What Is Supply Base Rationalization? How to Choose The Right Number of Suppliers
As procurement leaders seek to tackle tail spend, many are turning to supply base rationalization to clean up their supplier database and optimize spend. Supplier rationalization is a process that allows organizations to identify the best procurement partners with which to build long-term relationships. It can add resiliency to the supply chain, help with procurement, and reduce maverick spend.
Here’s how supply base rationalization works and some of the key reasons why your organization should consider implementing it.
What is supply base rationalization?
Supply base rationalization, or supplier rationalization, is the practice of reducing the number of active suppliers to streamline an organization’s spend. Ideally, intentionally shrinking a supply base will allow the organization to spend more time and focus on building value from existing supplier relationships.
Rationalization, the way it is performed today, is very similar to optimization. The best way to define “rationalize” is to think of a streamlining process: basically, ensuring that you have the right number of suppliers providing the right quantity of inputs at the right quality, price, and terms.
Historically, supply base rationalization focused on reducing the number of suppliers, minimizing the organization’s supply base to encourage competition among suppliers and to realize greater cost savings. However, since the rise of procurement transformation and tail spend tools and analytics, supplier rationalization has become a process of value creation rather than cost savings. Supplier rationalization goes hand-in-hand with supplier relationship management.
[Read more: What Is Supplier Relationship Management (SRM)?]
What does the process supplier rationalization entail? Here are some of the key steps to perform supply base rationalization.
How to perform supply base rationalization
The goal of supplier base rationalization is to not only save money, but also ensure you’re building quality, high-value long-term relationships with your suppliers. As such, the process of supply base rationalization should account for more than just a simple spending review, says Matt Corsi, research director at Gartner.
“Sometimes pressures to reduce spending quickly lead to reviews of only existing vendors and bypassing of competitive sourcing procedures,” wrote Corsi. “However, if you undertake a sourcing event that allows proposals from new vendors, this creates competitive tension and provides insight into new pricing and technology solutions.”
Follow these steps to create a supply chain that is streamlined and maintains strong, collaborative supplier relationships — rather than exclusively competitive ones.
Analyze spending down to the subcategory level
Start by understanding the basics: what are you purchasing, for how much, and from whom? This will allow you to identify where you have the best opportunities for supplier rationalization. Find out how many vendors you have in each procurement subcategory. From there, you can prioritize supplier rationalization for the subcategories in which your organization spends the most.
“Start with the subcategory from which you can derive the most benefit with the least resistance, in order to show your value and gain credibility. Then continue with other subcategories,” said the experts at Gartner.
Develop a roadmap for each subcategory
Next, develop an overview of historic spending with each vendor in your chosen subcategory, as well as a projection of future demand. Combine this vendor-specific data with market analysis and a sourcing plan that provides a baseline of your spending and savings targets. Ideally, your analysis will provide clarity around your procurement and growth goals and which of your existing or potential future suppliers is best positioned to help you meet those goals. This plan should guide your rationalization process, allowing you to build an RFP, solicit supplier responses, and deselect or transition between suppliers.
Identify your preferred vendors
Next, key stakeholders in the organization must agree on the plan and begin to solicit supplier bids. For a smooth RFX process, make sure to proactively communicate with existing vendors, extend any existing supplier agreements you intend to keep, and prepare a streamlined, strategic sourcing process to ensure you’re working toward the right goals.
Implement safeguards to maintain rationalization
Once you’ve cleaned up your supplier database and updated agreements with vendors who meet your goals, the next step is to make rationalization a part of your regular operations. Establish a governance process for new contracts that helps your procurement team ensure that preferred vendors remain competitive. Monitor changes in the market regularly, keeping an eye on prices, suppliers, and technology.
Benefits of supplier rationalization
Supplier rationalization may seem time-consuming, but it allows organizations to build valuable relationships with key suppliers and negotiate for better contract terms. Supplier rationalization can lead to better buying costs and terms, lower overhead costs, and cost savings in shipping and handling. It also contributes to better supply quality and reliability, stronger contractual agreements, and more integration with suppliers.
Beyond these immediate benefits, supplier rationalization can also lower an organization’s risk and help with compliance. It also contributes to lower maverick spend and other hidden risks that chip away at your profit margin. It can also build resiliency into your supply chain, identifying the best suppliers with a proven track record of historical performance and allowing you to build long-term relationships.
For more advice on reducing maverick spend and choosing suppliers, check out Fairmarkit’s blog, The Source.