Strategic Purchasing

How many suppliers do you need?

Supplier base reduction may not be a new purchasing concept, but it is an enduring, challenging, and strategic one.

Twenty years ago or so, when many OEMs were vertically integrated, it was not uncommon for large global electronics companies to have several thousand suppliers for the semiconductors, passives and other components and materials needed for production. Many leading-edge OEMs decided that it was hard to work with so many suppliers and that it would be more prudent to reduce their number of suppliers for many commodities.

By leveraging their production purchases with a limited number of suppliers, the OEM could get better pricing and overall better terms on contracts, and become more important to the remaining suppliers. Many OEMs decided to forge strategic partnerships with suppliers to get early access to their latest and greatest technology and generally get more support from suppliers.

Xerox Corp. is a good example. Ken Syme, vice president of global manufacturing, procurement, and supply chain for the company, recently told me that his company was ahead of curve in embracing the idea of supplier base reduction. He said in the late ‘80s, early ‘90s Xerox had a couple of thousand production suppliers, although 75% of Xerox's spend was with about 400 suppliers.

The company has since reduced its production supply base to about 200. In fact, Xerox now has only four strategic suppliers for about 60% to 70% of its production component and material purchases.

Many other electronics companies followed suit and reduced their supply base and achieved what they considered to be an optimum number of suppliers for their production requirements. However, the 2011 earthquake in Japan and flooding in Thailand resulted in many OEMs rethinking their supply base strategies. Besides killing thousands of people, those disasters also knocked out production for many electronic components and materials. Many OEMs and electronics manufacturing services (EMS) providers scrambled to find new sources for the parts that were affected by the disasters. Many major OEMs turned to distributors, both authorized and independent, for components.

They also looked to quickly qualify new suppliers for parts, and many made sure that new suppliers had the capacity to build the components in more than one location. Of course in some cases, qualifying a new supplier may be impossible if the part is a custom component and sole sourced from a supplier that owns the intellectual property (IP).

Determining the optimal number of suppliers is no easy task, as there is no one-size-fits-all rule other than that the number of sole-sourced suppliers should be kept at a minimum whenever possible.

Some OEMs have a single-source supplier, but the OEM owns the IP for the part and can qualify another supplier to build a part if necessary.

Depending on the company and part being sourced, many OEMs like to use three suppliers for a part and then apportion the spend among the three. For example, one supplier may be awarded 50% of the OEM’s business for the component, the second 35%, and the third 15%. Ideally, each supplier has part production in more than one plant in different geographies. The thinking is if a disaster strikes and takes down production of one of the suppliers, the two others should be able to pick up the slack.

The percentage of business awarded to each supplier can change based on the overall performance of suppliers.

Most large global OEMs buy the vast majority of the parts they need directly from semiconductor and other component manufacturers, but also have qualified distributors for certain parts. While many large OEMs have always purchased a small portion of their parts from distributors--often for design work--some are increasing their spend with distributors. They want to make sure they are able to buy from the distributor if a natural disaster or other event disrupts production of their direct manufacturers.

Some distributors make a point to take care of their established regular customers when parts are in short supply because of a supply disruption before selling parts to OEMs or other customers that they have not done business with in the past.

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