Rationalizing your supply base can be a daunting task, but it can also bring significant benefits to your organization. By streamlining your suppliers and focusing on those who offer the best value and fit with your business goals, supplier rationalization helps you improve efficiency, reduce costs, and build high-value relationships with your suppliers.
In this blog I’ll explore what it means to rationalize your supply base and how to go about it efficiently and effectively.
What is supplier rationalization?
Supplier rationalization is the process of evaluating and optimizing the number and quality of suppliers that you work with. It involves assessing your suppliers to better understand the services they offer (and can offer) aligned to your business needs, and identifying ways to consolidate or reduce your supply base by eliminating duplicative, low-value, and poor performing suppliers.
Why rationalize your supply base?
Rationalizing your supply base will not only help you reduce costs, it will also speed up purchasing decisions, improve quality, reduce risk and strengthen your supplier relationships. Here are a few reasons your organization should consider supplier rationalization.
Stronger relationships: One of the best reasons to rationalize your supply base is to focus your time on the few suppliers who can help you drive the biggest results. When you show a higher level of commitment to quality suppliers, they’ll be just as committed to you.
Improved quality: When you eliminate low-value and underperforming suppliers from your supply base, you’ll improve overall supplier performance along with the quality of the products and services you buy.
Enhanced agility: A streamlined supply base makes it easier to respond to changing market conditions and customer needs. By working with fewer suppliers, there is less complexity to manage, which can make it easier to pivot or scale as needed.
Reduced risk: More suppliers equals more risk. Rationalization provides the opportunity to replace your ‘too risky for me’ suppliers with others you may already be using who are more stable and/or have more robust policies, procedures and controls.
Cost savings: Of course, supplier rationalization also creates opportunity for cost savings through contract clean-up and greater leverage when you drive more spend through fewer suppliers. You’ll also save on ‘soft costs’ related to process efficiencies you’ll gain in your purchase-to-pay process.
How to rationalize your supply base
So, how do you go about rationalizing your supply base? A basic process you can follow to assess your suppliers and develop a strategy for supplier rationalization includes:
Identify your current suppliers: Start by identifying all of the suppliers you currently work with, along with the products or services they provide. This will give you a baseline to work from as you begin the rationalization process.
Categorize suppliers based on what they do: Establish spend categories aligned to your organization’s industry and size, and tag/categorize suppliers into the spend categories to understand who and how many you are working with in each category.
Prioritize the categories you want to rationalize: Don’t boil the ocean. Start with categories where rationalization is obvious and you can get some quick wins. You want early traction and reportable results. Save the more complex categories for the next phase.
Analyze supplier contracts, spend and performance: Dig into the details to understand what contracts you have and what you are spending with suppliers in your targeted categories. Also understand who’s performing and who’s not to help narrow down your strategy.
Create your category management strategy and transformation plan: Develop your game plan for consolidating and streamlining each targeted category. Determine which suppliers you want to keep as part of your supply base. These should be suppliers who offer the best value and fit with your business goals. And don’t forget to align your timelines to contractual requirements.
Implement your transformation plan: Depending on the number of suppliers you have, this can involve consolidating and negotiating new terms with your existing suppliers, or transitioning to new supplies entirely.
Build supplier rationalization into your supplier management process
Rationalizing your supply base can bring significant benefits to your business, including cost savings, improved quality, enhanced agility, and reduced risk. To be most effective, though, don’t view it as a one time effort.
As time passes and your organization grows, your supplier base will start to grow again as well. Supplier rationalization needs to be conducted at regular intervals to ensure you continue reaping the benefits of rationalization, and to mitigate risk throughout your supply chain.
If you’re interested in learning more about supplier rationalization and how it can benefit your organization, contact us today to schedule a free consultation. Our specialists can help you evaluate your current suppliers, determine which ones offer the best value and fit with your business goals, and help you implement any necessary changes to streamline your supply base. Don’t wait – start realizing the benefits of supply base rationalization today.