Supplier Rationalization

Recently I came across the concept of supplier Rationalization. A very important concept for the professionals working on the sourcing side; therefore I decided to write this blog entry for the beginners to get introduced to this vital concept.

Rationalizing the supply base basically means utilizing the right number of suppliers and high performing suppliers. This requires one to categorize spend and identify current and potential suppliers in each category. Options for supply base in each category:

·         Reduce:  When we already have enough number of qualified suppliers and we are sure that no other supplier can provide cost, quality or other advantages. Then we can consolidate spend with a subset of currently used suppliers.

·         Increase:  If a supplier is providing services/products in many categories; the question to be asked is if the supplier is providing best service/product in each category. If that is not the case than one may want to have more suppliers to gain more value.

·         Maintain it: In case we are happy with the current supply base; Retain and monitor it.

·         Keep the size, change the mix: Many times we have adequate number of suppliers but inadequate level of service/product offerings. In such a scenario we may want to replace poor performing suppliers with good ones.

·      Increase than reduce: Imagine a situation where you are given an objective of reducing the number of suppliers. In such a scenario you will not want to be dependent on less number of poor performing suppliers. Therefore one good approach could to be first increase the supplier base, identify the best suppliers and then reduce the total number of suppliers to attain the objectives. This two step approach enhances the chances of working with small number but high performing suppliers.

Strategic Sourcing Vs Operational Sourcing

Sourcing activities can be broadly be identified as operational sourcing and strategic sourcing

Operational sourcing is more operational in nature i.e. the demand comes from the requesters and the request is linked directly to the operations of the organization.. Various terms are used to describe this kind of sourcing, some of them being -- Operational, Responsive, or Tactical sourcing. Most of the companies have this type of sourcing. Operational sourcing is highly critical for manufacturing organizations that rely heavily on the "Direct" or "MRO" materials.

Strategic sourcing is more strategic in nature. The starting point for strategic sourcing process typically could be -- Spend Analysis, or Strategic Initiative from the top management. For this kind of sourcing, various terms such as -- Strategic, Collaborative or Proactive sourcing – are used. The majority of large scale companies have this kind of sourcing process. This kind of sourcing is more critical and widely used in

• Service oriented industries (e.g. Financial Services, Pharma, Retail, Public Sector, etc.) where there exist a huge savings opportunities in "Indirect" and "Services" spend

• Fast changing industries e.g. Life Sciences, media, where managing collaboration/partnership with strategic suppliers is becoming more and more critical with fast changing technologies.

The operational sourcing can be handled well by both SRM and SAP Sourcing. The main differentiator of E-Sourcing solution is that it can handle not only the operational sourcing but also the strategic sourcing.

In operational sourcing scenarios, the demand always gets started by the requesters (e.g shopping carts, purchase requisitions. The procurement / sourcing / purchasing team tries to fulfill these requests from operations. The purchasing team might utilize strategically defined contracts or agreements with various suppliers to source these requirements.

In Strategic Sourcing scenarios, the demand does not come from requesters or operations. The strategic team performs the analysis of spend and sets the goal for sourcing activities eg. reduce IT spend by 10%, reduce travel spend by 20%. Then, a strategy or a plan is devised to achieve this savings goal, supplier development goal, or contract renewal goal. Team responsible for strategic sourcing creates contracts , agreements with various vendors to increase savings. They generally utilize RFI , RFP , RFQ, Auctions etc for this activity.

Indian Retail sector: Next big wave?

Indian retail sector is undergoing a sea change. According to the study conducted by ICRIER, total retail business in India will grow at 13% from 322 billion $ in 2006-2007 to 590 billion $ in 2011-2012 and further to 1 trillion $ by 2016-2017.

Recent phenomenal changes in single brand retail FDI policy and significant discussion emanating towards allowing 100% FDI in multi brand retailing will be having a game changing impact on the modern retail sector in India. AT Kearny has ranked India at 5^th position in its Global Retail Development Index (GRDI). GRDI is unique because it does not just identify markets that are bigger or richer but markets with bursting with hot opportunities.

As per the Economist Intelligence unit though retail percentage contribution to India’s GDP is around 40% but organized retail penetration in India is only 6%. However the recent FDI policy changes are bringing along a sea change in the retail landscape.

As per the government regulation at least 50% of investment needs to be made for the backend infrastructure. IKEA (single brand) brand to invest 1.5 billion euros to open up 25 stores in India. It has decided to roll out 600 million Euros to set up 10 stores in India. With the Indian government planning to open up the sector for multi brand retail stores we can expect huge investment in India from the global players like Wal-mart and Carrefour.

Under the obligation to invest at least 50% investment in the backend infrastructure, one can foresee huge investments by these multinational giants in setting up of supply chains and related systems. Germany based Metro group has partnered with SAP, Intel, Microsoft and IBM to implement RFID technology which will gradually replace bar coding. Such technologies would percolate down to Metro stores in India. There appears to be no reason why similar partnerships and investments could not be expected by other international retailers in Indian market

Therefore to summarize I observe that retail sector is going to be the next booming bet for Indian economy. If the regulations permit we will notice multiple multinational retail brands making great investments in their supply chains and related IT systems. The question left to be answered is how ready are we to exploit this opportunity?