What is Supplier Rationalization?- Definition
Supplier rationalization, also known as supply base reduction [SBR] is the process of shrinking the supply base by reducing the number of active suppliers. The primary agenda of supplier rationalization is to streamline the organization’s spend to fewer suppliers and drive better value from those relationships.
Understanding Supplier Rationalization
Rationalizing a supply base is typically defined as picking the right suppliers and the right number of them, but in common practice, it has too often come to mean shrinking or consolidating a supply base in the name of securing more strategic relationships.
We tend to forget that supplier rationalization can also mean increasing the number of suppliers used, routinely changing your mix of suppliers or expanding and then reducing the number and types of suppliers you select in support of changing organizational objectives, tests, hunches and the desire to accelerate the transfer of innovation.
Importance of Supplier Rationalization
Every business pursues a mix of short- and long-term strategies in the course of business process management. Supplier rationalization is an especially important long-term strategy, as it involves finding ways to not only improve supply chain visibility and performance now, but continue to refine and optimize the supply chain for even better performance in the future.
Traditionally, supplier rationalization has been focused on choosing the right number of suppliers, with the right kind of performance, price, and reliability, to support an efficient sourcing strategy. This used to mean that supply base rationalization, and spend management, were both focused on supply base reduction, trimming the supply base to the absolute minimum to encourage competition and turn that competition to the company’s advantage at the negotiation table through fewer suppliers providing greater savings (albeit minimal resilience and agility should a major supply chain disruption occur).
But as more and more organizations discover the power of digital transformation and artificial-intelligence-adjacent technologies such as process automation and deep data analytics, many procurement teams are looking to glean insights from their data stream to optimize their supply chains for more than cost savings alone.
What are the benefits of Supplier Rationalization?
The bottom line remains a priority. However, the modern rationalization process prioritizes value creation as well as savings opportunities. It leverages supplier relationship management to consolidate the supply base using a model built around a core of key suppliers supported by an indefinite number of additional vendors who can be called upon to address specific needs when required.
The result? A responsive, contingency-aware, data-driven supply chain that’s constantly monitored, updated, and refined to:
- Maximize supplier performance and compliance while minimizing risk exposure.
- Prioritize strategic sourcing through analysis, collaboration, and continuous improvement.
- Identify and take advantage of savings opportunities as well as opportunities to collaborate and innovate with key suppliers.
- Build both resiliency and agility into the supply chain in order to protect business continuity and competitive performance, better insulating the company against global economic upheaval, natural disasters, and world-wide crises like the COVID-19 pandemic.
- Improve spend visibility and the accuracy and completeness of spend data to support and improve financial analysis, forecasting, reporting, and audits.
- Minimize the risk and impact of value-draining problems like maverick spend (also called tail spend, rogue spend, etc.) and invoice fraud.
- Speed and improve the performance of internal procurement processes like process automation and spend analytics, which in turn enhance your procurement organization’s procure-to-pay (P2P) workflows and, by extension, improve future iterations of your rationalization process.
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