Split of Business: The Best Sourcing Justification for Supplier Diversity?
When it comes to strategic sourcing, we all know that one of the cardinal rules of reducing costs is working with fewer suppliers. But at the same time, from a supply risk perspective, narrowing a supply base increases the chances of supply disruptions unless an organization puts safeguards into place -- e.g., increasing inventory, buffer stock, etc. In Japan, companies like Honda and Toyota have long practiced the notion of splitting award decisions whenever possible among a handful of suppliers (quite often in either an 80/20 or 60/20/20 manner). They do this for a number of reasons. The first is to insure continuity of supply, but just as important, split awards like this keep incumbents on their toes and force them to justify their position at the top (because suppliers with smaller award splits always have the chance to win additional business).
By dangling the carrot of additional business out to the secondary suppliers, a buying organization can get them to invest more in the relationship than they otherwise would. Out of this might even come joint innovations or even new product ideas. In other words, it's often the small guys who have the best shot at helping procurement to become more innovative in its contribution to the business -- but only if the smaller suppliers are managed and developed correctly. For the same reason, investing in smaller, entrepreneurial suppliers can make sense over the long haul from a sourcing perspective. But these suppliers should be able to stand on their own two feet from a solution perspective in their current form (even if they do not necessarily offer up the best combination of price and value relative to their larger competitors). Moreover, it's this group which can keep incumbents on their toes to perform (the constant threat of shifting spend out is often a far more effective tool than a one-time bidding event).
By dangling the carrot of additional business out to the secondary suppliers, a buying organization can get them to invest more in the relationship than they otherwise would. Out of this might even come joint innovations or even new product ideas. In other words, it's often the small guys who have the best shot at helping procurement to become more innovative in its contribution to the business -- but only if the smaller suppliers are managed and developed correctly. For the same reason, investing in smaller, entrepreneurial suppliers can make sense over the long haul from a sourcing perspective. But these suppliers should be able to stand on their own two feet from a solution perspective in their current form (even if they do not necessarily offer up the best combination of price and value relative to their larger competitors). Moreover, it's this group which can keep incumbents on their toes to perform (the constant threat of shifting spend out is often a far more effective tool than a one-time bidding event).
Unfortunately, I'm not hearing this argument enough from supplier diversity professionals. They point to the need to get closer to the community and their customers as reasons enough for such programs. And perhaps, in some cases, they're right. But as someone who wants to see entrepreneurial supplier development programs succeed on their own merits from a business perspective -- rather than a red-tape, check-the-box compliance one -- companies should think long and hard about using these types of programs to drive better, long-term sourcing programs just like the Japanese have for so long.
- Jason Busch
"In other words, it's often the small guys who have the best shot at helping procurement to become more innovative in its contribution to the business -- but only if the smaller suppliers are managed and developed correctly."
If procurement is involved primarily in the initial acquisition and distribution of spend, it appears innovation comes solely from more suppliers. Not working more closely with incumbents.
Shouldn't incumbents be innovative?
On-going vendor management should require innovation from incumbents. Incumbents have the most to lose. They should have greater insight into customers' culture, processes, & expectations.
Procurement concerns about secondary sources, delivery timelines, etc. can be developed with incumbents using transparent, verifiable solutions. Push the procurement burden of secondary suppliers onto the incumbent. As long as its verifiable.
If incumbents fail to produce these, contracting secondary suppliers directly makes sense.
Parsing spend among multiple suppliers misses the point of trying to get the most from incumbents first. Is this a lack of confidence, or trust, in vendor management?