There are two competing theories when it comes to the number of suppliers a purchasing organization should have in its vendor database.
Large multinational corporations have tens of thousands of vendors selling into their supply chain. The French energy company, Total, is said to have more than 150,000 suppliers. More is deemed to be better and companies with this mindset scramble to find even more suppliers.
On the other hand, some organizations choose to pursue category management. In theory, “This involves analyzing their spending, by category, and applying market analysis to find better solutions, better suppliers, and increased competition.” It’s exhaustive and expensive. In practice, it just means “consolidating purchasing across entities within the organization, or in partnership with other organizations.” The poor man’s attempt at monopsony, or oligopoly.
This simplifies (or, more likely, ignores) the complex tradeoffs in answering the question.
The optimal number of suppliers is the one most likely to expose the right suppliers to the organization when they are buying, even as buying requirements shift with the product set and the customer base, while balancing the costs and risk of having too few suppliers or too many suppliers.
We have written before that the “principal supplier risk is not getting the right supplier to bid.” Organizations purchase goods or services to solve a problem. How do we reduce costs? How do we bring this innovative product to market? How do we come to market faster?
The right solution is the good or service in the marketplace that solves the problem most directly and completely, not something that kind-of-sort-of solves part of the problem.
“If the suppliers with the right solutions don’t bid, then buyers end up either not making a purchase or buying a second-best solution. And if only one or two suppliers submit proposals, buyers end up over-paying for this second-best solution.”
So, the optimal number of suppliers should include, at a minimum, all the suppliers of the right solution for every one of the organization’s current problems. Or, at least, it should include a critical mass of the suppliers of the right solution, and no more. That is, it would not include any of the peripheral vendors, ideally.
An omniscient buyer would know all the right suppliers for their problem set and include these vendors, and only these vendors, in their supply chain.
Nobody is omniscient. The only way to tell if a vendor sells the right solution is to see their response to your problem, in the form of an RFP. Or, to see or hear of their response to someone else who has the same problem. In the case of the former, it’s trial and error in which the buyer is just as susceptible to Type I error (thinking someone is a good fit when they’re not) and Type II error (ignoring a vendor who would have been perfect because you thought they didn’t offer what you wanted). And the latter is hit-or-miss.
One solution is to look for every possible supplier in the space and engage with them, an approach riddled with costs and risks.
Generally, we can lump supply chain risks into several buckets: the risk of operational disruption (you have to shut down production for a while, or you are bottlenecked, for example); unforeseen costs (supplier introduces additional costs to ensure delivery, or the costs associated with monitoring a large supply chain including subcontractors); and regulatory compliance (ensuring the supplier complies with worker safety rules or fair pay, etc.).
With too few suppliers, the buyer becomes dependent (potentially intensively so) on the supplier’s ability to deliver. There is an increased risk of a supply disruption. Supply chain disruption is a growing problem. It can come from anywhere including inflexible capacity response, natural disaster, transportation failure, geopolitical instability, commodity price volatility, and cyber-attack. Of course, one can also develop a collaborative relationship with the supplier, partnering for innovation. It is easier to manage the relationship and track performance. The supplier is more likely to be responsive to fluctuations in buyer demand. The power dynamic is also interesting. Most buyers with this approach may think that they hold all the cards and can beat the supplier down on price due to their concentrated volume. But the power switch can flip the other way, too. Imagine a scenario in which the buyer is overly dependent on the single supplier, like technology hardware manufacturers with semiconductor companies.
Having too many suppliers introduces massive complexity (especially if one wants to have visibility into the supply chain and look through to the subcontractor level). It is more of a transactional relationship in which there is less motivation for the supplier to collaborate with the purchaser on new product design. It is more expensive to record and evaluate performance. Suppliers see the relationship as more commodity-like. Relationships are more likely to be thin. Suppliers may not be interested in adjusting capacity to short-term spikes.
Buyers compromise. They try to strike a balance between having too few suppliers (risking missing out on the right suppliers in order to simplify the supply chain) and having too many suppliers (ensuring additional costs of complexity, opacity, and rigidity in the supply chain, while potentially being exposed to the right suppliers).
EdgeworthBox presents an answer to the dilemma of choosing between the lesser of these two evils: trying to manage too many suppliers or focusing on too few suppliers. We call it network-based sourcing™.
The EdgeworthBox clearinghouse for administration lowers the cost of vendor management for the buyer even as it massively reduces frictions for suppliers, making it easier to attract more of them. You can evaluate more suppliers as potential right suppliers with the same amount of resources and suppliers have lower costs to engage with you.
Our clearinghouse for data and social networking tools give you the means to assess suppliers by considering what kind of projects they have worked on in the past and by seeing how their customers interact with them. EdgeworthBox gives buyers and suppliers the market intelligence to pair up efficiently, at reduced cost.
AI is useful for many things in procurement. It will not help you identify and develop the right relationships. EdgeworthBox makes it easy and less expensive to find and engage the right suppliers. Let’s talk about improving the RFP process for both buyers and suppliers.