JÄGER Business Blog

Supplier consolidation in the
rubber and plastics sector: advantages and disadvantages

A lean supplier network offers many advantages, some monetary, others process-related. It is no wonder that more and more companies are consolidating their procurement structures and, in the rubber and plastics sector, are switching to sourcing materials from as few suppliers as possible. But this strategy also harbors risks. Before decision-makers consolidate suppliers, they should therefore analyze exactly which procurement strategy is optimal for them.

Advantages of supplier consolidation

The purchasing department is being relieved

Every supplier incurs a certain amount of support effort, even if the company does not currently use their services. Purchasing must ensure that all suppliers in its network are capable of delivering and can continue to provide the required quality. To do this, it must request certifications, notify business partners of legal and procedural changes, and update master data in the database. In the foreseeable future, it will also be necessary to ensure, as part of the Supply Chain Act (LKG), that all suppliers comply with the ethical and ecological requirements formulated in the LKG. These tasks place a great burden on purchasing, especially in small organizations, particularly if they maintain an extensive supplier network.

Supply chain management can be partially outsourced

Consolidating procurement structures does not necessarily mean giving up the benefits of an extensive network. Many rubber and plastics producers have contacts with sub-suppliers and can outsource tasks if necessary. In this case, the coordination effort lies with the production partner. There are often also financial advantages, as suppliers can achieve higher economies of scale with sub-suppliers and have more leeway in contract negotiations. In this way, it is possible for customers to outsource part of their own supply chain management.

More efficient collaboration with suppliers

A consolidated supplier structure makes it possible to build closer relationships with individual service providers. If purchasing no longer has to divide its attention among a large number of suppliers, collaboration becomes easier. People know each other, have worked together several times in the past and know what is important to the other side. Conflicts are less likely to arise as a result. Networking of the IT systems is also possible in this scenario, so that a resource requirement on the customer side automatically appears as a purchase order in the supplier’s system and, in return, invoices are automatically made available to the customer’s accounting system.

Fewer redundancies in mold making

If a production company decides to purchase non-standard injection molded parts from several suppliers in parallel, multiple molds are required, whose costs are reflected in the purchase price of the components. In this case, the advantages in terms of delivery reliability resulting from redundancy are relativized by the rising costs. A consolidated procurement strategy has financial advantages in contrast. This may be a special case that is only relevant for the rubber and plastics sector. However, decision-makers should not ignore it.

Disadvantages of supplier consolidation

Reduced flexibility

The consequence of a consolidated supplier network is that the customer can no longer choose the supplier with the best conditions for each order or switch to alternative suppliers in the event of delivery problems. On the one hand, this has financial consequences, because the customer has less leeway in price negotiations. On the other hand, however, supply security can also be impaired, as the customer becomes dependent on a few suppliers. This disadvantage can be partially offset by long-term framework agreements. However, a certain residual risk remains.

Single point of failure

It cannot be denied that focusing on just a few suppliers always creates potential bottlenecks, in some cases even a single point of failure. If a preferred supplier has delivery problems at short notice, it is often difficult for the customer to find a replacement in time. This risk can also be minimized by choosing supply partners who themselves maintain an extensive supplier network. However, the organization of this network is not in the hands of the company, so there is always a certain degree of uncertainty here as well.

Current relevance (fall 2021)

At present, the topic of supplier consolidation is rather less relevant for most production companies, as they have difficulty obtaining materials at all. However, this state of affairs will not last. Sooner or later, the global availability of raw materials will level out again.

Conclusion

Whether the time and effort involved in supplier consolidation is worthwhile ultimately depends on the company. Many decision-makers are reluctant to give up the enormous flexibility offered by an extensive supplier network. A valid point of view. However, there is no denying that this procurement strategy generates costs and places an additional burden on purchasing. Every company must carefully weigh both sides. A good compromise is often to seek cooperation with rubber and plastics suppliers who themselves maintain an extensive network of sub-suppliers. In this way, production companies benefit from the advantages of supplier consolidation while mitigating its disadvantages.

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Author: Swen Schubert

Swen Schubert has been the site manager of the Jäger branch in Chemnitz since 2011. The trained wholesale and foreign trade merchant looks after all customers in the eastern federal states in the field service.

s.schubert@jaeger-gk.de | + 49371 – 5205714

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