Geraint John (GJ): To what extent are you focused on reducing the size of your supply base at the moment?
Faiza Rasheed (FR): When I started at BAA a year and a half ago, our supply base had grown to 11,500 across annual expenditure of about £1.5 billion, excluding capital investment funding. By starting a focused supplier reduction programme we are at about 3,000 suppliers now and the idea is that we can reduce that further to 1,000 across all of our categories. BAA hasn’t fully applied supplier management controls; anyone in the business has been able to ring up and say “we want a particular supplier”. Given that we are an airport operator with multiple locations, we have to take a pragmatic view that while we want to cut the numbers down, we also have to ensure that the operational business can still run. The strategy is to manage fewer suppliers with fewer people to achieve better service levels more cost-effectively.
Paul Alexander (PA): We have compressed our number of suppliers to about 2,000. For me, it’s not really an objective any more, it’s an indicator. Airlines are heavily fragmented – BA has about 2.5 per cent of the industry – and the supply base is often heavily consolidated or monopolistic. So trying to compress the number of suppliers, certainly in the areas where we are spending most of our money, is the wrong agenda. It does have a relevance at the tail end – I don’t want more than one stationery supplier, for example – but it’s more interesting trying to cultivate and develop new suppliers where barriers to entry are high.
Adrian Turner (AT): I would agree with that. A lot of the Apple proposition is based around quality of design. And the legal structure and geographic base is such that to some extent the control of supply base numbers at the end of the Pareto curve is fine, but primarily it’s about trying to encourage and develop competition in some very high-end suppliers that currently hold sway in the relationship.
GJ: So you are trying to grow your supply base rather than reduce it?
AT: In some areas, yes. We don’t have a supplier reduction target. Apple is a company that is growing fast – revenue in our last financial quarter was up 35 per cent year on year. So my biggest challenge is keeping up with the demands and ensuring that we have vendors that can scale with us. The question I’ve thought about over the years is why do we feel driven to reduce our supply base and how do you arrive at the very specific targets around vendor numbers that some companies develop? I’d be fascinated to know how BAA came up with the number 1,000, because in a previous job we went through a very aggressive supplier reduction programme and the number just magically appeared.
FR: The target of 1,000 suppliers is there to focus the minds of the organisation and to drive behavioural change within the broader business. The supply chain function owns the supplier relationships and all suppliers must be sourced through supply chain – that’s a mandated statement from our chief executive. It feels like a stick, but that’s what we need to change from the extreme lack of application of supplier controls BAA has had. We think that within the 1,000 suppliers we’ll probably have 80 per cent of our spend with the top 150 suppliers, and the rest will be tail end.
Ron Jarman (RJ): I agree there’s a real danger of doing supplier rationalisation for the sake of it. We don’t have any programme at Reuters that says we want to reduce our number of suppliers. Yes, there’s a piece around managing the tail and controlling the number of new suppliers, so that you only add them where you need them. But I don’t actually think that rationalising the number of suppliers is what we should be aiming to do; we should be doing what’s right for each category. It might be one supplier, it might be three, five or 10.
Gerry Walsh (GW): I think it depends on where you are starting from. If you go into an organisation where the supply base is out of control, then you need to do something about that. If you don’t set a number, it’s hard for people to tune into. A good CPO will be able to come up with a reasonable figure pretty quickly. But the danger always is that once you do that, some people can take that as a message that in every category we’re going to reduce the number of suppliers. I’m against that because you may end up increasing risk. We have seen instances in the past where not just companies but industries have, over a period of time and in certain categories, found themselves with a supply base that’s too small, and they have become hostages to fortune. Shame on us if we allow that to happen.
Clive Dedman (CDe): We have just 11 tier-1 suppliers – the “supply partners” that make our business tick. They have something like 11,000 staff who operate as Land Securities Trillium badged staff on our clients’ sites, so for us it’s all about liability. Because we are in the facilities management industry and we’ve got a lot of government clients, targets around things like sustainability are handed down to us. That’s really where the number of suppliers, and the type of suppliers, you’ve got begins to be of importance.
Klaus Hofmann (KH): It comes down to category strategy and also how much you want to leverage your volume on a global basis. If you go into a category that is completely new, you will consolidate very quickly. But I’m not going to drive it down to a level where all of a sudden we are working with one supplier, unless there is a specific category strategy in place because of innovation needs, for example. But then you manage it completely differently to your normal business.
Mark Hughes (MH): I think it depends on the business cycle. Premier Foods has been through some significant acquisitions of Campbell's and RHM and the priority has definitely been leverage and consolidation of the supply base. It’s now starting to get embedded into our overall category strategy and we do have targets for supplier consolidation but they’re not as radical as they were in the first stages of the integration programme.
RJ: Supply base consolidation can be the outcome of a strategy, be that M&A activity or the market driving it. It’s not the strategy itself. That’s the difference. Like Clive, I do care how many tier-1 suppliers we’ve got, so that we can work with them in a sensible way. You’ve got to get that number right.
GJ: Several of you have mentioned consolidation being driven within the marketplace rather than by procurement. What impact is that having?
KH: Something that is definitely impacting our industry, fast-moving consumer goods, more and more is the role of private equity. This is changing dramatically the way some suppliers are managed: their behaviours, their financial expectations, how they manage net working capital and their approach to innovation. This is something we weren’t dealing with three or four years ago.
PA: Yes, I certainly recognise that. If you think about what a venture capitalist does, or what often an acquiring company does, it incurs a lot of debt, it often has stakeholders who are looking for short-term returns, and guess what happens to your terms and conditions? The world I’m familiar with is one where I may have some influence, but I’m less and less in control. We are on the receiving end of this industry consolidation.
RJ: I was talking to somebody recently who said they got their category people to go back and reapply the tools around supplier control every year and say “we might have decided last year to go down to two suppliers – is that working for us now and have they consolidated?” We don’t do enough of that, but I think that’s the answer to the supply base consolidation issue.
GW: You can’t have a category strategy that’s going to last 10 years. I’d be surprised if it lasted three years. You’ve got to keep looking at it, keep on refreshing it. There’s no doubt that in certain industries the challenges are going to send you in the opposite direction from supply base consolidation. You will have to widen your supply base if you want to guarantee supply going forward.
AT: Apple has three main routes to market: its online business, its retail business and its channels. Each one of those has a different business proposition. The supply base for each of those channels has to be slightly different. If you put a category around the suppliers, it forces the business to take a procurement view, in terms of reducing the supply base and optimising a particular commodity, rather than procurement taking a business view and optimising that route to market to drive the business strategy.
Peter Marson (PM): I think there’s two dimensions to consolidation. One is you’ve got suppliers of a product that merge with each other and you get into a position where you are potentially dealing with too few suppliers in that industry. On the other hand you have categories where suppliers are operating a different kind of model, as managed service providers – for example, in recruitment where you might have had 500 suppliers before, now you can move to one that is essentially managing 500 on your behalf. You can hit your target quite easily by doing this. That’s a different dimension.
Colin Davies (CDa): We’ve certainly done that in temporary labour, where we moved to one large global supplier, providing something like 80 per cent of our agency staff. They are a mega-supplier, maybe of our own making. We’ve eliminated several thousand agency suppliers globally. The issue for us now is that we’ve got the transactional efficiencies, but does our managed service provider need to manage that huge supply base more effectively to drive down the costs overall? We need to work with them to help reduce the supply base.
AT: I won’t say that Apple doesn’t use the strategy of taking a chunk of suppliers and pushing them down the supply chain; if you are in a growth organisation, it has a number of benefits, especially in reducing the headcount you have to bring into the business. So it can reduce cost, but my experience is that you can lose quality of service.
GW: I think if it’s well implemented, you don’t have to. But the execution has to be really formidable.
CDa: At the moment we are getting the benefits, both in terms of supplier reduction, cost reduction and an improvement in service overall. But it is one of those areas where the bigger you go, service can degrade, particularly in a global organisation. And it is a trade-off sometimes between mega deals and mega efficiencies and service levels. The reasons we did it are twofold. First, it’s an area where you need to have increasing compliance. If you are dealing with several thousand suppliers in 150 countries and you haven’t got those controls in place, then your risk as a business increases enormously. The second area is that, being an American company, we have goals around supplier diversity and the value of business we place with minority suppliers. Half of our staff are contract labour and agency staff. If we have control of those tier-1 mega suppliers, we can do a lot more interesting things in that area.
GJ: Is corporate social responsibility (CSR) leading you to have a bigger supply base than you might have otherwise?
PA: Intuitively, you’d say you would have to grow the supply base, but my experience is that bigger companies are more environmentally sensitive, so there seems to be a contradiction there.
RJ: I think it’s another dimension to consider, but I don’t think we should assume that because of the CSR agenda we have to have bigger supply bases. I suspect that every one of our tier-1 and tier-2 suppliers uses subcontractors in some form. So your supply base is bigger and therefore you’ve probably got more diversity anyway.
FR: It’s about meeting your CSR objectives while still rationalising your supply base. At BAA it’s certainly in my mind that once we’ve gone down to 1,000 suppliers, how do we ensure that our airports still meet their community development objectives and support local suppliers? Although 80 per cent of the spend may be with our top 150 suppliers, we don’t really mind which suppliers make up the numbers to 1,000, as long as the cost and service levels are appropriate and the supply chain team has been involved in sourcing the suppliers.
CDe: When you are bidding for business in the public sector, as we are, there are boxes to be ticked in terms of using local suppliers. If our clients want local companies providing their goods and services, it’s procurement’s job to find them, not to say “well, we’ve got a widget maker somewhere else”.
MH: It’s the same in manufacturing. We’ve got pressure from some of our customers to use certain suppliers. We’ve got a very consolidated retailer customer base and they are driving us down certain consolidated supplier routes. Marks & Spencer, for instance, has specific A-list ingredients suppliers. That’s driven by economic leverage of scale, one would imagine, but also by its CSR agenda – satisfying some of its Plan A requirements.
GJ: What about commodity price inflation and the emphasis on securing supply. Is that driving up supplier numbers?
KH: Yes. There are commodities where even we are chasing materials now. Whether I like it or not, it’s not going to go away for a while, because the capacity hasn’t been built over the last few years and everyone is surprised by the demand coming out of countries like China and India. We go to places we hadn’t gone to before, like Kazakhstan; we don’t do it voluntarily, but you have to otherwise you won’t be able to support your factories.
RJ: But don’t you increase the risk for a while, because it’s a new market? In five years’ time, maybe you’ll be so used to dealing with Kazakhstan that it’ll seem no more risky than buying in France.
KH: Yes, after a few months or a year or two, you’ve got it under control. I think you will put more effort into supplier development, because even if they’ve got a material it may not fit your specification. That takes time and effort.
GJ: Do you see dangers in dealing with a smaller number of bigger suppliers? How can you retain sufficient competition?
RJ: Of course there are dangers in consolidating your supply base. It’s similar in outsourcing deals where you move to longer and longer arrangements and you lose all competition for seven or 10 years. You’ve just got to make sure that the benefits outweigh the risks. We had a good example recently of a supplier that worked across multiple categories and was viewed very badly in our business. Within six months they turned that relationship around by getting the day-to-day delivery working and then bringing lots of good ideas to the business. Now they are working in areas they’ve got without competitive bidding, because they’ve really understood our problems. As you go to fewer suppliers, you are able to put more effort into managing them.
PA: Philosophically we would encourage competition, but in our supply markets we see huge consolidation, so driving competition is very difficult, because we are on the receiving end of global forces. For me, there are probably two things we are doing that stand out. One is addressing the skills base, which is very different – maybe so different that you need different people, maybe even outside of procurement. The other is a theme we’ve adopted called “customer of choice”, where you position yourself to be a buyer who is favoured by suppliers in a competitive market. I think that forces you to address some of the things you’ve always done but that probably destroy value – like applying contracts that are unnecessarily onerous or using an overly rigorous strategic sourcing process, whether you pay your invoices on time, whether you inform people of your company business plan or let them guess what your direction is.
CDa: The answer depends on whether it is an industry-led consolidation or a buyer self-inflicted approach. Where it’s industry led it can be a bad thing in certain situations, and in certain categories, because it is eliminating competition and reducing innovation. Where it’s your conscious decision to deal with mega suppliers, the real challenge is having the organisation and the skill set to do it well. We don’t necessarily have the right people, the right skill sets and the right measures in place.
PM: I think that’s absolutely right. We see it a lot, it’s a completely different skill set in terms of managing those types of relationship. Once you’ve decided to outsource your entire company’s IT to IBM or Accenture and it’s for 10 years, the task on your hands is very different to buying some hardware and software. It has very little relationship with traditional core buying skills.
KH: This is stuff buyers didn’t do five years ago. It’s a huge change. For me, customer of choice is partly about supply security, so you want to make sure that in a crisis situation you are fairly high up in the food chain, but on the other side is innovation. That’s where completely different relationship management is required. It goes up and outside procurement – in our case up to CEO level.
RJ: And you can’t do that with too many suppliers.
GW: Sometimes there’s a belief that consolidation always means dealing with one mega supplier. That’s not necessarily the case; it may be that you have a couple of suppliers, one of whom is a mega supplier, but you also choose a smaller supplier that historically you know has just come up with great ideas, whether in marketing or product development. You need to maintain a level of competition, and if it isn’t there and you’re down to one supplier for the world, my view would be that there’s a fair chance you aren’t going to get the level of innovation that you want. It’s partly down to us to secure that future for our businesses.
CDa: It’s how you retain that competitive element intelligently, because in the past as a profession we’ve been too crude about it; we’ve always had lots of suppliers, regular bidding, an atmosphere of continual competition. But we can do it more intelligently than that; you can have 80 per cent of your business with one supplier and receive huge benefits of consolidation but still keep competition there. The question is how we do that better than perhaps we have done.
CDe: How we manage that and keep the relationship fresh is through service partner workshops, where we take them off somewhere for a couple of days and talk them through what we’re doing. It helps to build the relationships within the supplier as well, because people get to know one another.
GJ: How do you know when you’ve got the right number of suppliers in a particular category? And to what extent are you there now?
KH: For me it’s a moving target, it comes down to a proper risk assessment; you need to feel comfortable. Sometimes you might push it to the edge, so you need to make sure others in the business know what you are doing with suppliers and are aligned with that. We’ve got a couple of suppliers where on purpose we have chosen to go mono source because of innovation capability, price and business continuity planning, where they can support us from different factories if one goes down. Then you need to watch what’s happening in the outside world, because you might get a surprise in terms of supplier consolidation.
PA: I would say we have reached a level of coalescence with our supply base. As I said earlier, it’s an indicator. In my key markets I’d like more suppliers, not fewer; it’s narrowed too far. But on the indirect side we will continue to compress.
CDa: In some of our direct areas we need more suppliers and we need to work harder to get them. In the indirects area, we are trying to develop and implement more global category strategies and therefore we are moving towards more larger – mega – suppliers. It’s taking all that and somehow prioritsing it, because we’ve got finite resources. That’s the challenge.
PM: If you think big suppliers are accounting for a lot of the spend and the risk and the key activities of the business, it makes sense to invest the time and resources in making sure that those relationships are successful. Then you have a big tail of other stuff that creates the noise, the activity and the transaction costs. For some people that may not be an issue, but for others it’s how to manage that and could we offload it? Spending a huge amount of time on a category that you know has got 200 too many suppliers but where the value of that is pretty low is probably wasting time if there’s another way of doing it.
MH: It’s a function of the industry and the marketplace. In UK food, which is our market, we’ve got a handful of retailers, we’ve got hundreds of manufacturers and we’ve got thousands of direct suppliers. There’s a long way to go in the consolidation of that supply base. It does depend on category though, and especially in today’s inflationary environment you need to have very robust contingency planning as part of your category strategies.
RJ: I think you know you’ve got enough suppliers in any category when you are delivering on price, on risk, on security of supply and on innovation – then you are meeting the business requirements. We’ve got some categories where we’ve got too many suppliers and others where we’ve got too few and are actively looking for alternatives. I suspect overall we’ve got far too many suppliers, but the devil is in the detail.
GW: There are categories where we’ve got too many for certain. In terms of how far is too far – the title of this debate – when your supply base is not performing to your expectations, there’s nothing you can do about it and you’re placing your company at an unacceptable level of risk, that’s when you know you’ve gone too far.
MORE ON THE WEB
Visit www.cpoagenda.com/debates for eight other debates on key strategic issues for CPOs. They cover growth and innovation; procurement’s challenges in the next decade; low-cost country sourcing; global capabilities; new savings opportunities; world-class procurement; and the limits to procurement’s role
