Jon W. Hansen on trends towards vendor consolidation

SSON recently published a two-part article entitled The Trend Towards Vendor Consolidation examining the developing tendency among large-scale organizations towards reducing the number of vendors with whom their procurement departments have to deal. That article was prompted by a debate - still ongoing - between analysts and commentators regarding the rights and wrongs of specific instances of this trend.

One of the foremost commentators involved in this debate is Jon W. Hansen, author of the industry-leading Procurement Insights blog (syndicated to over 300,000 subscribers worldwide). Following publication of the aforementioned article, SSON spoke with Hansen - also a renowned speaker and host of the highly acclaimed PI Window on Business Show on Blog Talk Radio (BTR) - to get more detail on his take on vendor consolidation, the drivers behind it, and how far he believes the trend can continue.

SSON: Jon, in a recent Procurement Insights blog post you questioned the rationale behind Procter & Gamble’s move "to reduce the number of production companies with whom it’s brand agencies can deal from a current 125 to 30 through what they are referring to as a ‘preferred vendor’ status." Firstly can you please explain your concerns with regards to this specific move?

Jon Hansen: The principles or intent behind the misaligned or "broad" application of vendor rationalization strategies rarely accomplish sustainable results, and in fact in many instances irreversibly damage an organization's supply base.

This point was further illustrated by a subsequent post to the P&G article to which you had referred titled "Today’s PI Window on Business Show on Contracting Challenges Drives Home the Lessons That GM Has Learned the Hard Way!" Specifically my reference to the conclusions presented by ADR’s North America’s CEO Bill Michel that "the view that suppliers are a source of incremental profitability rather than an extension of manufacturing capability is a gross miscalculation."

The premise that is at the heart of the P&G strategy echoes the same "hard line" mindset that has crippled the GM supply chain, as well as the majority of other organizations who have introduced a rationalization program with an expectation that it will somehow result in reduced administrative costs, increased savings relative to volume discounts and a more focused or finely tuned supply base.

In reality, rationalization has in the majority of instances driven away high caliber suppliers, whose view of the onerous process relative to selection and the terms associated with "winning" a spot on the preferred roster pales in comparison to pursuing other more collaborative relationships in which a win-win outcome is at the center of the engagement strategy.

You merely have to look at the GM situation in which Michel indicates that the company’s "former" (the key word here is former) VP of Procurement and Supply Chain Bo Andersson’s "focus on price reduction, low cost country sourcing and extension of terms" has led to the "collapse of the domestic automotive supply industry."

Other supposed "bastions" of effective supplier engagement like Wal-Mart (think Vlassic Pickles) and the Federal Government of Canada’s (GoC) insistence on pursuing an exclusionary shared services strategy has or is producing a similar result. In the case of Wal-Mart, the problem has not yet manifested itself to the same degree of a GM or GoC; however it is just a matter of time.

SSON: Looking more generally at the bigger picture, do you see the current trend towards "vendor compression or rationalization", as you put it, as a pronounced negative at this time? Surely firms struggling to maintain a healthy P&L need this kind of leeway during the ongoing economic troubles?

JH: To begin, and while the practice of vendor rationalization (as well as transaction rationalization or reduction) is still being presented in some mainstream circles, the trend to which you are referring is beginning to move in the opposite direction.

The reason that the practice still persists is that its roots in traditional ERP or IT-centric initiatives was not based on operational efficiency but instead on technological limitations. These limitations, which no longer exist with emerging SaaS solutions that now offer the streamlined capacity to reliably engage an unlimited number of suppliers, caused companies to modify their practices to be compliant with what can only be referred to as static, finance driven applications.

In reality there is very little evidence to truly support the sustainable "results" associated with rationalizing one’s supply base. As alluded to earlier, and to the contrary, research shows that by relying upon a narrowing funnel of data associated with a decreased or diminished supply base, company’s end up with severely restricted market intelligence thereby creating a "false" performance metrics. The consequences of inaccurate metrics can be found in examples that include the Canadian Department on National Defence, who consistently paid a premium of 157 percent above market price for MRO goods, or a US-based retail giant’s 23 percent delta due to their IT related rationalization program.

SSON: What would be your advice to procurement professionals looking to avoid such vendor compression but at the same time faced with the need to find real savings, fast - can you share with us any quick wins (or, indeed, any longer-term wins)?

JH: The GM example shows that there is no such thing as a "quick win" in terms of achieving sustainable value. In fact the "quick win" mindset demonstrated by executives such as Andersson, whom Michel indicated might have achieved a "short term win for GM," but ultimately resulted in "long term supply chain problems and risk," indicates a lack of leadership and vision.

Supplier development and engagement is not a one time, short term - swing for the fences action, but instead calls for a purposeful and balanced approach that lays the foundation for a dynamic and adaptable supply base that delivers consistent results. In essence, and as described in his book Good to Great, supplier development and engagement is best served by what Jim Collins referred to as the Fly Wheel approach.

With the Fly Wheel, decisions are made based upon real intelligence versus unreasonable performance imperatives that fail take into account all the elements of achieving results both in the here and now as well as in the mid- to long-range future.

Unfortunately, the majority of vendor rationalization strategies are more in line with Collins’ Doom Loop approach, where decisions are usually made with minimal insight and even less input from key stakeholders.

SSON: If vendor compression is genuinely unavoidable, what steps can organizations take to minimize the disruption to existing operations during the rationalization process?

JH: If members of your executive or management team are of the opinion that a misaligned or broadly applied vendor rationalization strategy is unavoidable, follow GM’s lead and change your management! The former auto giant certainly has its work cut out for it in many, many areas, but at least in terms of supplier engagement they now appear to be heading in the right direction.

A self-serving, limited vision based on the mirage of quick gains through any strategy, not just the rationalization of the vendor base, will ultimately cut a large swath of damage that will put the company in a worse position that it was prior to pursuing it.

SSON: Do you see the compression/rationalization trend as resulting directly from a worsening economic environment globally or would the trend be manifesting itself even if we were still operating in comparative boom-type conditions? And if the latter, how long do you think we will see this trend continuing?

JH: As previously indicated, vendor (and transactional) rationalization has more to do with limited technological capability and a lack of executive leadership versus true operational imperatives. While the economy can and will exacerbate the cracks within any organization, it is not the main impetus behind its practice.

The influencing trends associated with rationalization are more generational than they are practical, and are a reflection of factors such as outdated association curriculum that continue to view purchasing as a functional adjunct versus a true strategic component of an enterprise. Based on this observation, changes relative to various strategies (including rationalization) will occur as newer and more progressively oriented professionals move into the field. In short, external factors such as the economy or globalization are merely the enhanced lens through which program effectiveness (or ineffectiveness) is viewed.