CPSM Blog

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.

Preventing and responding to discrimination or harassment in the supply management department

This section (3-B-8)  puts you in a Supply Management leader's role and asks you to think about issues of discrimination and harassment of co-workers. The important thing is that here you are not thinking about Supplier Diversity which is covered elsewhere in Exam 1 (1-F-3, 1-E-2, 1-D-1) and Exam 2 (2-D-3). Keep in mind that section 3-A-13 introduces the concept of diversity in the workplace but this particular segment of Exam 3 i.e. 3 B is about compliance - viz . if you are the CPO or Chief Supply Officer are you compliant with laws and rules pertaining to discrimination and harassment?

The laws can be US ones like:

1. Equal Pay Act of 1963 which asks you to ensure that for the same work using the same skills you should be paying the same. For example,  there was the class action lawsuit by women employees of Walmart followed by individual lawsuits. Could this have been prevented early on by better leadership  ?
2. Federal Civil Rights Act of 1964   particularly Title VII prevents discrimination against employees on the basis of race,religion,color,sex or national origin.
3. Executive order 11246 of 1965 prevents employment discrimination if you are a federal contractor. 
4. Age Discrimination 1967  This one is strange  because all of us will be old - one day. However, the relatively younger colleagues tend to be more technically competent and older colleagues get discriminated. Perhaps training older workers is away to prevent this kind of discrimination.
5. Equal Employment Opportunity Act (EEOA 1972)  is something you see in job ads. The purpose is to have an  employee  mix that reflects the community population mix. And the EEO Commission can directly file lawsuits against organizations that violate EEO. 
6. National Labor Relations Act or Collective Bargaining or Taft-Hartley allows individuals to organize and bargain effectively. 
7. OSHA is also featured in this section. Again the logic is are you compliant with OSHA in the supply management departmet? 
8. Americans With Disabilities Act prevents discrimination in employment for disabled candidates.
9. Although USERRA is not mentioned in the study guide it's a good idea to become familiar with the need to hire qualified veterans into supply management positions. 

Sexual harassment and diversity training are other important topics in this section. In general, you would have had your HR folks arrange training on these topics. Its a great idea to sign up- particularly for the online training in these topics. Apart from acing this section in the CPSM - you'll find that you'll learn nuances about what type of behaviors are appropriate and what are not, given the increasing complexity in this topic in the modern workplace.

Developing and managing supplier relationships

Having segmented suppliers the next step is to manage supplier relationships.Important areas are managing confidential information between organizations and being clear about intellectual property issues.

This section mentions ten different points to promote good relations and trust including top management meetings, timely payment of invoices, equitable treatment of suppliers,supplier development, supplier surveys and periodic business reviews. An important survey question to ask, which is not very obvious is "how can we make your work easier and how can we help you reduce your costs".

A final and important point made is about Early Supplier Involvement (ESI) in new product development because 70-80% of costs occur in the design phase and its really very strategic to involve suppliers early on.

Supplier Base Rationalization

The Supplier Relationship Management task (1-F) is the last task of Foundations of Supply Management. In this task the supply manager must examine the supplier base for the purpose of segmenting suppliers. Truly the work of Dyer and colleagues has influenced supply management thinking in this domain. For eg. see Dyer ,Cho and Chu (1998).

The overarching theme of the section is that the supply manager must differentiate between strategic suppliers who contribute to the core mission or business of the buyer's organization and those who do not. By and large the 80-20 rule applies here and only a few suppliers, in a few categories are of major strategic importance and relationship management becomes very important, these include critical raw materials. Interestingly, according to Procurement Strategy Council Research 50-70% of suppliers do not qualify for becoming strategic alliance partners. Nevertheless, all these suppliers need to be handled on a collaborative basis because they do have major business implications for example specialized packaging,IT services etc. Finally there are 20% suppliers who are  needed but not critical and these include MRO  and stationery items. For each of these categories a different set of supply management skills from strategic to tactical  are required but overall, the first step is to categorize suppliers.