Business & Technology Nexus

Dave Stephens on technology and business trends

Procurement’s “Long Tail” – Supplier Programs

with 8 comments

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 (see my previous post), 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.

These leading-edge firms 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. They are the ones in search of blue ocean strategies.

So, as you proceed with your supply base rationalization 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.

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Written by Dave Stephens

04/7/06 7:37 AM at 7:37 am

Posted in Opinion

8 Responses

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  1. Terrific post! Is the length of the tail the defining feature of the strategic advantage or is it the buyer’s ability to wag it (By “wag it” I am referring to a buyer’s ability to extract strategic innovation from their suppliers). Should companies prefer to gain competitive advantage from bringing new suppliers into their fold or should they prefer to work with existing suppliers to develop new, tailored offerings? I’d suggest their preference should be driven by a weighing of the risks inherent in bringing on a new supplier vs. the risk of moving with an existing supplier into a new offering. But it’s critical that it one or the other occurs.

    hudgeon

    04/7/06 2:19 PM at 2:19 pm

  2. I’ve seen Cisco, Amazon.com, and a number of other firms cultivate new sources of supply precisely because they felt they could tap into their unique innovations. Could you do the same through partnership with long-standing suppliers (who are often larger companies)? Sure you can. But whether they’ll have the creativity (in product design, in business practices, etc) to move you forward is an open question.

    Dave Stephens

    04/7/06 3:12 PM at 3:12 pm

  3. […] Dave Stephens has some great commentary on the role of the supplier in strategic execution. […]

  4. I completely agree with Dave Stephens. Here is one more reason why I think the big companies need to look for new suppliers all the time. For the very same reason these big companies acquire smaller ones.

    AnonymousCoward

    04/7/06 8:17 PM at 8:17 pm

  5. […] Firstly, the Vendor Manager must establish clear aspirational goals for the supplier relationship. Once they have established the goals and tied remuneration to the goals, the environment is set for a flexible relationship that can change with the times. If the parties are focused on the aspirational goals, they are more likely to be flexible [1] [2] [3] and to demonstrate innovation. […]

  6. This is an interesting but non conventional view. Dell is known for its low R&D/Sales ratio. It rides on R&D spending by its competitors and suppliers. With SRM and contract management applications, buyers can bring down supplier management costs and afford to expand supplier base. I wish some one come up with a framework for deciding when to select a new niche supplier or expand the relationship with existing supplier.

    This somewhat resembles the discussion on strategic supplier vs arms length supplier.

    Senthil Nathan

    04/17/06 3:42 AM at 3:42 am

  7. Strategic supplier segmentation, a comparision of supplier relationship in US, Korea and Japan

    What kind of relationship with supplier is best? Recently we have seen a lot of discussion about collaboration and supplier relationship. Here is a summary of recommendation from Professors from University of Pennsylvania and Seoul National Universi

  8. […] I couldn’t come up with a quick answer on how to compute the cost of adding a new supplier to your supply base. And I’m pretty sure it can’t be condensed into a formula. But all the same, let’s explore the topic some. If you’ll remember I wrote previously about the strategic advantage a company could gain by increasing its supply base in key areas. Perhaps now I can touch on what tools are required to maximize supplier efficiency to make that vision practical. […]


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