The global economy has been experiencing an unprecedented tough times. Sales are down substantially for most industries except education and affordable food chains. As a result, purchasing volume is down. In many instances, such the auto industry, volume is down by 50% or more. Purchasing organizations with shrinking business find themselves with several suppliers for a given commodity. The result is struggling suppliers with low utilization. In fact, capacity at manufacturers/assemblers could be under 50%.

Buyers are facing a dilemma. Does the buyer keep all of them as active suppliers with low utilization? Or perhaps evaluate all and phase out the weaker ones, shifting business to the stronger suppliers, increasing their capacity?

If the buyer keeps all of their suppliers operating at low capacity, there are several concerns:

• High fixed costs - Suppliers may not be able to stay competitive due to fixed cost.
• Weak revenues - Supplier balance sheets are weakening.
• Service levels - Many are laying off employees, which may reduce level, quality or speed of service.
• Supply chain disruptions - Financially strapped suppliers are selling equipment or closing plants.

On the flip side, buyers should evaluate supplier’s financials in order to mitigate risk and ensure supply continuity. Armed with that information, wise decisions on which suppliers to keep and whom to drop can be made. In this way, the buyer will be able to shift business to the “surviving suppliers”, increasing their capacity, maintaining lower prices, and strengthening the relationship. The buyer will have the opportunity to move forward with the stronger, better performing suppliers.

This course of action does have some potential short and long-term risks. Buyers need to take into consideration the following:

• Present - Competition is reduced if fewer suppliers are utilized.
• Future - When the economy turns around, the suppliers that lost the business might not be there anymore. Buyers will have to develop new sources.

Either way, buyers are facing very unique challenges. However, they need to take the necessary actions to help their organization to survive. Rightsizing the supply base is a smart tactic that can lower costs and promote good financial health in the supply chain.

Erez Azaria is a Senior Consultant in Ariba’s Spend Management Services group. Erez specializes in working with automotive manufacturers on strategic sourcing events.