Do I Need Fewer Suppliers, Or More Of Them?

Is it better too have a lot of suppliers or just a few?

Supplier Selection
Supplier Selection. Getty Images

Supplier management can be a lot like a presidential primary. If you’ve got too many options, your choices might be confusing. But if you whittle down your options too hastily, how do you know you’re left with the best of the lot?

The question for supply chain professionals – how do I know if I have too many versus how do I know if I have too few – is a similar question that voters might ask themselves.

Luckily for voters, they can watch all of the hopefuls from their side of the aisle throw water balloons at each other in a single night. For supply chain pros, we have to go through a more rigorous process of figuring out if we need fewer suppliers (and if so, which ones) or more of them (and if so, which ones).

Does your company need to go through a supply base rationalization or a supply base expansion?  That’s the supply chain way of asking yourself that “too many or too few” question. And the answer is – as always – it depends.

What’s driving you to ask the question? That is the first question.

Are you trying to drive cost of goods down? Are you trying to minimize the admin cost of managing suppliers?  Are you trying to improve quality or customer service or innovation? Do you need suppliers that have capabilities that your current suppliers don’t have?

Those are some of the questions that supply chain pros find themselves with when starting out on this journey.

Let’s start with the cost of goods question – which is why most of us think we need to undergo a supply base rationalization. Are you trying to drive cost of goods down? It makes sense, at first glance, to think that if you have three suppliers making the same item – that you can drive your costs down by giving all of your business to a single supplier.

And, yes, often this works… in the short term.

If you open up a sourcing project by asking suppliers to provide quotes on three times the volume they currently make, you will see suppliers’ unit prices go down. In this case, a move toward fewer suppliers can help achieve the goal of lower costs of goods. But make sure you lock down a long-term supply agreement with the supplier you choose – to prevent price increases once that supplier no longer has any competition.

I’ve also seen the use of a supply base expansion (i.e. adding more suppliers) to drive down costs of goods.  You can use a supply base expansion to give other suppliers the opportunity to bid on products they hadn’t been making before.  By opening up competition, your incumbents may be willing to lower costs of goods.

By combining supply base expansion with supply base contraction, you may be able to lower costs, improve quality and customer service and drive innovation – within a single strategic project. 

In the example above, you start with three suppliers. You start by launching a sourcing initiative that announces to your incumbent suppliers and any new suppliers that you are looking to expand your supply base to five suppliers.

You may end up selecting your three incumbents and adding two new suppliers. Or you may end up selecting five new suppliers. Or any combination thereof.

But your strategy is – and you let your incumbent and potential new suppliers know – that you will select five suppliers to work with for eighteen months. During that eighteen months, you will evaluate the five suppliers you’ve selected on several criteria (cost, quality, customer service, innovation – whatever is important to you). At the end of your eighteen month period, you will then whittle your five suppliers down to two.

In the short term (the eighteen month period), you will have to manage a couple more suppliers – but the long term benefits of a smaller supplier base, lower costs, and better quality/service/innovation are your real strategic wins.

Managing your suppliers is a critical way to ensure you're optimizing your delivery to your customers.  And getting your customers what they want, when they want it - and spending as little money as possible getting that done - is what optimized supply chain is all about.

And, of course, if you have CNN televise your selection process – you get the added benefit of mudslinging, low-brow entertainment.