“Consolidation is the key to success!” “Streamline your supply chain for maximum efficiency and cost savings!” Sound familiar? We've been told for decades that using a single supplier for as many products and services as possible is a smart business decision.
But what if it's not? What if consolidation is the key to catastrophe?
When Consolidation Fails
Consider this: You've consolidated your telecommunications services with one supplier. Telephone, internet, web hosting, cloud data storage—the supplier gave you a great deal by bundling these services and the cost savings are significant.
Then a fire breaks out at one of the supplier's data centers (this actually happened at a company where I used to work) and everything goes down. Everything. Your website is down so potential and current customers are met with an Error 404 message. Your telephone service is down so you cannot make or receive calls. Horror of horrors, you have no internet access. Who knows if the data you stored in the cloud will survive?
Or maybe it's not a natural disaster. Maybe your supplier is based overseas and fluctuating exchange rates send costs through the roof. Maybe your supplier isn't prepared to scale in keeping with demand and runs out of capacity to meet your orders. Maybe your supplier is purchased by another company and a bumpy transition interrupts the supply chain. Maybe your supplier commits a major PR faux pas and you become entangled in the public backlash.
These are just a few of the risks involved when you have a lopsided dependency scenario. Let's see what happens when you diversify your supplier base and develop a multi-vendor strategy.
How Diversification Can Help You Succeed
The most obvious pro for an expanded supplier base is that multiple suppliers reduce supplier dependency and mitigate the damage if one fails. Should natural disaster—or unionized employees—strike, you can quickly initiate alternate supply plans with other suppliers.
Diversification also frees you from the tyranny of accepting whatever the parent company provides. When you diversify, you can select best-of-breed suppliers for each segment of your supply chain rather than accepting lower-quality products or services in the name of efficiency and cost savings. A diverse supplier base also allows access to a broader talent pool, promoting innovation.
If potential higher costs due to loss of volume discounts are stopping you from diversifying your supplier base, consider how this strategy allows you to reduce costs by promoting competition between suppliers. While many suppliers offer lower rates when you consolidate products or services with them, negotiating individual contracts opens the doors for suppliers to compete for your business.
Another stumbling block to diversifying your supplier base is the belief that managing a wider network of suppliers means a heavier administrative load. After all, when you're dealing with a single supplier, in theory you have a single contact, a single invoice, a single supplier relationship. So much simpler, right? With today's technology, managing a multi-vendor supply chain is easier than ever.
A supplier portal allows you to aggregate data and required documents into one system. By customizing the portal, you can vet potential suppliers, forward applications and inquiries to the proper purchasing manager, even streamline communication about upcoming bidding and supplier development opportunities. Risk mitigation is not a one-time task: Ask that suppliers update their information in the portal on an annual basis to ensure you have correct information.
A robust, constantly updated database that draws from multiple databases further mitigates risk by ensuring data integrity. Use the database to research the financial strength of your suppliers, check certification status, and identify potential risks such as hidden family tree connections or mergers and acquisitions. A quality database can also help you find potential new suppliers for your expanded supply chain, allowing you to search by the criteria you deem most important. A database like this can be found through a third-party supplier diversity company.
Diversifying your supplier base mitigates risk, can reduce costs, and breeds innovation and competition among suppliers. What are you waiting for?