Large companies have a common symptom: thousands upon thousands of suppliers in their system. Many of them with little spend or no recent transactions. Most of them unknowns when it comes to understanding what product or service they sell, never mind value they bring to the business. Those suppliers make spend reports cluttered, create operational cost for record maintenance and make it near impossible to consistently apply contract terms, pricing schedules and other metrics uniformly.
So Procurement departments are asked to rationalize the supplier base to create more manageable, understandable supplier roster for each category. Firstly, when supplier record creation is not central and tightly controlled or hasn’t been in the past, then removing duplicate supplier records is the first step. Next comes deleting records for vendors who have been inactive for more than a specified period.
Now comes the meatier part of rationalizing suppliers and reducing actual live suppliers. This can take very different shapes depending on the rationalization target, the strategic relevance of the category, whether it’s a central or decentralized Procurement team or other internal dynamics. And more often than not supplier rationalization is expected to deliver savings through volume consolidation and better conditions from the providers receiving a larger share.
For SMEs, Supplier Rationalization may spell trouble. They have become a supplier through an established connection, but maybe never undergone a formal selection process. They may or may not be invited to a tender to rationalize the supplier base. If they are, the combined requirements may be more than they can handle at that point in time. They may not be invited to the tender at all, being considered too small from the start and just be faced with the fact of losing the client to a large industry player.
While there is no fool proof recipe of not losing the client, SMEs can at least prepare themselves by doing the following:
- Regularly consider client demand scenarios and how they would affect you: if they client goes international, if the client replaces current technology, if the client is under pressure to cut headcount, if the client looks to cut cost by offshoring, if the client wants to reduce number of live supplier relationships, if the client wants more local expertise, etc.
- Draft response for those scenarios. And consider that your company may not be able to meet every one of them reasonably. E.g. developing an offshore presence is not a quick exercise to be engaged in on impulse.
- Consider how likely scenarios are with important clients. Talk to contacts there to get a sense of the general direction and pressures they are under. Read the media.
- Talk to your Procurement contacts and make it clear what opportunities you’d like to be considered for, if you are willing to scale up and what your longer term business ambition is
- Create a clear strategy how you compete in the market right now and in the near and mid-term future. Create a client acquisition strategy that relates to your competitive strengths. Bigger and multinational clients may not be the right strategy.
- Think about how else you can create a benefit for your client other than the direct product or service you are currently supplying. Does the client have a headache or inefficiency that you as a smaller player can more nimbly and effectively solve than your large competitors?
- Ensure no over-reliance on individual large clients and safe-guard yourself if you engage in such (e.g. through extended contract terms and firm commitments). Think wisely before making large infrastructure investments for an individual client (other clients to share it across? Commitments? Divestment opportunities?)
- Continuously develop other clients to ensure risk is spread, but also to gain a broader market perspective to reduce risk of becoming a “fit for this client only” type of supplier
- Explore opportunities to partner with larger and international providers to compete for bigger opportunities that go beyond your capacity. You may need to become a Tier 2 supplier to a current client even, be practical about this.
Losing clients or companies changing their supplier portfolio is nothing unusual. Procurement’s supplier rationalization programs are just a more formal way of driving the change. Many SMEs seem to mostly complain bitterly about them, but there is much preparation that can be done for a more level headed talk with your client counterpart about the future of the relationship.
I have personally seen SME suppliers drop out where they were not considered to be strategically or otherwise relevant and not able to cope with a larger scope. On the other hand, true specialist niche players, very innovative SMEs or an SME able to save a headache still has game. Most claim they are one of those – but ask yourself honestly, are you really, really?
A favourite example was a small stationery supplier – a very replaceable commodity and competition were large multinational players. The SME won because it could most effectively sold the internal inefficiency in ordering, administrating and controlling use of stationery items. A headache solved, internal headcount relieved and a client retained!