The Trend Towards Vendor Consolidation
About a fortnight ago, an interesting - and increasingly far-reaching - debate began to make waves through the blogosphere and other channels following a report highlighting a decision by Procter & Gamble to "create a shortlist of production companies its brand agencies must work with, cutting the number from last year’s total of around 125 down to a list closer to 30" (www.creativity-online.com).
Reaction to the story has been fierce from all sides, with some voices raised in outrage (with leading procurement blogger Jon Hansen writing on his Procurement Insights: "It never ceases to amaze me how the bigger companies lack the creative insight to look beyond the old standby of vendor compression or rationalization as a means of driving procurement savings") while others leapt to the defense of P&G in the face of outdated and self-aggrandizing practices on Madison Avenue (typified by the MultiCult Classics blog’s comments that "perhaps these measures would not be necessary if advertising agency dinosaurs didn’t consistently insist on hiring A-level directors for lame talking-head commercials—while staying at 5-star hotels and maxing per diems like corporate CEOs on crack").
The specifics of this particular story are not in themselves worthy of a great deal of focus here. But what is indeed of great interest to the shared services and outsourcing community - and in particular that element thereof concerned with procurement practices - is the trend represented by P&G’s apparent move towards cutting provider numbers: the move, on a global level, towards vendor consolidation among large-scale organizations.
That there is such a trend appears in little doubt. While firm figures on vendor numbers are impossible to obtain on a global level, anecdotally it seems telling that not a single person contacted for input into this article disagreed that there was a trend towards vendor rationalization, with many believing that the process is actually accelerating.
For instance, global sourcing executive Robert Dixon believes that "the trend is continuing… There are multiple reasons for this; among those reasons are performance improvement of the supply base and internal organization. First, the more suppliers a company or organization has, the more internal resources are required to manage those suppliers. Second, during the down cycle, it gives companies opportunities to eliminate suppliers who are not performing. This could be for cost, quality, delivery or flexibility reasons. But the time to reduce suppliers is during a down cycle, not during an up cycle when the resources are focused on getting material."
Dan Hunt, IT procurement director for a financial services company, agrees: "Vendor rationalization and consolidation are becoming a daily discussion topic, even though we've already done quite a bit of consolidation. The impact is not insignificant; it can be a time-consuming task to consolidate spend, often fraught with emotional issues for your end users (everyone likes their supplier and doesn’t want to change)."
Interestingly, the view from those at the center of the trend is echoed by those looking inwards from a less embedded perspective. Christina Langley, MD of procurement-focused recruiters Langley Search & Selection, says that the topic of vendor consolidation is arising increasingly frequently during her organization’s conversations with big companies.
"In this space," Langley comments, "through talking to candidates and clients, we find there is a trend towards vendor rationalization which is driven by trying to minimize the cost of doing business with multiple suppliers, consolidate spend to drive cost reductions through volume price reductions and in some cases wanting to build better long-term partnerships with a more limited number of suppliers to enable competitive advantage (either technological, cost down or service driven). In some cases procurement is now influencing areas of spend that they have not before - e.g. marketing, legal and other professional services areas - hence this process is just part of implementing a cohesive strategy for these areas."
So there does appear to be a consensus that firms are looking to reduce the number of vendors with whom they need to interact. However, significantly - and fascinatingly - there is a much smaller degree of consensus around precisely why this is taking place, with many commentators unwilling to attribute too much responsibility to the recent global slowdown (which has become such a convenient scapegoat in so many other areas). While the pressures of the recession are, of course, having an impact, many people view other factors as contributing hugely to the trend.
Claudine Paccio, President, The Sourcing Authority, is one who highlights the consequences of the downturn: "Growing revenue in the current economy has proven to be a significant challenge, as a result, companies have turned their focus toward cost savings initiatives. There are consistently two main areas of focus that we see companies addressing in order to get their cost savings efforts started -- spend analysis and supplier rationalization."
Dan Hunt echoes these sentiments: "From what I hear, the ONLY driver is cost savings. The economic slowdown may not have started this effort, but it certainly accelerated the need to realize savings, and has driven the willingness to consolidate where it didn't exist before."
However, Umesh Bordivekar of Pionnier Supply Chain Services takes a different view.
"In my opinion, reducing procurement costs is the primary driver behind this trend." says Bordivekar. "This cost can be reduced in two ways, namely, renegotiating contracts with the new supply base and reduction in the transaction costs due to fewer suppliers. I do not think the global economic slowdown is responsible for this. This is mainly because vendor consolidation is an approach for gaining long term benefits and creating strategic relationships with suppliers, while the global slowdown is a short term effect. Apart from financial stability, other metrics like R&D capabilities, production capacity, customer diversity, etc. are equally important while consolidating vendors. Though the slowdown is a good time to rethink vendor consolidation efforts, the consolidation should not be a reaction to the crisis."
Meanwhile supply chain consultant Tony Noe believes that the current trend towards fewer vendors results from "a recognition of the need to utilize the spend analysis to help bring volume pressure to bear on our supplier base."
"That analysis also tends to point to too many suppliers for a scarce volume of purchases. The global economics have a direct effect driving the activity, but once learned and the results are seen it will continue," Noe adds.
The fact is, of course, that in tough operating conditions the pressure from all sides on every aspect of a business to achieve savings can be overwhelming; regardless of the debate over the precise causes of the trend towards vendor consolidation it’s pretty obvious that the global economic slowdown is at the very least contributing to the process via the pressing need to cut procurement costs. The problem is that opinion seems also to be divided as to whether or not this makes sense in either the short or long terms. Remember that the report on P&G’s own consolidation moves kicked off a stormy debate precisely because there was no clear consensus on whether or not this was the right thing to do for the reasons attributed by those participating in the debate (many, it must be said, with little or no knowledge of the exact sequence of causes and events which led to the move in the first place).
Supply management professional Steve Adolt highlights one of the major issues at play: the trade-off between short-term and long-term benefits to organizations considering vendor rationalization.
"Strategic sourcing coupled with good supplier management has always proven to be an excellent way to reduce and control costs," Adolt says. "Cutting off or reducing suppliers unilaterally and beating the remaining ones up to reduce costs will provide limited short-term gains. If companies are in this for the long haul - and, strategically, they should be - the keys to a successful and strong supply chain are the strength and development of the relationship(s) between the company and their suppliers. The best way to bring this to the table on a regular basis is to formalize the relationship (contract) and then challenge the relationship to get better. Companies that fail to do this now, or have failed to do it in the past, will be the economic losers when the economy comes back. Being a ‘preferred customer’ in today's market will almost guarantee being a ‘preferred customer’ when the market comes back. And who will suppliers remember? The companies that stood by them and that they stood by during these unstable economic times."
Claudine Paccio looks upon vendor rationalization as something unavoidable but which must be handled carefully and with common sense: "I think it is a necessary exercise – but again, there needs to be controls in place to guarantee that the resultant supply base can meet the needs of the business. In addition, the initiative should address the vendor 'onboarding' process to protect against bringing on new vendors for products and services that could be procured from the existing supply base."
While making plain his view that "consolidation, where it generates economic benefit, is a logical and sensible response to today's conditions," Dan Hunt maintains that the trend towards consolidation can prove "a tremendous opportunity for smaller providers to make a name for themselves and grow, and potentially a challenge to the larger players who may not be a nimble as they need to be to react to their customers' needs."
Hunt continues: "There's a hundred sides to this question, which is to say that there's no easy answers. I have found that consolidation CAN lead to excellent savings, especially when what you're buying is not a commodity (let's face it, you can easily do reverse auctions and RFPs for things like standard office supplies or basic raw materials). But economies of scale do apply, especially if your provider is not a large company, or if what you're buying is huge quantities of something. But, it also can easily lead to complacency; the ‘chosen’ vendor begins to think they've got a lifetime gig and starts to lose their competitive edge. You can combat this by routinely reviewing your vendors, keeping vendor scorecards, and using contracts to govern the relationship. Every time the contract expires, the vendor is subject to a new RFP and must re-win your business. Another perspective is that you lose the ability to move quickly if there's a problem. For this reason, I always keep the lines of communication open with a couple alternate providers, maybe send them a bone now and then, so that if something happens to my primary provider, I have a fall-back position."