Many firms are aware that they are dealing with too many suppliers. So they figure that the first thing they need to do is reduce the number of suppliers. The benefits of a smaller supply base lie in the area of reduced costs: lower prices by leveraging volume with fewer suppliers, fewer transactions to manage, and better collaboration with the “vital few”, high-performing suppliers that remain. The problem is that supply base reduction as a first step may not be the best move.
The last part is key – high-performing. Firms should first be relatively certain that they are already working with the best, most qualified suppliers. Reducing the overall number of suppliers is less important than having the highest quality, most appropriate suppliers to support your business. If you have enough qualified suppliers, rationalization can help you “right-size” the supply base. But while supply base size matters, who the suppliers are and what their capabilities are matter most. Also, some companies may consolidate purchases with one supplier, using them for multiple categories in order to work with fewer suppliers. This strategy may be flawed as well. Some suppliers may be much better at supplying one category than another. Working with suppliers who are most competent in every category they supply is better than sacrificing performance for convenience. There has to be a measurable benefit in using one supplier across categories. Therefore, you may actually need to increase your supply base.
Having the right suppliers is the first step. Next is weeding out poor performers. Then you are ready to reduce the overall number, as required by your business.