What’s the magic number?

24 May 2011
Large cuts to the supplier base make headline news. In November last year, support services and construction company Carillion announced that it was cutting its supplier base from 25,000 companies to just 5,000. In February this year, Balfour Beatty’s construction services UK division set out its plans to reduce the number of suppliers it uses from 27,000 to 10,000. Initiatives along these lines are met with great enthusiasm in the City as expectations rise for significant cost savings. For Carillion the slimming of the supply base is part of a drive to save £140 million a year by 2013. Such radical rationalisation of the supply base sends shock waves down the supply chain – and perhaps that is the intention. Keener pricing on contracts is achieved through a combination of a desire on the part of the supplier to retain business and the opportunity to discount on larger-scale contracts. A smaller supply base also allows for closer collaboration between supplier and buyer, with all the potential for efficiency gains this affords. But what is the impact on an organisation’s exposure to supplier risk? Does increasing your dependency on a smaller group of suppliers work for or against your long-term aims? And, if the strategy is sound, how do you go about reducing supplier numbers? In many respects, it is easier to manage supply chain risk when you have fewer suppliers. A clear focus can be applied to a more refined list, risk analysis is easier to conduct and closer checks can be carried out to verify data on higher risk suppliers. Costs for managing a smaller supplier base should also be lower as there are fewer reviews and audits to conduct. However, for many corporates the large number of suppliers they have on their database may be misleading. There can be duplicated records, with the same supplier being entered onto the database several times due to misspellings or inaccuracies in address details. Removing duplication, errors and one-time purchases can see supplier lists reduced by 50 per cent. The problem is, most companies do not allocate the necessary resources to maintaining and updating their supplier information. Further issues arise when people raise purchase orders in a rush and so assign a purchase to an inappropriate category. A spend analysis then produces an incomplete picture. If organisations are to make important decisions on their supply base they need to address these issues by centralising supplier information and introducing processes that create consistency of data across the entire enterprise. Only by having complete visibility of your supply base can supplier numbers be rationalised and risks properly assessed and mitigated. ☛ Carl Millington is director of utilities at Achilles
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