News focus: Procurement in SME catch-22

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7 December 2010 | Lindsay Clark

Purchasing is being encouraged to use more SME suppliers, but how does it achieve that while also reducing vendor numbers, asks Lindsay Clark.

They are the dark matter of the economy, the hidden mass that makes up the majority of business activity and the source of illusive innovation that firms need to move forward.

Small and medium-sized suppliers are very much in vogue as the UK government seeks to harness their potential to improve efficiency and boost growth in the economy.

Last month, in a bid to break away from government contracts being “the preserve of big business”, the Cabinet Office said it would work with departments to ensure 25 per cent of their procurement is directed to SMEs. Meanwhile, in business, the requirements of corporate social responsibility are encouraging buyers to use local, small firms in their supplier mix.

But herein lies a paradox. Procurement teams are also striving to slash their supplier base, hoping to push costs down by buying in greater volume from fewer vendors. By definition, SMEs could struggle to fulfil such orders.

Volvo Cars has joined Serco and Premier Foods in discussing a radical reduction to its supplier numbers. The carmaker plans to cut its vendors from 450 down to around 300.

Bernt Ejbyfeldt, Volvo’s senior vice‑president purchasing, says the surplus in suppliers is part of the firm’s legacy. It was owned by Ford and drew from the US firm’s supply base as well as its own. Now an independent company under Chinese ownership, Volvo sees efficiency in cutting suppliers.

“We don’t need as many suppliers today,” Ejbyfeldt says. “We have to make sure we have the right cost because the customer is not prepared to pay more for the car. There is a target to increase the turnover per supplier and to reduce product cost.”

Cost reduction targets vary depending on the category and the maturity of technology, he says.

But small suppliers stand a good chance of entering the Volvo supply chain if they have new technology that supports the firm’s core values, Ejbyfeldt says.

“We are working very hard to find the supplier base for the future, all the time looking for new suppliers with the right technology,” he says.

While SMEs can offer the innovation buyers crave in order to make a difference with their stakeholders, not all companies are as diligent as Volvo in ensuring they remain ahead in recruiting the best vendors, says Alan Day, managing director of procurement consultancy State of Flux.

“I think there’s always room for innovation, new ideas and people who are going to deliver something more nimbly. Part of our role is to look for these people, nurture them and develop them.

“Because stakeholders want deals done we tend to skip the market investigation and market intelligence area and go straight to a request for proposal,” says Day.

Mark Hughes, group procurement director at Premier Foods, has succeeded in reducing the firm’s suppliers by 11 per cent in the last quarter to about 7,000.

But reducing numbers was not the only objective, he says. “We are working with the best suppliers in each of our categories, be they small or large. They can grow their business with us and we can reinvest the financial benefits of that consolidation in growing our brands.”

The horses-for-courses approach is not lost on government. Speaking at London’s “Delivering more for less” conference last month, John Collington, head of procurement at the Cabinet Office’s Efficiency and Reform Group, said there would be “specific supply strategies” for the different categories in using SMEs. “Can we ensure 25 per cent of energy contracts go to SMEs? No.”

But he said that to balance this more than 25 per cent of work could be awarded to SMEs in other areas such as professional services for consultants.

Yet with Cabinet Office minster Francis Maude bemoaning the paucity of strong supplier data in government, it remains to be seen whether organisations will actually be able to identify these innovative small organisations.

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