The hidden benefit in using small companies

Last year Lloyds TSB started a programme of staff cuts, cost cutting and efficiency improvements. They said:

“We will optimise our demand management, simplify specifications and further strengthen our supplier relationships, reducing the number of suppliers to the group from around 17,000 to under 10,000, and further focusing on a core group of lead suppliers, to achieve approximately a 15% saving on addressable spend”

What is interesting here is the aim of reducing supplier numbers, this is often a target when trying to make efficiencies. Reducing numbers will reduce administration, reduce the number of contracts that need to be managed, and make each contract bigger to achieve economies of scale.

But it is really a good strategy in the long-run? There is a real risk that reducing too far will give the suppliers too much power. The next time the company re-tenders the contract they may find that their former suppliers have gone out of business and suddenly there is no competition for the current supplier and prices shoot up.

This is the obvious risk in reducing supplier numbers, but there is another less obvious one.

The other risk is that when companies, such as Lloyds TSB, reduce their number of suppliers, they naturally end up giving larger contracts to larger businesses. The small suppliers don’t stand a chance of winning the big contracts. Those small suppliers are still in an entrepreneurial phase of growth where they are fast, responsive and very innovative. In the short-term the big company has gained by reducing its number of suppliers, but in the long-term they have failed to support innovative smaller companies who may have come up with ideas and services that would change the industry.

Remember that procurement is a repeated game and not a one-off. Supporting a small innovative company may pay off in the long-term.

Image: SOMMAI / FreeDigitalPhotos.net

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