Supplier consolidation – also known as vendor rationalization – is a supply chain management strategy that aligns with the common goal of procurement, cost reduction. It involves reducing the number of suppliers a company does business with, in the belief that supplier consolidation is cost effective and improves operational efficiency. Supplier consolidation gives companies the economies of scale to lower procurement, administration and delivery costs, improve supplier quality, mitigate risks and strengthen supply agreements. It’s a continuous process and one that produces significant cost reductions.
Things to consider when carrying out supplier consolidation
Although the cost reductions are obvious, every business is unique in terms of their operations, risks faced and company goals. Therefore, there are several things to consider before forging ahead with your supplier consolidation plan. They are:
- Soft costs – Hard costs from product purchases are obvious and easier to measure, being direct costs on which we can put a price tag. On the other hand, soft costs such as cost savings from paying fewer bills and managing fewer suppliers – although intangible – can have significant impact on your business and must be taken into consideration as well.
- Product capability – The goal here is to secure the best possible product and service offering from a single supplier. Therefore, there is a need to ensure the supplier chosen has the expertise and knowledge in each area of supply.
- Proven ability – Look for suppliers who service customers in industries similar to your business and carry out your due diligence in the form of research and asking for references. A reliable and respected supplier makes doing business much easier.
- Control and visibility – Do you find yourself losing track of business expenditure due to multiple suppliers? Supplier consolidation allows you to monitor product usage and reduce costs across your business.
- Service and delivery – Supplier consolidation is all about obtaining the best possible service levels, which will determine whether your business runs smoothly or not. Having a wide product range means nothing if the product is constantly out of stock or the delivery schedules are not followed.
How does supplier consolidation benefit businesses?
Choose to procure products and services from a small pool of trusted suppliers allows companies to build stronger and more cooperative relationships with suppliers, which often translates to better business outcomes. Supplier consolidation also brings about reduced procurement and operating expenses and soft costs. These outcomes not only result in cost savings in supply chain management, but include a host of other plus points, discussed below:
Increased purchasing and bargaining power
Having a small supplier base means that you will be merging your purchases, raising its volume, and awarding it to just a few suppliers. This effectively means that suppliers will benefit from high volume orders, making room for further negotiations on cost reduction. Awarding high volumes of business to a smaller group of suppliers raises your bargaining power while giving suppliers a long-term source of income, creating a win-win situation for both parties. Supplier consolidation enables you to obtain better discounts – the higher the volume of business you conduct with a supplier, the higher the discounts you should be eligible for. It’s about leveraging the power of bulk purchasing.
Lower administrative costs
Dealing with a smaller number of suppliers means less time is spent on supplier relationship management matters such as tracking supplier performance, and lower administrative costs from not having to maintain many purchasing agreements and contracts. Supplier consolidation also translated to fewer vendor meetings, negotiations, phone calls and emails, which also has direct relations to lower administrative costs in the form of less purchase orders and invoices to process.
Lower freight charges
When carrying out supplier consolidation, not only is it important to select quality suppliers, but also suppliers who are ideally, closest to your operation base. This is because bulk orders translate to higher inventory costs, which can eat into your business’ gross profits significantly. You can lower freight charges by shipping in larger volumes, which consequently reduces the cost of goods sold (COGS), thereby improving your gross profit on sales. However, lower freight charges aren’t just about purchasing more than you can afford to hold. Rather, it’s about achieving that delicate balance between procurement volumes and inventory management, which is a big part of supply chain management.
Better buyer-supplier relationships
A smaller supplier pool gives you more time to cultivate good relationships with your suppliers, which is an essential part of supply chain management. Good buyer-supplier relationships lead to better business outcomes for both parties in the long term. Suppliers become partners and will be more inclined to ensure the success of your company. Supplier consolidation will result in better relationships and improved service levels, as the supplier will deem your account to be more strategic to them.
Improved quality, service and support
A supplier that gets plenty of business from you is a happy supplier, and a happy supplier will be more inclined to give you excellent service. This means that the suppliers are more likely to improve the quality of their service to minimise the risk of losing your business. When it comes to quality, it encompasses the whole range of services that the supplier provides, from the delivery of the products purchased and flexible credit management options, to the after-sales customer support provided.
Stronger contractual agreements
Obtaining your products and services from a single source gives you the ability to pursue stronger contracts and agreements, especially in the area of inventory management. An agreement with value add should reduce the carrying costs of inventory by reducing the costs of damage, obsolescence, financing and theft. Having your suppliers share in the costs of holding inventory reduces your company’s cost structure.
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