Case study of limiting your suppliers

By July 4, 2016 No Comments

Is it good for a company to limit it’s suppliers. Sure keeping a limit supplier list will make the purchasing departments manageable and even efficient.  However, does it really benefit the organization as  a whole – that is a larger question. It may not always be the case that it is benefit to the organization. In fact, a lot of times, it is detrimental to the organization’s bottom line. Here is a case study, suggesting the same.

A large multi-national bank, had trimmed down their purchasing department to minimal sustainable level, as a cost cutting measure. In order to work with limited resources, their VP of purchasing decided to cut their supplier base. So instead of having 5000+ suppliers in their supplier base, they cut it down to a manageable 700+ suppliers.

As a direct consequence of this trimmed down supplier list a lot of small companies were removed along with some decent sized companies. Among those who were left out of the updated supplier base was a company called AXX Systems. They had built innovate solutions, that was connecting PoS into a ERP solution for banks.

A year later, there was a RFP from a large warehouse retailer. They had invited several banks to provide visa credit card services through their banks for retail customers. The contract was worth millions of dollars. One of the major requirements in the RFP was the integration of the retailers PoS with the ERP for the bank. This bank could not provide that since they had purged AXX Systems out of their supplier base. A competitor bank which had a relationship with AXX Systems, carried them on their team. This was one of the major factors for the rival competitor to win the contract, resulting in profit that was many times over than the original cost cutting amount.

Purging of supplier base is currently practiced by many companies, saving the purchasing departments operating cost. However, what purchasing and management of these companies fail to recognize that it will be pushing innovative products or services out it’s door. This is very short sighted, without innovation, many loose business and profits. This in turn will make management make further cost cutting and result in a vicious cycle until they eventually get bought out or run out of business.

It is important for large companies to recognize that their success depends on innovation either internally (sadly, not many companies are investing here anymore) or by its supplier base. When these companies remove young, flexible and innovative smaller sized companies from their supplier base, they remove innovation and perhaps their own future.