How Do You Deal with Lots of Small Suppliers?

Photo by Val Vesa on Unsplash

One of the key problems enterprise buyers have is that they do not have enough of the right suppliers submitting bids in response to their Requests for Proposal.

Another problem that purchasers may have, paradoxically, is that they have too many suppliers. Consider a large corporation like a bank. How many small suppliers does a large financial institution have delivering specialized or regional services like compliance training?

Here is Forbes describing the issue:

“The supply chains of most organizations have grown ungovernably large. It is not uncommon for global brands to possess tens of thousands or even hundreds of thousands of suppliers.”

Think about the administrative complexity of managing such a large network of suppliers. Registering them as vendors. Paying them. Monitoring their performance.

The natural reaction is to rationalize or reduce the supplier base.

But doing so penalizes smaller suppliers, who are often owned and operated by members of historically disadvantaged groups such as minorities, women, service-disabled veterans, and members of the LGBTQ community. Some of them are sole proprietorships or very small entities with only several employees. This stands in contrast to the stark and growing pressure to diversify supply chains.

One way to fix this problem would be to consolidate the suppliers into something akin to a “Group Selling Organization,” ideally with a disadvantaged wrapper.

How might this work in practice?

Consider the example of Metrobank. They need to purchase compliance training for their employees working in retail stores across the country. They might purchase an online solution from a large seller and require their employees to do the training by a certain date, on their own time. Or, they could source these services from small training companies located across the country for in-person delivery.

If they do the latter, then they must deal with hundreds of suppliers. This means identifying them, gathering vendor management information on them, paying them, and tracking their performance.

In traditional sourcing involving small suppliers, just as in life, there are tradeoffs. There are always tradeoffs. Between risk and efficiency, cost and suitability. All of it.

The Group Selling Organization we propose here would be a centralized counterparty for Metrobank. Instead of buying from five hundred Mom-and-Pops, they would deal with one company, GSO Corp.

Practically, the Group Selling Organization would have the hundreds of suppliers on their platform, including detailed supplier profiles, marketing materials, and vendor management information. Metrobank could peruse the GSO platform, select the individual supplier who would deliver the service, but contract only with the GSO. Metrobank pays the GSO and the GSO pays the individual supplier, albeit at a nominally discounted price to reflect the transactional friction.

Naturally, the Group Selling Organization would require contractual indemnification from the buyer and the supplier such that the buyer would acknowledge they have no recourse to the GSO for any performance failure or other issues and the supplier would indemnify further the GSO from the costs of any litigation risk or required performance make-wholes.

It would be as if the buyer were purchasing directly from the supplier, but with the administrative simplification of executing through the GSO.

To make this happen, the GSO would require a platform that could sit as a layer on top of the buyer’s incumbent strategic sourcing architecture, while at the same time providing a much more user-friendly interface for the small suppliers. It would have to be a platform that could onboard suppliers easily with detailed vendor management. Ideally, there would be links to supplier profile pages (including marketing information); think Shopify for B2B. And there would be social networking like messaging to facilitate greater collaboration between small suppliers, or the development of relationships between buyers and suppliers. There could even be contract management for things like invoice reconciliation.

This is precisely the kind of platform we have built at EdgeworthBox. We have taken techniques from financial markets and applied them to the RFP business process to reinvent the way organizations purchase goods and services for the 21st century. We call it “network-based sourcing™” We would love to talk to you about what we have learned about procurement and how we want to change the way the world buys goods and services. Let’s talk.

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Chand Sooran

Founder & CEO, EdgeworthBox. Investor and entrepreneur. I want to change the RFP business process.