be rationalised.

Supplier Segmentation Pyramid

An organisation’s third-party master list can be assessed and segmented to effectively identify each relationship based on its significance for business continuity. Gaining this clarity can be helpful to generate efficiency and value-based partnerships. Otherwise, it is unrealistic to channel great quantities of efforts in managing all suppliers.

Supplier Segmentation Pyramid
Diagram created by Nur Farizah Omar (Nov 2023) adapted from https://www.wavestone.us/capabilities/cost-process-optimization/vendor-rationalization/

Vendors are typically suppliers that are not yet preferred but have engaged in pre-qualification processes and approved as legitimate suppliers. Qualified suppliers are those contracted by the procurement team to supply specified goods or services. This could be based on request of a single or few business units in an organisation. Preferred suppliers are approved suppliers that have negotiated means of agreement with the procurement team for their supply of goods or services. Engaging with preferred suppliers may not necessarily require justification. However, their supplies and services should always be consistent with scopes like price or quality that were identified in the contract. Organisations may also decide to negotiate with these suppliers or request for new proposals. This may depend on factors like financial capacity or market availability of goods and services.Strategic suppliers are long-term cooperative partners committed to leverage the strategic or operational capabilities of the organisation. These suppliers and the organisation would aim to achieve mutual benefits such as joint commercial success. Continuous integration and provision of resources by the suppliers can also be highly critical to support an organisation’s operations.From this pyramid tiering, the most valuable suppliers could be determined. Dormant or inactive suppliers could also be identified as they can remain on the vendor base. Ideally, the master list should be efficiently managed to maintain the integrity of an organisation’s supplier base.

Analytical Hierarchy Process (AHP)

An interchange should exist for eliminating ineffective or marginal suppliers where the next logical step is to then add new competent suppliers. Replacement of good suppliers should be substituted with better or the best suppliers. Here, decision-making methods such as AHP could be utilised. Organisations will first need to identify both supplier elimination and selection criteria.

The main criteria for selection and elimination may include performance metrics, business structure considerations and suppliers’ accommodation for quality. Within those criteria, sub-criteria could then be established. Performances metrics may include shipment quality, delivery compliance or consistency in price behaviour. Business structure considerations may include employee profile, financial status, technological compatibility of equipment or retaining a systematic planned production. Suppliers’ accommodation for quality may include conducting regular process inspection, reliable product development or continuously pursuing process improvements for quality assurance.While this focus can be on the suppliers’ performance and services, maintaining an impartial judgement in coming to decision is crucial. Measurement scales to rank the suppliers could be done by assigning specific numerical ratings for each sub-criteria. Then, finalised scores could be distinguished for each suppliers. Ultimately, reducing or expanding the number of suppliers should be supportive of an organisation’s changes in priorities or objectives.

Supplier Consolidation

Organisations may consider an uncompromising process to reduce the number of suppliers through selection of the best ones and elimination of the remaining ones. Supplier consolidation is recognised through collaboration of multiple business units and then identifying opportunities where duplicated suppliers could be consolidated.Finding areas to consolidate product volumes to only a single supplier can enable organisations to achieve price reduction during purchasing. Additionally, it could be helpful to simplify the process of supplier management by reducing the supplier base. However, the extent of disregarding other suppliers should be thoroughly evaluated in terms of all possible values and risks. Without alternative suppliers, the organisation could be exposed to greater likelihood of supply chain disruptions. Therefore, finding a balance in taking advantage of synergies may be more practical.

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Nur Farizah Omar
Nur Farizah Omar
Nur Farizah Omar has several years of experience in the life sciences industry specifically within the areas of Research and Development. She holds the Diploma in Pharmaceutical Sciences from Republic Polytechnic, and she is a member of Singapore Institute of Purchasing and Materials Management (SIPMM). She completed the Diploma in Procurement and Supply Management on December 2023 at SIPMM Institute.

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