Dangerous Supply Chain Myths Revisited (Part 1): The Myth of Consolidation

Each day for the next seven days I will be posting parts 1 through 7 from what is considered to be one of the most popular series in the Procurement Insights Blog’s history.

The Dangerous Supply Chain Myths series was based on my review of the ISM, CAPS and A.T. Kearney Report that was originally released in May 2007.

Considered to be a breakthrough assessment of the purchasing industry at the time, I felt that there were several gaps in the study.  What is important, and within the context of present day realities, what do you think.  Do the key areas highlighted in the study still carry weight in the here and now?  If not, what has superseded them in terms of overall importance?

Whatever your thoughts, I am certain that you will find this series interesting.

Opening Comments:

While generally interesting, the recent 10 Page Report (excerpt) by ISM, CAPS and Kearney perpetuate a number of the myths that actually fuel the high rate of e-procurement initiative failures.

Focusing on what is referred to as the “seven critical supply strategies” for Succeeding in a Dynamic World, I will address each “strategy” over the next seven day period referencing the results of our 15 years (and counting) of research findings and front line experiences.

Please keep in mind that this undertaking is not designed to malign or even call into question the capabilities of the parties involved. The main impetus behind the effort is to provide you with information that will hopefully motivate you to think outside of the framework with which you are most familiar. The fact is that based on my interaction with procurement professionals across North America through my Changing Face of Procurement conference series, the majority already question the validity of what is supposedly “accepted” or “mainstream” thinking. As we progress in this series you will find out why.

Segment 1 The Myth of Consolidation

• Category Strategy Development
  Consolidate your supply base for each category into a small number of preferred suppliers that can be efficiently managed while mitigating risk. The strategy for each category should focus on the overall value chain over a three-to-five year time frame.

This strategy is the epitome of the two edged sword. While applicable in certain situations it is the broad application of the consolidation strategy across the entire spend which is a major factor in the high rate of e-procurement initiative failures. In my paper Acres of Diamonds I highlighted the results of 14 years research which identified that all commodities fall into one of two categories, Historic Flat Line and Dynamic Flux. Based on the study’s findings the strategy with one will not work with the other. (Let me know if you would like a copy of the Acres paper by return e-mail.)

Unfortunately, virtually all existing applications are structured around the procurement of Historic Flat Line commodities. As a result of the exorbitantly high licensing and maintenance fees clients pay for implementing these applications, when savings (both Cost of Goods and Cycle Time Reduction) dry up organizations employ what I refer to as a “pull through” strategy in an attempt to satiate the voracious savings appetite of a costly underachieving initiative. Specifically, they attempt to justify the application investment by utilizing a consolidation strategy for purchases which are not suited to this approach. The result is an over-reliance on a change management and compliance strategy that consumes valuable cycles in an effort to legislate or enforce a program which should not have been introduced in the first place.

Kearney’s failed efforts to implement such a strategy with the Federal Government of Canada are just one of countless examples where this approach alienated stakeholders both within and external to the client, with the most vociferous resistance coming from the supplier community. In fact for those of you in the public sector (although I am certain that private sector professionals will also be interested), you may want to refer to a US report which came to the following conclusion (and I quote):

“The number and size of bundled contracts within the executive branch have reached record levels. Although contract bundling can serve a useful purpose, the effect of this increase in contract bundling over the past ten years cannot be underestimated. Not only are substantially fewer small businesses receiving federal contracts, but the federal government is suffering from a reduced supplier base. American small businesses bring innovation, creativity, competition and lower costs to the federal table. When these businesses are excluded from federal opportunities through contract bundling, our agencies, small businesses and the taxpayers lose.”

Note that while the report recognizes the fact that contract bundling or consolidation can (and I believe this) does serve a useful purpose, the problems arise when there is an attempt to force feed the strategy against the better judgment of key stakeholders (especially those for whom the initiative is supposedly designed to assist). (Let me know if you would also like a copy of the US Report.)

While I recognize the conceptual value of organizations such as CAPS, or an Aberdeen and Gartner the fact that they have ties to vendors through a variety of non-arms length relationships (either as a collaborative study partner or client) is the main reason that the validity of their study findings are subject to an increasing level of cynicism from key stakeholders such as frontline buyers. When 75 to 85% (some would suggest that this number is even higher) of all e-procurement initiatives fail to achieve the expected results, one cannot help but wonder why the CAPS’ and Kearney’s of the world continue to cling to a broadly applied consolidation strategy.

(Next Installment: Supplier Development and Management)

You can also access the entire series through the link listed in the right hand index of this blog.

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