Know-How Exchange : Strategy

There is a cost in inventorying and tracking multiple suppliers and they want to take advantage of those efficiences. Many firms are partnering with their suppliers, taking equity positions and both have incentive to help each other succeed.

But your statement is blanket and not always true. If your product is critical to the operation they will maintain 2 or more vendors just for the sake of backup. For example, the new Walmart concept with solid luxury vinyl tile used in a few departments. Walmart can't have a store opening delayed if this material isn't available. So they have several suppliers of the same product. It also benefits the supplier. Walmart buys so much of this product it would fill a factories entire production schedule. The company would not be able to fill orders from others-- products that are higher priced and profitable. And of course, the design concepts are constantly being reviewed to keep the look current. Once they change the design these firms, who have "bet the bank" on Walmart may or may not be able to provide the new look.

I am curious as to why you asked the question.

Are you attempting to become a new supplier to companies? Are you looking for an answer to objection from potential buyers?

Are you wondering how you might update your business strategy to respond to this trend? Or are you just trying to get us to do homework for you?

Let's assume for the moment that you're a sales person attempting to land new accounts or a marketing manager trying to assist the sales force in doing so. The fact is that many companies are reducing the number of suppliers. So how should you react?

It seems to me that companies today need to offer a broader range of services. Since companies have fewer suppliers, they must as a supplier to provide more types of products and services. Maybe you should consider broadening your product line.

It also seems to me unique to work hard to maintain the customers you have.

Each supplier is an administrative burden, and companies are looking for solutions not new problems. If you provide us with more information about your specific situation and goals, we can be more focused than helpful in our answers. Good luck to you.

Firms reduce the number of suppliers they deal with for a number of reasons. This practice was in great vogue during the last economic recession 1982-85. Later it was practiced as more companies went through the lean process. Finally, additional reductions are happening as part of the 'integrated supply" concept.

Here are some of the reasons for limiting suppliers:
1) It costs money to maintain purchasing and vendor records.
2) Once you get past the top 3-5 suppliers the dollar amounts purchased become quite small. The account is not important to the supplier.
3) Leverage - if you spend millions of dollars with a supplier you can ask for better terms, lower prices, extra service, etc.
4) Standardization - Think about buying something simple like a pad lock. If you buy padlocks from 5 suppliers it becomes difficult to maintain master keys, track length of service, etc.
5) Elimination of administrative function. Integrated supply especially pushes some of the administrative function out to the supplier in return for larger purchase volumes.

If you would like to learn more, please contact me via my profile. Malcolm Mills a writing partner of mine is one of the leading experts on purchasinig trends.

More suppliers are enforcing minimums in their contracts. In the past, those were ignored...by both sides.

Now, if you want to keep a deal you need to hit the targets.

Down side? The weaker suppliers will be forced to offer no-commitment pricing OR target their customers better OR show their USP OR go out of business

Michael

Why? Because the less supplier companies the buyers have to deal with, the simpler their jobs become. That's it. And so long as they aren't boxed in to a single source (vulnerable, risky) they want security of supply, low pricing, and an easy life.

Of course, the larger a customer they become to each supplier, the more they feel they can dictate the terms, i.e. become price makers, not price takers.

So in summary, cheaper, more powerful, less work. That works for them, and I think it would work for everyone.

Except the smaller supplier trying to break in.

It is a matter of convenience. If I can get everything I want from one place and I do not need to spend a lot of time dealing with other vendors then that is a huge benefit to me. It may even be worth a little premium.