Does Size Matter? Effects of Company Size On Sourcing Strategy

Why Does Company Size Matter?

I was originally going to have this as video only post, but after the time and effort it took to simplify strategy changes for a brief video, I figured some context was in order. This just isn’t an easy subject to cover!

Company Size = Spend Level = Leverage

I know it seems simple, but it’s not always intuitive. When I moved from Amgen to Gilead, I had huge shell shock.  Where did the $100M+ categories go? Where’s all the spend? And now in my current role, it has me asking ‘where’s the beef?!’

Talk about moving from large to small amounts of spend. And with that, my strategies have drastically changed. I can guarantee you, there are very few suppliers that are knocking down our doors.

Yes, we get the normal spam emails from major corporations and small, but nothing like my days at Amgen. There were days we had to shelter in place to hide from suppliers at our doors.

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Check out this article in the balance small business – Should My Small Business Engage in Strategic Sourcing? To find out if your company is too small for sourcing practices.

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How Does This Change Strategy?

Well for one, it sure makes your life a hell of a lot harder. I’ve never seen the repeated rejection of RFPs until I entered my current role. Who rejects RFPs? It’s business and all the same right? Not so much.

I found out the hard way why three analyses were so important to our jobs. So let me explain why they should be for you too.

1. First is Porter’s Five Forces. Buyer Power Specifically.

Nothing can kill your negotiations faster, when your spend isn’t even on the industry’s radar. If you are Ab InBev and spend $1B in advertising, your reputation precedes you. And, you pretty much get to tell suppliers what they are going to do.

But, as in my case, if your company is so small and has zero reputation, you are more likely going to take what you can get. Pressing on pricing isn’t easy. You have ZERO buyer power. And that matters.

2. Supplier Perspective Analysis.

Large companies (in general) are viewed at as an attractive partner? Why? Spend. Opportunities that come along with Gigantic Budgets. And that’s exactly why small businesses are view as the opposite.

Why would a supplier pursue working with a company with a budget of $2-5M, when they could go after the big fish. A company with $200M in category spend, tends to be a lot more attractive. And worth your time and effort.

It’s why suppliers reject RFPs. There’s just not a good enough ROI for it to make sense. Small accounts are annoying. It’s just easier to try push the bounds of margin and let nature run its course. And it’s doubtful that it will tarnish their reputations.

3. AT Kearney’s Purchasing Chessboard 

Supply versus demand. Big budgets = big demand. Small budgets = small demand. It’s pretty simple. So when you are working for a small company, you are limited in the sourcing strategies you can deploy. Especially when it comes to revenue or profit sharing. And your business isn’t making any.

Your options tend to be on the lower half of the purchasing chessboard, whereas the larger corporations tend to have carte blanche on the whole chessboard, but can utilize the upper half of strategies.

These things are true category management. There is a huge impact for change management, but the reward outweighs the risk. And having leverage with not only suppliers, but business partners can make a difference.

So What’s the Conclusion to this all?

 

Well, I’m not going to give a spoiler alert on this, you’ll have to watch the video!

But just know, if you are thinking on moving from large to small corporations, or the opposite in your career, make sure you re-do your analysis. Having spend at the $2-5M versus $100-200M, can make a big impact on strategies you can  pursue.

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