Deadly Mistake #3:

Meeting Supply Base Reduction Targets

Supply Base Reduction Targets

Supply Base Reduction Targets

When I first started in purchasing, the only indicator being tracked was cost savings.

No kidding.

Then over time, the list of indicators grew and grew and grew.

Pretty soon I viewed my senior management as being pretty spineless – I envisioned them following every latest purchasing fad and asking us to start tracking some related indicator, and also agreeing to every new indicator that some group in the company (finance, public relations, investor relations, accounting, receiving, environmental health & safety, and on and on) decided that purchasing needed to be now tracking.

One of those indicators was one that measured the size of the supply base. Except this one was a bit different.

Conceptually, it was well founded. In theory, it measured the extent to which purchasing spends were aggregated and spent with fewer suppliers, therefore resulting in increased cost savings and less time spent managing suppliers unnecessarily.

And so the revolution started, and it’s still going today. And it’s a great initiative. It only has one problem, and that’s that it’s completely flawed. Other than that, it’s a great indicator to track.

Now you’re ready to argue with me. I know, trust me, it’s not my first time to the dance. I know what to expect.

Let me explain. You see, I’m not an academic. I’ve done this stuff, just like you have. Heck, I still do it, only now in partnership with people that want my help.

The key issue is this: reducing the supply base requires that a purchasing professional log into the corporate supplier database and manually delete suppliers from the database. And there will be a big stink if you delete a supplier that’s going to get used again in the next few months.

So what do you do? You delete the suppliers that stopped being used long ago – suppliers that probably won’t be used again, whether or not you delete them from the database.

On top of that, most suppliers have multiple entries (different spellings, different supplier locations, duplicate entries with slightly different details, etc), which can add up to 30 or more duplicate entries for a single supplier.

In the end, the supply base indicator improves, but nothing else does! The madness needs to stop, right away. Just think about how many negotiation opportunities are passed up to manipulate this indicator.

The answer to this one is pretty simple, and I’ve been driving this crusade one company at a time: the metric that SHOULD be tracked is what % of the supply base is receiving 90% of the expenditures.

That is really what you should care about. All the other suppliers laying around in the supply base take too long to get to, and they’re not worth getting to either.Most supplier databases drop suppliers after a certain period of inactivity – let them fall off on their own.

Good purchasing organizations have 90% of their expenditures going to 5% or less of their supply base – preferably something closer to 1 – 2%. This does in fact mean that they are effectively aggregating their expenditures, whereas supply base size guarantees no such thing.

There are some critical planning and implementation steps of course to make this transition successfully, but you have to start with your goal.

Throw that supply base indicator in the trash where it belongs, and let’s move forward on initiatives that make a difference. Stay tuned. Next time I’m going to send you an email about getting out of the business of using your talent to place purchase orders.

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