Strategic supply-base reduction
Strategic supply-base reduction (SBR) has become a major tool used by leading firms to reduce costs and improve quality, responsiveness, flexibility, and other key dimensions of performance. Here are some examples of SBR in action. AlliedSignal: AlliedSignal’s first step in its sourcing strategy was to prune the supply base from 10,000 in 1992 to fewer than 2000 in 1997. Plans called for its supply base to shrink further to 1500 over the next few years. AlliedSignal’s automotive sector saved $28 million in 1993, which came primarily from winnowing the supply base and negotiating new contracts (Minahan, 1997). Boeing: ‘Boeing will cut 13,000 of its 31,000 suppliers over the next four years, mostly smaller companies that duplicate equipment’ (Rae-Dupree, 1999). Chrysler: From 1989 to 1993, Chrysler reduced its production supplier base from 2500 companies to 1114 and fundamentally changed the way it works with those that remain. The time to develop a new vehicle is approaching 160 weeks, down from an average of 234 weeks during the 1980s. The
cost of developing a new vehicle has decreased by an estimated 20 to 40 per cent. Since 1988, Chrysler has reduced its number of buyers by 30 per cent and has increased the dollar value of goods procured by each buyer. Profit per vehicle has increased from approximately $250 in the 1980s (taking the average from 1985 through 1989) to $2110 in 1994 (Dyer, 1996). ‘Now about 90 per cent of Chrysler’s purchasing volume is with 150 suppliers’ (Lewis, 1995).
GEC Marconi Electronics: GEC Marconi replaced the multiple systems it used to manage and order parts with a single system. As a result, it was able to reduce its supply base from 97,000 to 28,000 and generate a yearly savings in its component costs of 15 per cent (Bylinsky, 1999). Intel: ‘Since the mid ’80s, Intel has made a serious effort to consolidate its supply base, adopting an n + 1 rule-of-thumb in determining the maximum number of suppliers (‘n’) needed in each commodity
area to satisfy production requirements.’ That is, Intel will not have more than one extra supplier above the minimum number needed to satisfy its production requirements. For example, the number of suppliers of lead frames has been trimmed from 12 to 3, ceramic packages from 6 to 3, and wire and moulding compound from 3 to 1 (Morgan, 1995). Kraft Foods: ‘Recent initiatives to consolidate activity [copier equipment and records retention] with a Single vendor for each function are generating annual cost savings of 30 to 40 per cent’ (Westfall, 1999).
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Examine the concept strategic supply- base reduction as a strategy in light of the covid pandemic. (20)
Discuss how reducing the supplier base can improve organisational performance. (20)