Using numerous vendors for the same product is frequently regarded as good procurement strategy, as it promotes competition and reduces reliance on a single provider. Spreading purchasing volumes too thin can have the opposite impact, reducing purchasing power, increasing operational complexity, and ultimately raising the entire cost of procurement.
Image supplied
But according to Brendon Bain, sales director at Sapphire, an integrated business solutions company specialising in procurement, logistics and branded merchandise, spreading purchasing volumes across multiple suppliers can actually increase costs while creating additional administrative and operational complexity.
“When three or four suppliers are competing to provide essentially the same item, it can feel like the business is protecting itself and keeping pricing competitive,” says Bain.
“The moment you divide your volume, you dilute your buying power; shorter production runs, smaller orders, and fragmented deliveries can quickly wipe out any perceived pricing advantage.”
The problem however, is not unique to South African businesses.
McKinsey documented how one global food company reduced the supplier base for a key ingredient from eight to four, increasing its buying power and achieving a 10% category cost saving within three months.
Sapphire encountered the same procurement challenge when it began working with a major retail client in 2017.
“The retailer was purchasing shopper bags from three different suppliers,” he explains. “While this provided backup in the event of one supplier being unable to deliver, splitting the volumes created inefficiencies across production, pricing and delivery.”
“The solution was to conduct a dedicated tender and consolidate the category with one manufacturer,” he says. “Concentrating the purchasing volume improved production efficiencies and resulted in savings of approximately 25 percent of the client's annual gross purchase value for the category.”
Brendon Bain, sales director at Sapphire. Image supplied
The challenge, Bain adds, was achieving those savings without increasing the retailer’s exposure to supply disruption. “The selected manufacturer developed a contingency model under which approximately three months of stock was produced and stored in a separate warehouse adjacent to our own facility.”
“The fact that the buffer stock was held away from the manufacturer’s production premises meant it remained available should an incident affect the manufacturing facility,” he explains. “The three-month stockholding also provided sufficient time for production to recover or an alternative solution to be implemented.”
“The objective should never be consolidation for the sake of consolidation,” says Bain. “You need to balance price and efficiency with continuity of supply and risk. In this case, we could capture the benefits of concentrating the volume while designing the supply chain to protect the client if something went wrong.”
Stop looking only at price
Bain believes the same thinking needs to be applied to one of procurement’s most entrenched habits: comparing products primarily on their purchase price.
“Businesses need to stop looking at price in isolation and start looking at replacement cycles,” he says. “The cheapest product is not necessarily the cheapest product to own.”
By way of example, he adds, that an item costing R100 that needs replacing every year may be considerably more expensive over its useful life than an alternative costing R130 that lasts three years.
“That calculation becomes even more significant when the cost of replacement includes repeat ordering, administration, freight, warehousing and distribution,” he says. “The principle extends to supplier management itself.”
“Every additional supplier can bring onboarding and compliance requirements, purchase orders, invoices, account management, logistics coordination and reporting,” Bain adds. “Fragmentation can also make it harder for businesses to see what they are spending across a category and identify opportunities to leverage their total purchasing power.”
He explains that the answer is not simply to reduce supplier numbers, but to interrogate what each supplier is contributing.
“Multiple suppliers absolutely have a role where they materially reduce risk or provide a capability the business needs,” he says. “Every additional supplier, however, should have a clear purpose. If you have three suppliers rather than one, you should know exactly what that additional complexity is delivering.”
“The biggest procurement saving isn't always another percentage point negotiated off the unit price,” Bain concludes. “Sometimes it comes from changing the way you buy.”
