The most valuable possession of a small business owner is discretionary management time. So what does that have to do with small business supply chain management? Plenty.
In my work with small business owners, I often learn that time and attention is not invested with selling products. Time is not invested in teaching employees. And time is not invested in strategic planning.
Too much of the business owners’ time is consumed with managing vendors. Dealing with complexities in the business supply chain.
My advice is to reduce or limit the total number of vendors the managers have to manage. Large businesses are moving in this direction. Small businesses should take note.
What You Can Learn from Big Business Examples
Large businesses offer learning examples for small business supply chain management. And specifically on vendor consolidation.
Initiatives by companies like Ford, Hardee’s and others, have over the years sought to improve operating margins by reducing the number of suppliers.
Consider the example of Hardee’s Restaurants. Andy Puzder, who took over as Hardee’s CEO, saw he had a complex business that needed to be streamlined.
At the time he noted, “Hardee’s 50-item menu, … was a mess of complexity… and stocking all that stuff was a supply chain nightmare.”
Puzder was able to reduce the Hardee’s restaurants’ offerings. In the process, Hardee’s gained efficiency and improved operating income.
The Ford Motor Company had a similar supply problem. Ford is famous for having made gains in efficiency through the assembly line. They’ve had over 100 years of experience. (See image of Ford assembly line from 1913, above).
But the challenge changed over the years as the company grew. The Wall Street Journal reported that Ford was looking for savings by revamping their supply system. The auto manufacturer wanted to reduce their 2,500 suppliers down to 1,000. This was in 2005.
Ford’s challenge was not in the change in the number of suppliers. Ford’s real challenge was with changing its purchasing department corporate culture: beating up suppliers on price.
But Ford decided to look for efficiencies by managing a fewer number of vendors.
My Case Study in Business Supply Chain Management
A few years ago I tried the same thing in the public sector.
It didn’t work. Here’s my case study.
I once had the assignment of getting more efficiency from a department’s supply chain during a tour of duty in government. But I made a mistake. I didn’t ask, “Who are the stake holders in this decision?”
I started by reviewing the vendors for this $400 million department. It had over 11,000 suppliers.
First came the easy MBA 101 task. I directed the staff to report on the number of vendors that did most of the business with us — say 80-90% of the dollar volume.
To no one’s shock and awe, save mine, we learned that 900 vendors did 90% of the business with my government agency.
I addressed the staff. “You mean,” says I, “we have to manage over 10,000 vendors to deliver 10% of our purchase orders?”
My chin thrust out with smug incredulousness. I was making one more high-priced MBA observation.
“Yes. So?” the staff replied in unison.
From there, my smug MBA attitude soon would meet political realities.
I strongly suggested that we should look to consolidate vendors. I asked them to look at ways to reduce the number of transactions and paper work.
The team jumped to it.
In mere hours the calls came in. No, not from disgruntled vendors. The calls came from locally elected officials representing the disgruntled vendors.
No one was happy their rice bowls were going to be broken.
And the fact that this all took less than a day alerted me that back channels were working at the speed of light.
The vendors (and the politicians) were aided and abetted by the army of bureaucrats pushing all that paper around. The politicos clamored for efficient government as long as the suppliers in someone else’s district were cut.
No one wanted change.
I didn’t have a chance at improving the supply chain. Nor did the citizens’ tax dollars.
This was my first rude lesson in ‘multiple points of accountability.’ In government a civil servant answers to his boss, of course. But he or she also must be mindful of other politicians, the press, the public, the unions, the lobbyists and peers making a grab for his budget.
The supply chain management fight wasn’t worth the political capital necessary to win.
My lesson learned, I quickly moved on to other battles where I had half a chance.
The Lesson for Small Business Supply Chain Management
The small business owner will have more control over contract terminations than I did. Small businesses can move faster.
Don’t let my case study in government dissuade you from improving your small business supply chain management.
Look for ways to streamline vendors. Consolidation reduces complexity. It reduces the time you have to spend. And frees you up to work on the big picture.
But as you try to control your time and your staff’s time, consider outside influencers. Community leaders. Relatives of employees. Franchisors. Mutual friends. Local officials.
They may have more power than you think.
Yes, sometimes, small business supply chain management is about more than contracts.
I just wanted to say that I really enjoyed reading your article. You make several excellent points about all the time wasted in managing the supply chain. I agree that streamlining is the key. As you said, choose a few good vendors and stick with them.
Having worked in a big company that did much of that based on Deming’s injunction to go for sole source suppliers as a way to reduce risk, reduce costs, and improve quality (it’s a lot easier to manage one relationship well than to manage two or three for the same part), I understand your point well.
I’m curious, though. What might have been the other effects had you succeeded in cutting the vendor count in your example by 10,000? Would that, for example, meant not buying office supplies from Office Depot, Staples, _and_ Office Max, all relatively large companies, or would it have cut out myriad small businesses who didn’t have the capacity to address all your needs but provided both a useful product to you and a livable wage to them (the readers of this blog, for example)? Would that, ultimately, reduce commerce to an even smaller number of big players? Would that have kept you from getting innovative products and services that may flourish at small start-ups?
I don’t really know the answers; I’m curious in your thoughts.
Bill, you are correct in most of your analysis. Cutting the number of vendors would have cut the local suppliers to the local neighborhood government offices.
And the consolidation may very well have raised prices on the goods/services purchases. But this should have been off-set by the reduced cost of overhead of administering the transactions. Back then, the time and motion cost of handling a purchase order was about $100. Account for total costs and all that.
I would agree that some local businesses would have been laboratories of innovation and cost savings. But I am not persuaded that savings would have been “scaleable” across all vendors. Indeed the individual supplier would be reluctant to share competitive advantages with competitors. Cost savings would be spottie, if realised at all.
Another challenge was the focus on saving the taxpayers’ dollars not the income of the vendors. The government is not the employer of last resort; nor the buyer of last resort.
But commerce does not exist totally outside political realities. As Your Business Blogger/heartless/snothead/MBA learned the hard way.
It is the responsibility of the small business owner to bring innovation and compelling products with added value to the buyer, that would justify the higher costs of procurement.
Thank you for your comment,
Jack
I am writing a book to be published soon and would like to take the article above by Jack Yoest. Your permission please Jack/
The article is a refresher on the need to keep the vendor base lean and responsive with cost continually coming down – economies of scale and niche products will become commodities sooner or later – sooner now with the rapid pace of information and the enabling technology. Principle factor that needs certain tunning of our intellectual thoughts are:
a) in any small business we must be some things to some people – developing core competency
b) the need for collaborative thinking amongst like suppliers / vendors to look at the bigger picture – ask yourself why is merger and acquisition taking place increasing – greater market share within a country, region and globally – a progression path
c) innovation and creativity – coming with better and better products to serve the customers even better – size and the ability to look at varied work atmosphere and create newer and newer products
My personal opiion above is mirrored by the developments taking shape in the Far East where I come from. I am sure as much as I feel for the small business community it is also time to grow up and to look at the bigger picture – entrepreneurship and growth comes from a need and like minded thinking to share a bigger slice of the burgeoning cake. Take heed and let us all progress – stress is part but at the end of the road there is a place for everyone. There is a saying nature has a way of balancing things up in the final equation.
Best regards.
T Rajagopal
Principal Consultant
Supply Chain – ASIA Seminars
s
Jack
My web-site will be updated soon with the latest.
Presently I am discussing with the US Embassy here in Singapore on how we could help small business community through a series of seminars for the big and corporate business in Asia starting from the MNCs Fortune 500 companies executives and managers in the supply chain.
At the appropriate time I will keep you informed.
Let us work to make the small business a potent force and one whose balance in the final equation of a product are value added. Remember even an ant can tickle an elephant…small is beautiful.
Regards.
T Rajagopal
Principal Consultant
Supply Chain – ASIA Seminars
cpo@supplychain-asia.org
I am thankful for the new things I learned reading your post. Thanks.