Supplier relationship programs – Procurement’s “Long Tail”

Long-held beliefs in Procurement tie back to simple concepts. Know who you buy from. Negotiate tough but fair. Do business with as many different suppliers as you need, but not 1 more than that.

By attempting to understand how "Long Tail" concepts can be applied to Procurement, we can begin to challenge some of the most basic assumptions around Procurement best practices.

For today, I'll challenge this widely-held belief:

Reducing your supply base is good

In traditional supply chains, vendors who do well in a particular area tend to grow out to serve other areas. For example, a bolt supplier might decide to carry wing nuts. And if your bolt supplier has been easy to work with, offering fair and reasonable prices, an attractive return policy, etc, you might naturally grow your relationship. In this way, suppliers (who tend to be or become distributors) grow their revenue by selling you more and more widgets for different parts of your business. The downside, for those that value it, is your supplier becomes less expert on each area as he begins offering you a broader and broader set of goods.

This tradeoff made sense 10 or 20 years ago. The incremental cost of forming and keeping a relationship with a dedicated "wing nut" supplier was just too high. Reducing overhead by consolidating the supply base was an easy way to produce great returns.

But in many areas, and for a variety of reasons, that's changed. Some firms are cultivating more supplier relationships, not fewer. And they aren't doing it to become inefficient. They are doing it because they are efficient. And because they view having a very diverse supply base of "point experts" as a way to produce strategic advantage.

Using the best supplier collaboration tools around, and preferring seamless & automated transaction processing, these buying organizations can flip-a-switch to "onboard" new suppliers. Tremendous investment has been ploughed into technology, supplier "onboarding" capabilities and outsourced supplier networks to make this a reality today.

The change in behaviour brought about by Social Media enables the management of many more relationships. Sharing of supplier credentials becomes very practical if the joint knowledge of a large network of procurement professionals is pooled and accessible.

Leading-edge firms now cultivate new sources of supply all the time. They do it to stay on top of the latest trends in areas that connect directly to their businesses long-term success.

So, as you proceed with your supply base rationalisation program, think long and hard about the objectives for the categories under management. Should the category be whittled down to just a few suppliers? Or is this an area you should be expanding your supply base in – reaching out for new sources & taking the time to understand how the market may move in the coming years.

Procurement's Long Tail: Grow your supply base in key areas to produce strategic advantage. Think about it.