“Consolidating suppliers within specific supply markets is a proven strategy to concentrate buying power and reduce purchase prices. The activity can be taken further, though, especially within non-production (indirect) spending areas . . . Consolidating suppliers within specific supply markets is a proven strategy to concentrate buying power and reduce purchase prices. The specific business benefits include . . .”
Speechless and left wondering what were they thinking are the immediate descriptive phrases that come to mind when I reflect on the recent Hackett Group research article on supplier consolidation. What is equally perplexing is the fact that they focused on Indirect Material spend as the basis for supporting the viability of their position.
Right off the bat I want to stress that supplier consolidation makes sense when strategically applied to specific areas of procurement such as in the acquisition of complex products that require highly specialized and ongoing support. Of course consolidation in this area might be a moot point in that when we enter the realm of specialized equipment the field of suppliers with whom one can deal is already naturally limited.
However, by referencing Indirect Material spend and supplier consolidation in the same breath, Hackett demonstrates that they are stuck in the bygone era of traditional ERP-based applications that were best suited to low volume, high dollar transactions. In other words, these monolithically cumbersome programs were the true impetus behind supplier rationalization strategies as opposed to a viable business metric or imperative.
As I had indicated in my December 18th, 2013 post 3 supply chain concepts that should finally (and mercifully) be abandoned in 2013; “In a world where both public and private sector organizations are looking for a marketplace “that never stops growing and always allows both contract and non-contract participation,” these ideas – which have always been bad by the way – are the antithesis of the new B2B world.”
Now one might think that I am just providing an opinion. Maybe so but, my opinion is based on hard fact resulting from my government funded research in which I identified the existence of commodity characteristics. You can read about it in my Dangerous Supply Chain Myths post on Enabling Technology and the emergence of the Metaprise however, over a 14 year period we discovered that all commodities consistently fall into 1 of 2 categories – Historic Flat Line and Dynamic Flux.
A Historic Flat Line commodity is characterized by a static price performance where there are minimal cost fluctuations over an extended period of time. It is further accentuated by a “narrow” floor to ceiling price chasm. Direct Materials as well as specialty products such as scientific and medical equipment commonly exhibit Historic Flat Line characteristics.
A Dynamic Flux commodity is characterized by a dramatic and consistent fluctuation in cost that is mirrored by a steady downward price performance over an extended period of time. It is further accentuated by a wide (usually significant) floor to ceiling price chasm. Indirect Materials and in particular MRO commodities commonly exhibit Dynamic Flux characteristics.
The reason that commodity characteristics are important is that the absence of this knowledge has been a major contributor to both process and technological misalignment. The kind of misalignment that has usually been championed by papers and articles such as the one being presented by The Hackett Group. This is due to the fact that by applying the same purchasing process used for Direct Material (Historic Flat Line) procurement to Indirect Material (Dynamic Flux) commodities, the perceived volume discount savings are virtually negated within a very short period of time (in some cases almost immediately). This is one of the factors that fuel the buyer refrain that they can usually beat the centrally negotiated contract pricing with a single phone call to a local supplier.
So in reducing the number of suppliers with whom they dealt, organizations lost touch relative to actual market pricing trends. The end result was one government department had paid on average more than 23% above the going market price for their MRO products, while a major American retailer experienced a similar outcome with their rationalization initiative.
The sad part is that The Hackett article focuses on supporting rationalization by referencing what amounts to an artificially narrowed supply base, while simultaneously ignoring the emergence of the new cloud-based solutions. Unlike the ERP applications of the past, this new generation of solutions create the means through which organizations can easily and conveniently engage more rather than fewer suppliers.
Once again, what were they thinking?