There is a brewing conflict in the world of Procurement – firms are aggressively pursuing Vendor Diversification while the same time, they are unable to manage most of their incumbent vendors, according to a recent Deloitte survey.
Majority of firms – at least 75% based on Deloitte’s survey – are actively expanding or maintaining their supplier base at status-quo. At the same time, at least 50% of firms have poor visibility into their largest suppliers (e.g. Tier 1 suppliers) and most have virtually no visibility into the remaining base, which typically account for 90%+ of all suppliers and at least 50% of the total vendor spending.
As companies continue and expand their Supplier Diversification initiatives, most of the new suppliers are likely to enjoy a relatively small wallet-share from the buying firms, thereby placing them square into Tier 2+ supplier categories. As such, the number of suppliers in Tier 2+ category will continue to increase, further deteriorating the supplier visibility challenge.
Just Because You Can, Does Not Mean You Should
Yes, it is possible to substantially expand supplier base. Yes, there is potential value that can be generated through Supplier Diversification. But … these actions must be considered, and they should be performed with specific goals. Doing something for the sake of doing something has typically resulted in deep disappointment and increased complexity when firms finally resolve to address the self-inflicted challenges.
You Cannot Improve What You Cannot Measure
The growing approved supplier base and decreasing supplier visibility will further deteriorate what is already a bleak performance of most Strategic Sourcing teams. As I have written before (here, here, and here), most Procurement teams are lucky to generate 1%-3% cost reduction. In fact, most firms generate no Strategic Sourcing bottom-line results, as Vendor Spending is increasing as fast, or faster, than Revenue growth.
The current direction only exacerbates the challenge faced by most Procurement teams, including the challenge to reduce vendor costs, increase efficiency, improve vendor risk management, and reduce operational busy work to improve employee retention & morale.
Shortcuts Do Not Work
A surprise to no one, shortcuts will not resolve this challenge. The promise of “black box” automation – including AI and ML like solutions – are conceptually interesting but operationally premature, at least for Procurement and Strategic Sourcing. For most, deploying these tools into operations at scale is at least 3 – 5 years away (and tens of millions of dollars of investment for experimentation). Further, all such solutions require clean data – which most organizations lack.
A similar challenge faces those relying on Tail Spend solutions. I have written about the fool’s gold that is Tail Spend sourcing in the past, this approach only adds to the problem by masking the operational, financial and risk challenges.
The Path Forward
The path forward below is premised on the key objectives of better operational efficiency, controlled vendor risk, and staff unburdened with busy work.
First: cease adding more suppliers just because you can
Second: create spend and supplier transparency based on insights achieved from robust Spend Analytics
Third: engage business stakeholders to optimize “raw materials” purchasing, while improving quality of service and right-sizing preferred vendor universe
Fourth: manage performance with proactive reporting, gap analysis and corrective action plan focused on both business users and vendors