When selecting which suppliers your organization will trade with, it is typical for a larger supplier to be selected over a smaller supplier. This is because these larger suppliers are perceived, not just to be better placed to handle larger order volumes, but to be more stable than smaller businesses. Buyers tend to have more confidence in larger suppliers, and they believe that there is less chance of a larger supplier with a healthy financial position going out of business.
All suppliers – whatever their size – carry risk, but more businesses are starting to expand their supplier base and realize that by working with smaller suppliers they can still gain a competitive advantage through more rebate income, more sales and better opportunities. Let’s explore all the benefits of expanding your supplier base below.
More opportunities to innovate
A strong commitment to increasing your supplier base can provide new opportunities such as introducing new products, increasing competition on price between current and potential new suppliers driving down your net costs, shortening time-to-market, and increasing margins; all of which can lead to sustained profitable growth.
If you continually use the same suppliers without branching out into new markets, you risk being less innovative. Smaller suppliers tend to differentiate themselves from their competitors by offering a more “niche” product. You also have an increased opportunity to develop truly collaborative relationships, so you can take advantage of that innovation and help to shape it as your relationship grows.
Experiment with the different types of rebate deals
If you have been with the same suppliers for a long time, you may find they get stuck in their ways and don’t want to change how they do business, but at the end of the day rebates provide a big opportunity for profitable growth. In our dealings we have come across over 300 different types of deals that you could be realizing the benefit of by expanding your supplier base and our software can help you manage all of them in an efficient way.
More favourable contract terms
Larger suppliers usually have stricter contract terms and an inability to accommodate even the most insignificant amendments. As a result, buyers who are also trying to satisfy their internal stakeholders get frustrated. On the other hand, smaller suppliers are generally more responsive to the value of the contract and willing to negotiate more favourable terms.
If you choose to expand your supplier base, you may find a smaller supplier will have fewer staff and therefore shorter command structures; this makes communicating with their key decision-makers about your rebate agreements much simpler, making implementing change quicker and more straightforward. To streamline this even more, a collaborative platform like Enable means all communication can be achieved on one system, removing the need to scour through long email threads.
Better quality service
If a supplier has fewer customers, they will be more inclined to provide a higher quality customer service and are typically more concerned about the risk of losing your business. This makes them more receptive to suggestions and improvements and probably more willing to be flexible on profitable, rebate programmes. They are also better prepared to provide a more personal service, an important element in maximising competitive advantage and increasing collaboration.
Drive your bottom line
Many companies do not pursue all the rebates available to them with all their supplier base. This is typically because they don’t have the time and so focus on the 20-50% of their suppliers that account for a perceived 80% of potential earnings.
Should you be ignoring the rest of these smaller suppliers? The answer is no, because pursuing the ‘long tail’ of rebates as we call it could become a significant amount of rebate for your company. For example, by pursuing the long tail of rebates, your 10 biggest suppliers which currently contribute 90% of your total rebate earnings (and are therefore vital to your business) could now contribute 70% of your total rebate earnings (without reducing the actual value). This therefore means you can be less reliant on a few suppliers by growing the rebate income from other as-yet-untapped sources.
A report by the Hackett Group found that companies who participate in a long-term supplier diversity program generate a ROI 133% greater than firms who look no further than the suppliers they traditionally rely upon. The report claims supplier diversity programs also drive an additional $3.6 million to an organization’s bottom line for every $1 million spent in procurement operating costs.
Expand your supplier base today
Building your new and improved supplier base can be daunting but, as we’ve reviewed above, it will benefit your business in many ways. Smaller suppliers can play a more significant role in the business environment and in the economy as a whole than is often realised. Sometimes you should avoid the concept of ‘big is best’ and analyse all your supplier options carefully.
By implementing a rebate management system like Enable you will have increased visibility over all your suppliers – even the smaller ones – and you can reduce the admin burden of managing rebate to a point where there’s a net benefit to paying attention to the smaller suppliers.