The Trend towards Vendor Consolidation Part II

SSON News and Analysis
Posted: 07/09/2012

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).

View Part I of this series

The need for a "fall-back position" invokes one of the most pressing questions confronting procurement professionals faced with the need (or, at least, the instruction) to consolidate their vendor portfolios: minimizing disruption to their own organizations. After all, it’s pointless achieving x per cent cost savings through reducing vendor numbers if one of the consequences is a breakdown of the supply chain and a consequent collapse in production - the archetypal "throwing the baby out with the bathwater".

Agreement appears - thankfully - more or less unanimous that regardless of the other questions hanging over vendor consolidation, if an organization is determined to pursue that course it needs to be done sensibly, carefully and, indeed, compassionately: not only will there undoubtedly arise internal difficulties ("everyone likes their supplier and doesn’t want to change," as Dan Hunt says) but the consequences for those vendors who don’t make the cut could be catastrophic.

Top priority, of course, is keeping the impact on the wider organization down to a minimum.

"Do not go into this thinking it is easy," cautions Robert Dixon: "It never is as this is one of the most emotional activities a procurement organization will undertake. Understand the Current State and describe the Future State of the supply base. It needs to be a data-driven exercise. The organization needs to be able to describe what the supply base performance must be and what it currently is by supplier. Consideration needs to be given to the needs of Engineering and New Products. Finally, what improvement requirements is the company getting from its own customer and how can a reconfigured supply base support those requirements?"

"One of the first steps in the rationalization process is to categorize the existing suppliers into appropriate categories (ex. critical, strategic, approved, etc) to develop a solid understanding of what suppliers are essential to running the business," confirms Claudine Paccio. "Keeping in mind that companies are entering into these rationalization efforts because they recognize that having too many vendors is both inefficient and costly, it's critical to ensure that the resultant vendor base can sufficiently meet the supply demands necessary to support your business."

Christina Langley urges procurement organizations to focus on the change management aspects of any consolidation program to minimize the damage to the procurement function itself.

"When moving business, procurement teams and stakeholder groups face considerable risks of lack of supply, being put 'last' by the existing suppliers and the danger that they will suffer critical service reductions despite making good commercial decisions over the change," she cautions. "Good teams have a very planned approach to the changes, usually appoint a key sponsor and project manager for major changes and seek to communicate and manage SLAs and KPIs closely for existing and new suppliers. The key issues around whether vendor compression as a trend is for the good or not should be examined carefully by category area, specific company and its situation. A well-rounded, thought-through business case should be put together through a detailed source plan for each aspect of spend - this should be promulgated throughout key stakeholder groups and a consensus arrived upon for the way forward."

Strategic sourcing and procurement consultant Ellen Lasser agrees: "The three best ways to reduce disruption are communication, communication, communication. The more the company understands why vendors are being reduced, the more they understand the benefits (lower costs, better quality and service), the more likely they will be to participate."

Meanwhile, Dan Hunt highlights the importance of leveraging the vendors themselves in order to make life as easy as possible for the procurement team.

"If you plan to consolidate to one provider for widely-used products or services - let's say office supplies, for example - then make the winning provider help you communicate to your users, make them responsible for troubleshooting, training, coordination, etc. After all, they're the ones who stand to make more money in this initiative. Leverage the vendor as much as you can - with one caveat: ALWAYS remain engaged so that you can judge their effectiveness and efficiency, and head off any misconceptions or misunderstandings among your users. Sometimes the vendors get over-eager, too, and overstep the bounds of the particular engagement. You don't want the office supply people to tell your users that they also are the primary provider of computer equipment if you've designated a different provider for that."

For those very vendors, of course, the issue of vendor consolidation is an altogether more perilous concern: the cuts which large organizations are looking to implement could make the difference between commercial life and death for the vendors themselves. After all, while a large organization will deal with a great number of different vendors (hence the need to consolidate in the first place) for some of those vendors the organization in question may be the primary or even only client, and losing such contracts could instantly drive said vendors into oblivion.

So what can those vendors do to ensure they make it through the consolidation process? Of course, a great deal will be out of the vendors’ hands: even with attention paid to Ellen Lasser’s mantra of "communication, communication, communication" and with the greatest respect paid to existing vendors, the buying organization can’t be expected to work with every vendor to ensure they remain on the "yes" list: that would defeat the point of the rationalization program. However, certain things can and should be done to at least maximize the vendor’s commercial advantages and improve their chances of making it through to the final list of approved partners.

First and foremost, says Robert Dixon, "be proactive": "Do not stick your head in the sand like an ostrich... Discuss with your customers how you can help them, make sure they know you recognize the need for improvement and describe what your company is doing to improve. Understand what your customers’ business goals are and discuss how you might support those goals. A company would be crazy to get rid of a supplier that was behaving in a way that supports their business goals."

"Don't wait for your customers to come to you, go to them and make a pitch for getting more (or all) of their business," agrees Dan Hunt. "If you don't have a mechanism to measure your impact and efficiency - your own vendor scorecard, if you will - then develop one and implement it. Send useful information to your customers without them asking for it - spend data sliced and diced in ways that are meaningful - as well as discount offers, helpful tips on how to save money by using their products more efficiently, general newsletters about your industry and how it's dealing with the economy, examples of savings you've been able to offer other customers and why, etc., etc. An important part of the sales process today is to make it abundantly clear WHAT differentiates you from your competition. Even if your customers aren't rationalizing their vendor base, efforts along these lines will pay off handsomely in increased respect, value and goodwill."

"Vendors trying to influence buyers who may be considering rationaliZing their database should do what good sales directors always have done," says Christina Langley. "Examination of their USPs, comparison of costs/cost drivers, technology/service roadmaps and market sector strategy should come into play of course, as should the communication of these to key buyers and stakeholders in the target companies."

Steve Adolt recommends vendors to "demonstrate what they've done in the past and what they will continue to do in the future as value-added".

"If they perceive their customer is only viewing their company as a ‘commodity’ and that's the way the supplier wants to be viewed, then provide cost reductions," Adolt continues. "If the supplier is strategic and has a different view on what their value added proposition is, they need to seriously consider what company(s) they are going to partner with to survive today's economic crisis and position themselves to be stronger when the economy comes back. And some of this process should involve walking away from business that will not appropriately position them for success. It's a hard decision, and inevitably will separate the premier suppliers from the less than desirable ones."

Finally, Tony Noe concludes that in the end it’s good old-fashioned quality which will be the determining factor for vendors facing sink-or-swim challenges: "Their actions have already spoken for them. Their quality should be to spec, their delivery should be on-time: those make them a potential as a 'survivor' and not get voted off the island."

View Part I of this series

SSON News and Analysis
Posted: 07/09/2012

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