I saw a discussion recently on LinkedIn discussing why companies are turning toward having a few preferred suppliers rather than selecting items on price alone. This strategy is known as Strategic Sourcing. The question spurred quite a discussion. Here are some of the key points.
- Price alone has nothing to do with material standards, product quality, or timeliness of delivery. Most often a manufacturer can excel at two of three key things…price, quality or service. A savvy buyer develops relationships for their company that balance all three.
- Consolidating vendors helps reduce costs, and increases price leverage opportunities. A reduced vendor base can also help focus the procurement department’s ability to focus on quality, service and pricing.
- Once you have developed a relationship with a supplier and know that they are reliable, you are often able to negotiate better pricing than they would offer to others. Another reason is that they know that you can deliver, such as paying on time, which further solidifies their willingness to do business with one company over another. It goes both ways.
- The simple answer is “Value.” Preferred suppliers are chosen for many reasons including: pricing, quality and service. Some companies sell strictly on pricing and the notion that “you get what you pay for” usually holds true. I suggest that you demonstrate value and you may get more results than strictly pricing.
- With a few preferred suppliers you can develop a kind of partnership which means long-term benefits for both parts, a win-win situation. Along with your supplier you can sometimes even develop or change products by using your joint knowledge and other things that you are unable to affect if you are frequently changing suppliers.
- The movement toward fewer preferred suppliers is a practical one. For smaller businesses, it is a way to develop better business traction. By staying with suppliers that share your values, you have the opportunity to grow together and ensure that you receive a level of customer support and visibility that you may not receive if you don’t generate enough business to be important to larger suppliers.
- For larger businesses, fewer suppliers is also a practical consideration. Larger businesses may have thousands of suppliers generating many thousands of reports, invoices, follow-up calls. Supplier consolidation can save these businesses enormous sums of money.
What are your thoughts? Chime in using the comments section below.