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Managing Your AVL With the 80 / 20 Rule

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It does not matter whether you have 10 or 100 suppliers in your approved vendors list (AVL), electronics OEMs want to make sure their AVLs do not grow beyond their control. Buyers in OEMs must clearly understand each vendor and how your company can improve cooperation with vendors listed in the AVL.

The categorization of suppliers below illustrates how you can create and manage a better AVL to help balance your suppliers. Typically, your suppliers will fall into four categories:

  1. Original manufacturers selling main stream products and services in the market which meet your, primary needs, and those of your customers.
  2. Single source, or most competitive, distributors for the original manufacturer in category 1. Such distributors typically focus on a limited number of manufacturers’ brands and do not re-sell other brands from their list.
  3. Distributors selling a wide range of products / services which cover your primary, or minor, requirements. Such distributors are willing to help you source and pass along whichever products / services you need.
  4. Regional niche suppliers selling products that meet very specific, or sometimes minor, needs. You purchase from them for a few projects, usually randomly, with low volume requirements.

Keeping the above categories in mind, you are likely to observe that 80% of your spending goes to 20% of your suppliers.

Categories 1, 2 and 3 are most likely to be in the 20% volume range, but use up 80% of your spending capability. Meanwhile, category 4 suppliers represent 80% of the volume, but consume only 20% of your spending.

The bulk of spending is distributed to a small percentage of suppliers

Suppliers in categories 1 and 2 are in a relatively strong power matrix compared to suppliers in categories 3 and 4. You will likely not replace your category 1 and 2 suppliers with alternative suppliers unless the alternatives offer improvements in technology or significant market changes occur.

Additionally, category 2 suppliers likely have deeper knowledge and stronger service capabilities to fit your needs than category 3 suppliers, who focus on pure product re-selling.

Therefore, it is recommended that your company work to cooperate with category 1 and 2 suppliers under a strategic roadmap. Your time and effort in managing these suppliers is crucial for your business to succeed. These suppliers consume 80% of your spending, providing the major products / services which you use develop, sustain, and grow your business.

Suppliers in category 3 help you to consolidate sourcing and offer the best, and likely the most consistent, markup, terms, and conditions.

When total spending encompasses a broad range of brands, category 3 suppliers have a good chance to beat category 1 and 2 suppliers to become your top spending suppliers. Category 3 suppliers are critical in your exercises to consolidate category 4 (80%) suppliers.

Whenever you want to add a supplier to meet a new requirement in category 4, make sure to evaluate beforehand whether any category 3 suppliers you are currently working with can help you with acceptable markup, considering future spending forecasts for any new requirements.

This AVL review pays off in the long run by saving your efforts while helping you focus on your core businesses. We Chinese have a saying: It is better to lack something rather than have too much.

In summary, it is better to further develop your top 20% suppliers, especially those in category 3, so they can take over the roles and responsibilities of the category 4 long-tail suppliers representing 80% of the supplier volume. You can then save extreme time and effort by managing less suppliers and focusing on your relationship with the core suppliers.

However, it is necessary to remember that this may introduce more risk when purchasing complex services instead of products.