Founder and CEO,
StrategicSource, Inc. and ExpenseEdge
If your organization is interested in cutting costs and getting your expenses in line, you may just be overlooking the biggest cash drain and time-wasting activities. Cost reductions – profit improvement initiatives are much more than buying the "widget" at the lowest cost. For example, if you buy 100 different kinds of widgets, do you really need 500, 1,000, or 4,500 suppliers to provide those widgets?
Examples of Dealer Inefficiency – Cash Drains
Below are just a few examples of inefficiencies we have seen
Category to Supplier Ratio
Optimal Supplier Base Ratio
Why does this happen? Management philosophies are the primary reason in my experience. Believing that allowing locations to select their suppliers is the more "collegial" management approach and preferential to telling them which suppliers to use. After all, they are running their dealerships and are profitable, so why mess with success?
Business Problems for Accounts Payable Departments
Accounts payables departments are notoriously understaffed. Yet they are burdened with many process tasks, maintaining suppliers in the system, having mounds of paperwork to work through, facing constant supplier payment deadlines, adding new suppliers to the system, and they're consistently responsible for protecting the organization against fraud.
Business Problems for those who Purchase – or Purchasing
The purchasing of supplies and services within a decentralized purchasing environment is challenging for those sourcing, managing, and paying the suppliers. Sourcing effectively is not a simple task; it involves 80+ hours if done correctly and effectively. If departments or various locations have the freedom to select their own suppliers, ignoring preferred solutions
This approach mitigates the impact of well-sourced, negotiated supply and service programs.
Common Problems to Both Payables and Purchasing Personnel -
Organizations have to source suppliers to operate. Effective sourcing requires sourcing suppliers, vetting, quoting, negotiation, management, audit, and payment – tasks typically performed by operations, office staff, purchasing, and accounts payables. The more suppliers utilized, the more the following will occur:
Net, net suppliers are imperative to support your business. The right amount – the optimal amount of suppliers can be managed by an optimal expense category approach. Excessive amounts of suppliers can result in the following:
Dealership & Supplier Base Metrics
Think about the following data points in your organization:
A Solution Within Your Control
With an understanding of the labor shortages going on today and time wasted due to a large supplier base, with the knowledge of the different processes involved in carrying more suppliers than are necessary, and an appreciation of the additional costs incurred, leverage & discounts lost, and confusion created, it should be clear to the executive team what they must do. Large supplier bases should be surgically trimmed at once. Poor management, as well as oversight, is not only costly to your organization, draining your profitability, but it is increasing your financial risk as well.
Solution - How to Execute Preferred Supplier Strategy - Supply Base Reduction
The solution to wasteful spending is strategic and pretty simple. Imagine that you designated a "Preferred Supplier" in each of the 100 expense categories you spend money in annually. Then, to protect the supply chain and the organization, you designate a "backup" supplier in each category. Not all expense categories need a backup supplier; many should be single-sourced. Some categories require an exception. Auto parts, for instance, towing, but the exceptions are rare and are few. Soon, your supply base could be 150 – 200 suppliers in total instead of 500 to 1000. The benefits of a Preferred Supplier strategy are as follows:
Benefits of a Preferred Supplier Strategy
A Preferred Supplier strategy will yield the following benefits
to your organization:
Moving to a Preferred Supplier Network
Decentralized purchasing has limited benefits. It allows teams to select their own suppliers and may even empower them. However, those that want to spend their time shopping for the cheapest post-it notes today can make a career out of shopping – and you will find that their time costs more than the benefits you receive. The downside of decentralized purchasing is well documented and pervasive, including thousands of wasted working hours duplicating sourcing efforts, managing too many suppliers, paying too many invoices, and paying prices too high. Moving to a Preferred Supplier strategy will reduce supplier counts, improve leverage, reduce pricing, increase discounts, and simplify the business while reducing risk.
Prudent management teams will be better off looking upstream at your supplier base. And fixing that now is the strategic play. Then when the supply base is "fixed" or "optimized," you should go tactical and focus on price, inventory, business terms, and service levels with suppliers, and select the best one that meets your needs and lock in your pricing so that you are not always in "shopping mode."
You can achieve this if you are serious about reducing cost and waste and managing more effectively. You now have the recipe – the rest is up to you and your team. Good luck in 2023.
If you would like a tool to help map your supplier base and begin establishing your Preferred Supplier network, shoot me an email. I will be happy to provide that to you.
Doug Austin is the founder and CEO of StrategicSource, Inc. and ExpenseEdge, the leading provider of spend management services (strategy, spend mapping, sourcing, process improvement, and audit) for the automotive, manufacturing, hospitality, professional services, education industries, and more. Doug is a veteran of the U.S. Marine Corps, a graduate of the University of St. Thomas, and a trainer, speaker, consultant, and business owner. He has 40+ years of line, staff, and executive experience in spend management and supply chain management in various vertical markets.r.