More suppliers do not mean lower prices

The myth: More suppliers means more competition, which means lower prices. Spread purchases across as many qualified vendors as possible. Keep them competing. Never let any supplier feel too comfortable.

A procurement director once told me her organization had 14 approved suppliers for the same grade of stainless steel fasteners. Fourteen. Different prices, different lead times, different quality regimes. The combined spend was $2.3 million across those 14 suppliers — an average of $164,000 each. None of them considered this buyer a priority account. None had incentive to invest in quality improvement or joint cost reduction. The buyer was a small customer to all of them and a valuable customer to none.

Where the myth comes from

The idea has a respectable origin. Michael Porter's Five Forces framework, taught in every MBA program since 1980, explicitly advised firms to spread purchases among alternate suppliers to improve bargaining position. The logic is intuitive: competition drives down prices. It is true in simple commodity markets with perfect information and zero transaction costs. It is not true when the good or service is complex, when non-price factors like quality and responsiveness matter, or when coordination between buyer and supplier requires investment on both sides.

In 1993, Bakos and Brynjolfsson at MIT published a paper that should have ended the debate. Their model showed that a buyer does not maximize profits by maximizing the number of suppliers — profits peak where the marginal benefit of one more supplier equals the marginal coordination cost. Adding suppliers beyond that point destroys value. The paper was published in the Journal of Management Information Systems, widely cited in supply chain literature, and functionally ignored by decades of procurement practice.

Why more suppliers actually costs more

The hidden cost is coordination. Each additional supplier creates a new interface requiring RFQs, technical clarification cycles, delivery tracking, quality monitoring, invoice reconciliation, and relationship management. Research by Deprotech, citing Balaeva et al. (2020) in Public Money & Management, found transaction costs of 1% to 1.4% of contract value in standard procurement — rising to 6.6% to 8.1% in small-batch procurement where interface density is highest. Those costs often exceed any unit-price savings from competitive tendering.

Fragmentation has a second cost: diluted leverage. Acquis Consulting found that 35% to 75% of spend occurs outside negotiated agreements in fragmented procurement organizations. Each unmanaged supplier relationship costs approximately $925 in redundant onboarding and $150 to $225 per year in administrative overhead. When 40% to 60% of suppliers are duplicates providing the same goods at different prices — as Acquis found — the "competition" is not competition. It is disorganization.

The third cost: destroyed supplier incentives

The MIT model identified a cost most procurement teams never measure. When suppliers must invest in non-contractible improvements — innovation, quality upgrades, information sharing, responsiveness to unplanned demand — they only make that investment if they trust the buyer will share the gains. If the buyer can always switch to the lowest bidder, the supplier has no reason to invest. The gains from that investment get expropriated by the next low bid.

Fewer suppliers with stronger relationships create exactly the incentive structure that produces non-contractible value. The supplier invests because the relationship is deep enough to capture returns. The buyer benefits from innovation, flexibility, and quality that a transactional multi-sourced model cannot produce.

What the data shows: consolidation works

McKinsey research by Kothari, Noor, and Scholz (2011) found supplier consolidation generates 10% to 20% cost reductions in some purchasing categories through improved demand transparency and coordination. Automotive industry data points the same direction: between 1983 and 1988, automakers reduced supplier counts by 25% (Helper, cited in the MIT paper). Organizations that actively manage supplier-base hygiene recover 30% to 40% of savings previously lost to fragmentation.

What replaces the myth: category-by-category supplier strategy

The correct approach is not "always consolidate" any more than "always multi-source." It is category-segmented strategic sourcing that matches supplier count to category characteristics. Keystone Procurement frames this as moving past the "false choice between single-source-and-cheap or multiple-sources-and-expensive."

For strategic and innovation-critical categories, one close partner produces stronger non-contractible investment — quality improvement, joint R&D, information sharing — than a fragmented base ever could. For bottleneck and supply-risk categories, dual sourcing at two to three suppliers provides resilience without the overhead of a larger base. For leverage commodities, two to three suppliers with periodic market testing maintains competitive tension while capturing volume consolidation benefits. For routine, non-critical categories, one preferred supplier plus catalog access for spot needs eliminates administrative waste.

What this means in practice

• Run a supplier duplication audit: pull your spend by category and count suppliers providing the same goods or services. If 40% or more are duplicates, you have a fragmentation problem that is leaking margin.
• Segment your supply base by category type — strategic, bottleneck, leverage, routine — and set supplier-count targets per category, not a blanket policy.
• When evaluating a new supplier, include the total cost of the additional relationship — RFQ cost, quality onboarding, contracting, administration — not just the quoted unit price. The quoted price is a fraction of the total cost.
• For categories where innovation and quality matter more than unit-price compression, invest in fewer, deeper relationships. The MIT model says the incentive value exceeds the competitive-tension value for non-contractible improvements.

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