As businesses expand their supply base size, the resources required to support supplier visits, RFQs, and development tends to expand proportionally. Because most businesses spend 80 percent of their COGS with 20 percent of their suppliers it is critical to free up time to foster deep relationships with top supply partners. Further, each supplier interaction has an associated transaction cost, and supply disruption challenges at most companies are tied to suppliers performing in the bottom 10%. Thus, optimizing your supply base is a necessary means of ongoing continuous improvement for realizing a lean supply chain.
We subscribe to a continuous improvement mindset akin to gardening your supply base, by utilizing a Supply Performance Framework to maintain a healthy number of supply partners for each spending category. By first rationalizing, then optimizing your supply base, you can have a dramatic positive effect on your supply performance.
The ongoing state of change that most businesses undergo complicates the seemingly simple task of maintaining an appropriate number of suppliers. In addition, seismic shifts, company acquisitions and mergers, and new product launches obscure ongoing supply rationalization efforts, undermining supply performance.
Suppliers who have marginal performance (i.e. lackluster quality scores, poor on-time delivery, and high costs) present ongoing risks to the supply chain. The daily practice of “putting out fires” that many supply chain professionals endure poses a challenge to the supplier rationalization process. Decentralized procurement organizations, internal company politics, and disparate organizations can also further complicate the cross-functional team coalescence needed to swiftly rationalize a supply base.
Many companies make the tactical mistake of diving in too quickly, intending to make immediate performance progress by first working to develop their suppliers all at once, only to get overwhelmed. Lasting change involves a shift in cultural and procedural mindset, so strategies must be institutionalized to generate long-term results.
What is Supply Base Optimization?
Sustainable supply base optimization starts with rationalization, a strategic initiative, and supporting processes to initially reduce static or limited-use suppliers; moving beyond simply reducing the number of suppliers and spending more time with fewer suppliers to reduce costs. It then requires critical lean supply chain methods and tools to systematically optimize the supply base size, which is dependent upon supplier performance.
Ensuring that supply bases are comprised of capable supply partners and persist at manageable sizes is essential for supply chain operations to effectively manage supplier performance. Lean supply chain concepts mandate a more intimate partnership with supply partners and, thus, companies must consolidate buy with partners to be able to focus on system-wide waste reduction.
When leveraged as part of a Supplier Development Program, supply base optimization can dramatically speed up the implementation and improve the performance of lean supply chain initiatives.
Step 1) Analyze Supplier Spend, Capabilities, & Performance
First, outline why you desire to optimize your supply base; performance? leverage? cost reduction? Then, define success quantitatively; i.e. 250 total suppliers, two preferred supply partners for each spend category, 3.4 issues per million. Documenting desired future states will help visualize and realize success. Several approaches are available to determine the right suppliers to consolidate, including: arbitrary reduction, reduction in total number of suppliers by a percent or number, top spend approach, and eliminating the bottom performing suppliers.
Conduct a spend analysis by pulling a list of the following for each supplier: total annual spend, spend by quarter for the past four quarters, spend by category, last PO issue date, supplier plant address, current inventory, monthly usage, lead time, payment terms, and supply performance ratings.
Segment suppliers by performance utilizing ABC Analysis: A – high performing suppliers, B – suppliers falling short of performance goals, and C – suppliers incapable of meeting current and future performance goals.
Segment suppliers by relationship utilizing ABC Analysis: A – strategic partnership/sole source, B – business, and C – commodity.
Highlight supply rationalization opportunities, suppliers not purchased from in over a year, suppliers representing less than 5% of total buy, selling commodities purchased from three or more suppliers within the past year, and suppliers with poor performance.
Step 2) Create Project, Transition, & Communication Plan
The strategic nature of rationalization and optimization initiatives requires internal leadership signoff and support. Develop a robust supply transition plan consisting of budget, timeline, and cross-functional sign off by spend category. Outline a communication plan to ensure parties understand appropriate internal and external communication. Attain written commitment that consolidated new supply partners will become part of Lean Supplier Development Program. Consolidate spend to leverage buy and expedite lean supply chain execution. Outline expectations for quarterly meetings, cost sharing, packaging standardization, and kaizen events.
Step 3) Rationalize Supply Base First
Focus on rationalizing your supply base first to realize quick low-risk wins. Start by eliminating “C” level suppliers that are inactive and/or are a small percentage of spend with no plan to increase spend. Second, single source “C” level commodity products, i.e. move from purchasing interchangeable fasteners from four suppliers to one supply partner.
Step 4) Execute Optimization Plan
Optimize your supply base (before improving it) to free up time to focus on high-performing supply partners. Ahead of transitioning your supply base, review the days on hand, lead time, equipment, and tooling. Build a bank of parts and approve shipment from the new supply partner to mitigate disruption. Exit “C” level suppliers with performance issues. If you have a larger number of bottom-tier suppliers in this category, greater than 5% of spend, execute in phases by spend category from smallest spend to largest.
Leverage a Supply Performance Program to connect performance with rewards to incentivize “B” level suppliers to improve. Communicate program KPIs to A- and B-level supply partners, and include that you view them as valuable long-term partners in your business. Identify and exit select “B” level suppliers by conducting true-cost sourcing analyses, specifically with switching costs, to attain future-state supply base goals.
The key to long-term sustainable supply performance success is to thoroughly review your spending every quarter and at a minimum, each year. Supply transitions are risky and may be complicated by a multitude of factors, thus, outlining a detailed supply base rationalization and optimization plan in the beginning will furnish you and your team with the confidence to weather any unknown factors that inevitably arise.
Following a proven process to strategically take coordinated actions to first rationalize, then optimize, your supply base will lead to smoother, lower-risk supply transitions. Lean supply chain requires closer relationships with Tier Is, and in a growing number of industries, Tier II and IIIs, to drive out waste in the supply chain.
The one constant in business is that your company, specifically your supply base, is either getting better or worse when compared to your competition. Therefore, it is critical that you work tirelessly to develop your preferred supply partners and replace good suppliers with great ones to drive supply performance.