Kraft Buys Into the Mirage of Vendor Rationalization (REVISITED)

“How important is effective internal collaboration? Just ask a candy company in the U.S. mid-west. As the manufacturer of a number of leading brands, this organization grew dramatically in a very short period of time through a series of acquisitions. Unfortunately, an extemporal supply base was a byproduct of the transactions leaving the acquiring company with a highly suspicious, deeply segmented group of suppliers.

As expressed by a senior procurement manager for the parent organization, the biggest challenge was convincing the former suppliers of the acquired companies that becoming part of a larger pool would expose them to opportunities for increased sales.

Their suppliers weren’t buying the “increased opportunity” mantra, and as a result, the transition process was challenging to say the least.

From Yes Virginia! There is more to e-procurement than software (Part 2), Procurement Insights – September 20, 2007

In yet another example of the “when will they ever learn” category, About.com’s Martin Murray’s article “Kraft To Rationalize Vendors” reported that the company “announced that it is planning to cut its supplier base in half. The move will reportedly affect more than 30,000 businesses but possibly save Kraft more than $300 million a year.”

Let’s put aside the fact that enterprise-wide rationalization strategies rarely deliver the sustainable savings that organizations expect. It would be interesting to see how Kraft calculated the $300 million per year savings, especially since history has repeatedly shown that the “sifting” process usually results in a static versus dynamic and adaptive supply base.

Consider the negative vendor response regarding the Procter & Gamble save money “plan,” through which the industry heavyweight is looking to reduce the number of production companies with whom its brand agencies can deal from a current 125 to 30 through what they are referring to as a “preferred vendor” status.

Or the precipitous collapse of the GM North American supply base through implementing misguided mainstream strategies that also included a “drive on price reduction, low-cost country (LCC) sourcing, and extension of terms.”

In other words, there is no shortage of case references or research material to demonstrate to Kraft Foods that the over-utilized, under-achieving rationalization approach delivers anything more than an eroding supply base that, once lost, is not easy to rebuild.

In my September 27, 2009 post “The Continuing Dangers of Vendor Rationalization,” I point out that advocates reference several “commonsense reasons” to reduce or rationalize supply bases. These reasons include lower administrative and operational costs, increased quality control through more strategic relationships, and the ever-popular volume discount savings. Unfortunately, the numbers or statistical support for the move have been less convincing. When broadly applied across an enterprise’s entire spend, statistics clearly indicate that the unintended consequence of rationalizing the supply base will lead to increased costs in areas such as Indirect Material procurement.

I now find myself asking the same question almost two years later; why? “Why continue to perpetuate a practice that has yet to deliver the promised results while simultaneously alienating key stakeholders such as regional or local buyers and suppliers?”

The only answer besides an unimaginative and short-sighted vision is that the common denominator has and continues to be “linked” to an adjunct IT or ERP-centric strategy. It is a strategy built on a somewhat static foundation that fails to recognize and therefore adapt to the dynamic realities of today’s increasingly complex, global supply chains.

An irony, of course, is that while pursuing a rationalization strategy, real supply chain risks that pose a serious threat to supply and profitability are largely ignored.

A 2008 Aberdeen study supports this conclusion stating that 99% of supply management executives reported disruptions in their organization’s supply chain in the previous 12 month period. These reported disruptions negatively impacted customer relations, earnings, time to market cycles, sales, and overall brand perceptions.

However, despite the frequency of the disruptions and far-reaching negative consequences, the survey reported that 84% of executives believe that their company is not prepared to respond to a disruption in their organization’s supply chain.

A further consideration when contemplating a rationalization strategy is that pricing risks, and risks/delays with suppliers were identified as the top two concerns of the majority of executives who responded to the poll.

Against this backdrop, one cannot help but wonder how a rationalization strategy that alienates rather than engages suppliers could be a viable and sustainable approach beyond the initial savings bump, from the standpoint of decreasing costs and increasing savings?