Steve's IT Rants - Supplier Eraser

Steve Duplessie has a well honed nack of hitting the nail on the head in a style and language that both informs, entertains & 'sticks' (if you've seen him present in person you'll know what I mean).

Again I find myself reading his blog at http://esgblogs.typepad.com/steves_it_rants/2009/08/it-shops-are-starting-to-trim-number-of-vendors-in-earnest.html

I started to write a comment reply to his post, but felt it was more than a reply so would draft something here.

Some key points from Steve's blog :-

• 34% of customers looking to reduce supplier qty
  
• Isn't the vendor list being reduced organically through acquisition?
• Is it good for the market as a whole? I'm not sure it is.
• It seems it will stifle innovation in exchange for more consistent vendor relationships (consistent does not imply "good," necessarily).
  

Frankly I'm staggered that it's only 34% and not a much higher number - a lot of people (incorrectly IMHO) associate supplier reduction with cost savings.



Yes in the short-term there can be a reduction in the cost of purchase orders by reducing supplier qtys - with the biggest short term gain to be to move to single supplier for a given area. Clearly 'value', 'quality' and 'sustainability' are often overlooked in such situations, similarly 'flexibility' is often missed and a 'cheap deal' suddenly becomes much more expensive when the full picture of lifetime costs & changes are considered. Again over time we have traditionally seen these 'savings' eroded as both supplier & customer get 'lazy & comfortable' together, with less emphasis on value.

As far as I can see such deals often also ignore the cost of migrating to the new terms, technologies or processes - often the 'adoption' costs can be considerable. Again people often think of deal durations as being a long time, but consider a 3yr deal - 6+ months taken to 'adopt' the deal after signing, and the renewal position will need to be considered at least 12 months before expiry to allow for the annual budget process to permit flexibility in the renewal outcome. So at best I'd say you get 12-18 months of stability (ie potential for 'cost savings') during a 36mth agreement.

So what do I think are some of the driving factors re supplier reduction :-

• Reduction in resources & overheads in supply chain functions - thus forcing them to only wish to deal with fewer companies of a larger deal value.
  
• The current 'in vogue' supply chain quality processes have a similar 'better fit' with companies of larger scale and with a larger / more regular financial exchange between customer & supplier
  
• As a result of above, supply chain are often being rewarded or KPI'd with regards to supplier qty reduction - and personal rewards or KPIs always drive behaviours
• Customer IT/IS depts are under hard pressure to do more, better, quicker with less - which equals less time & resource to accommodate diversity (product or suppliers)
• Naturally there is also a major drive from the larger suppliers, with them offering big discounts on deals in order to generate any form of revenue and also elbow out competitors. These 'deals' are increasingly not just technology acquisition price, but are moving to multi-year deals covering tech, services, support & maint etc. It would appear such deals are often 'sold internally' as vendor displacement and are defensive in nature, with the vendor expecting later to cross sell into other areas (sometimes even just to act as a reseller to be able to book revenue), to recoup funds through services or simply to be able to remove a competitor.
  

Yes the supplier list is being reduced through acquisition, but I've yet to see this reduce the costs to the customer, nor does it always appear to be beneficial when the technology is killed off or vanishes for years.

Similarly I'm yet to be convinced that a reduction in competition is good for the customer of the industry - the customer looses due to less commercial pressures and less reason for suppliers to work with open standards, the industry looses through lack of innovation and enforced marriage acquisition issues.

My conclusion is that I think there is a lot of short term thinking (and savings benefit claiming) going on both in vendors (revenue now at cost of profit now & revenue in future), and customers (in terms of standards, commercials, leverage & choice) - with a considerable risk to all concerned for the mid-term.