Rationalizing the supply base - opportunities and benefits

"Rationalizing the supply base" invariably produces stress and anxiety among both suppliers and supply management professionals. Perhaps the word "rationalizing" reminds one of "rationalizing" within the organization that typically means retrenchment and reduction of work force- at least from the employees viewpoint. Some of these concerns for employment are real.

Nevertheless, professional supply managers and also professional B2B marketers should try to understand the purpose of rationalizing the supply base. The earlier you understand and implement it- the better is the performance of your supply chain.  Here are some key points on this topic:

1. Every supplier and commodity is not same: Think of the Risk Value matrix and it tells you that you have a variety of suppliers that can be divided on dimensions of Risk vs. Value to your operations. Suppliers must also understand that their product may be a strategic item in one instance eg. a fresh fish supplier to a restaurant chain vs. a grocery chain. The restaurant chain might be in a bigger crisis in case fresh fish supply is suddenly disrupted. Just thinking of suppliers in an ABC model is also quite effective. "C" class suppliers are those that supply low value items including MRO items that have many vendors. Supply managers with tactical and transactional skills can handle this category. The "B" category of suppliers might involve $1-5 million of supplies and they might include packaging items that are very important to your market. Supply managers must have relational skills and some strategic skills to deal with this category. Finally, you have the "A" list items that total over $5 million that matter a lot to your own customers. Here you need strategic skills in the supply manager.
2. Segment suppliers in each category: After categorizing suppliers either through the Risk-Value method or the ABC method you need to segment suppliers. Segmenting methods include categories like Approved Suppliers,Preferred Suppliers and Diverse suppliers. The bad suppliers can have categories like Disqualified or Debarred Suppliers who might be temprarily suspended for bad performance. Segmentation of suppliers helps a lot by saving time when it is time to order.
3. Transactional,Collaborative and Strategic Alliance: You supplier relationship strategy follows the ABC model where transactional relationships are fine for non-critical items. You want employees to buy their own stationery from approved suppliers- just set up a contract and let people buy through their P-Cards. Perhaps have two supply sources and an annual contract list of prices. Collaborative relationships are important in items that your people must work collaboratively to come up with a great offering for your customer- packaging development is an example in this category. Strategic Alliance can be for more long term joint activity that can completely revolutionize your business- strategy consultants, innovation developing suppliers fall in this category.

Ongoing supply base rationalization does help efficiency  but can come with risks particularly when natural disasters happen as in the case of the Japan Tsunami.