Cost Insights
by PowerAdvocate

Intelligence for energy companies seeking a data-driven approach to cost management

The Top 3 Warning Signs of an Ineffective Supply Base

July 28, 2015 at 4:39 PM / by PowerAdvocate

One of the greatest challenges that energy supply chain organizations face is finding the right balance of suppliers for each of their cost categories.

Go with too many suppliers, and you end up with a fragmented supply base. Go with too few, and you risk over-consolidating.

So what's the right middle ground?

In today's post, we show the top 3 warning signs of an ineffective supply base:

1. The Over-Consolidation Pattern

Over Consolidation Pattern

The over-consolidation pattern is characterized by one or two suppliers receiving an oversized amount of spend within a category.

Heavy spend concentration causes a high risk of disruption if a supplier were to suffer an event like bankruptcy, outage, or lack of inventory. We recommend that supply chains develop strong relationships with multiple strategic partners to ensure that if one is disrupted, others can take its place.

Patterns like this can also indicate incumbent suppliers with an outsized amount of bargaining power, suggesting opportunities for strategic sourcing to drive competition and lower prices.

2. The Long-Tail Pattern

Long Tail Pattern

The defining trait of the long-tail pattern is a large number of suppliers with small amounts of spend.

Long tails indicate high levels of off-contract spend, the combined value of which can reach millions of dollars. When spread across tens of different suppliers, that spend provides no added strategic benefit. Instead, energy firms can reallocate that spend to preferred suppliers to leverage higher volumes for discounts.

In addition, large long tails pose an administrative burden on the organizations that manage supplier interactions. By consolidating spend with a few preferred partners, energy firms can streamline their operations while capturing savings.

3. The Fragmentation Pattern

Fragmentation Pattern

The final pattern is characterized by a high number of suppliers with mid-range amounts of spend. This spend is neither small enough to suggest an immediate need to buy in the field nor is it large enough to result in meaningful strategic partnerships, volume discounts, or preferred contract terms.

By splitting the total spend on a category among many suppliers, energy firms lose out on capturing added strategic value from those dollars. Instead, energy firms should consolidate spend with a few strategic partners who offer better lead times, unit price savings, and improved quality in exchange for increased volume.

The Bottom Line

Almost every energy firm sees combinations of each of these patterns: over-consolidation in some categories and combinations of long tails and fragmentation in others.

By avoiding the extremes of each of these 3 profiles and finding the right balance when allocating spend to suppliers, energy firms can go beyond merely procuring goods and services to capturing strategic value from their supply base.

Wondering how you determine whether your supply base is fragmented? Click here to learn more.

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