For a More Agile Supply Chain, Consolidate and Diversify Your Supplier Base
Building an agile supply chain anchored in the United States is more important than ever. Many manufacturers have been trying to reduce their reliance on China as the fragility of their supply chain networks has been exposed. Initally this was due to tariffs and then in 2020 the COVID-19 pandemic.
In addition, factory lockdowns, political unrest, and even natural disasters are driving procurement professionals to reconsider their supply chain strategy and secure partnerships closer to home.
But even if your entire supply chain is already in the US, balancing supplier consolidation and supplier diversification can help maximize agility to provide lasting business benefits.
In this blog we explain the advantages of balancing supplier consolidation and diversification and provide tips for implementing these strategies to help build a more agile supply chain.
Before jumping in to how to balance the two strategies, we’ll discuss the advantages of each one.
Advantages Of Supplier Consolidation
Better Processes, Pricing, And Speed Time-to-Market
The Pareto Principle, or 80/20 rule, specifies that 80% of results come from 20% of the action. In many cases manufacturers that consolidate their spend into fewer suppliers generally have greater flexibility to leverage buying power.
Streamline Process and Procedures
Supplier consolidation can improve the agility of your internal team by reducing the number of contacts they work with. And, it can also reduce the number of processes and procedures they need to follow for requesting quotes and submitting purchase orders.
Though often considered a “soft” cost, tasking purchasing and engineering to create requests for quotes and prepare purchase orders can be expensive.
This process often involves taking time to separate parts by category like fasteners, MRO/consumables, and then plastics, metals. It could also involve organizing by manufacturing process type like injection molding, CNC machining, or rapid prototyping.
For example, consider an upcoming project that requires three competitive quotes:
- Company A requires quotes be submitted through a portal system
- Company B may require 2D drawings via email
- Company C requires CAD files and 2D drawings but only through their website’s generic sales email box
With this example, it’s easy to see how consolidating your supplier base reduces the number of contacts and streamlines processes to make your organization more efficient.
Reduce “Soft” Admin Costs
Administration costs are often overlooked when companies set cost savings goals for their team. Common tactics usually include asking vendors for price breaks based on quantities purchased, rebate programs based on annual spend, negotiating terms, or flat out asking for a cost reduction to improve the bottom line.
With fewer suppliers, a company could benefit from “soft” cost savings across multiple departments.
Processing fewer purchase orders saves time and money in a variety of ways. Less data entry, less emails being sent out, less time spent on the phone chasing down ship dates or clarifying order acknowledgements.
Supplier consolidation can help speed time-to-market. This advantage generally applies to small- and medium-sized companies that rely on their supply chain for full-service quality control on their parts.
Selecting a few trusted vendors can help control the process better, thus reducing rejected parts, failures in the field, and complaints from end customers who you depend on for brand growth.
Fast 5 Action Items: Supplier Consolidation For a More Agile Supply Chain
To get started, identify specific goals that you want to achieve. Then evaluate your supplier base against these expectations to help choose the right fit.
Here are 5 action items to help guide you through the consolidation process.
Consider all costs
Piece price is critical, as long as you don’t lose big in other areas. That’s why it’s important to consider all costs associated with adding or subtracting vendors from your supplier base.
- Logistics – Is the vendor located near your company? Will the difference in freight cost exceed the perceived cost savings?
- Process agility – Is production handled entirely in-house, or do they outsource secondary processes? How many touch points are required to complete the manufacturing process?
- Speed-to-market – What is the vendor’s track record for turnaround time? Will you save money on piece price but lose market share due to slow turnaround time?
With software programs that can slice and dice information a million ways, taking time to analyze your data in a meaningful way is extremely important for effective consolidation efforts.
Evaluate your current systems’ ability to track and measure the following.
- Quality control and vendor performance
- Key Performance Indicators including on-time delivery, communications, and feedback
- Records – Data such as number of purchase orders placed weekly, monthly, annually for a particular part or group of parts to a particular vendor
Scale production for greater flexibility
Partnering with suppliers who can quickly scale from prototyping runs to low volume or high-volume production can improve the agility of your supply chain.
- What is the vendor’s product development process?
- How quickly can they deliver prototypes?
- How fast are they able to transition from prototype to production?
Transition to a digital ecosystem
A digital ecosystem uses technology to connect your internal departments with customers, vendors, and external organizations to increase the flow of data. This improves data flow and helps drive your business.
- Does the vendor have digital manufacturing capabilities?
- Do you have compatible systems?
Organize supplier data into categories
For example, for parts consider:
- Material type
- Overall spend
- Secondary manufacturing processes
Advantages of Supplier Diversification
Drive Innovation, Identify New Revenue Streams, and Expand Market Share
Beyond the obvious benefits of improved resilience to disruptions, supplier diversification can help your business maintain the competitive edge in the marketplace. This can be accomplished by choosing suppliers that offer new areas of expertise as well as those that are owned by minorities.
Diversifying your vendor network can introduce Subject Matter Experts (SMEs) outside of your usual channels. This will provide you with access to different ideas, different experiences, and out-of-the-box thinking which could help you add new product features. And, leveraging their expertise, knowledge, and abilities can help you to advance your products and enter new markets.
Include diversity in your diversification strategy
Often, a diversification strategy can lead to partnerships with smaller companies who provide the advantage of being able to adapt more quickly to market changes and business fluctuations.
If your diversification strategy incorporates a corporate goal to increase diversity in your supply base, working with minority-, women-, and veteran-owned suppliers can open opportunities in growing minority markets.
A recent report from Michigan State University stated that “Diverse suppliers can be a cornerstone of any organization’s success, helping companies to ethically and efficiently source products and services while maintaining profits, growing customers, improving the economy and encouraging innovation. With forward-thinking supply chain management and a focus on strategic sourcing, companies and the diverse suppliers within their supply chains can increasingly benefit from going into business together.”
Fast 5 Action Items: Supplier Diversification
Executing a diversification program does not have to be an all or nothing proposition. Use these recommendations to help guide your selection process.
Identify supply chain risks to avoid
Start by identifying the specific supply chain risks you want to avoid. Then evaluate vendors to find the right ones for building a more resilient and agile supply chain.
- Tariffs and lockdowns
- Increased labor costs
- Regional and global disruptions
Implement in stages
Taking an incremental approach will be more cost- and time-efficient. It is often more difficult to diversify your supplier base with current projects in production.
Instead, apply the strategy to new projects. For a more seamless transition, determine whether the vendors’ SMEs can assist with the transition. Evaluate them for specific criteria including:
- Do they have an onboarding process?
- Can they get involved early?
- How can they drive innovation from the beginning?
How can vendors’ SMEs drive innovation? One of the key benefits to diversifying your supplier base is to leverage new areas of expertise to gain access to new markets. Evaluate SMEs to ensure they can help you drive innovation.
- Identify their core areas of expertise
- What opportunities can they expose you to?
- What is their process for penetrating new markets?
Consider suppliers whose own diversity can support your company’s goals to improve your corporate diversity. At the same time, these suppliers can improve your competitiveness in changing market demographics.
- What is their ownership status?
- Ask for a list of organizations they work with
- Identify opportunities they can help you achieve
Flexibility and agility
Look for suppliers that can provide flexibility and agility to quickly scale to meet changing market demands.
- Company size – smaller suppliers are often more nimble.
- Value-add – Look for suppliers that offer more than one service
- Logistics – Can they complete all services in-house?
The Right Balance Can Help Build A More Resilient and Agile Supply Chain
Strategies of consolidation and diversification are not necessarily opposing. Instead, it is possible to reduce the total number of suppliers while simultaneously diversifying your supply base. Before deciding how to proceed, determine your goals. Once you agree upon the objective, the strategies can be put in place.
Avoid analysis paralysis. Instead of tackling all programs and tens or hundreds of potential new suppliers, begin with a focus on new product programs and evaluate 3 or 4 new suppliers.
Remove legacy bias. Define a set of evaluation criteria which will benefit your business. Then evaluate your new supplier options and your legacy suppliers against the same criteria.
Be hyper critical when adding or subtracting vendors. Legacy suppliers don’t necessarily need to be cut loose. And new suppliers won’t necessarily help improve your business. Be critical when creating your evaluation criteria with the goal of benefiting the business.
Regardless of how you balance these strategies, remember the final objective is to build a resilient, agile supply chain that can help you maintain the competitive edge in any market condition.
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