Vendor consolidation, also known as vendor rationalization, is one of the methods companies use to improve operational efficiency. Electing to choose from a limited pool of trusted vendors
has enabled companies to build stronger and more collaborative relationships that deliver a range of benefits to the organization, including: lower costs in relationship management, lower administration costs, less risk to the business, increased quality and speed in delivery and improved supplier responsiveness.
Awarding higher volumes to a smaller group of suppliers gives you bargaining power that can mean a win-win to you and your chosen suppliers; you get better discounts and they get more business. That being said, when starting the rationalization process do not solely focus on the price paid for raw materials and finished goods. Reducing prices doesn’t help if it means you must hold more inventory or incur higher logistics costs. Work with your narrowed supplier base on stronger contractual stocking agreements so they hold inventory for you which will lower your carrying costs. You can also work with your suppliers to reduce your freight costs through larger volume shipments or consolidated shipments instead of getting multiple shipments from various suppliers.
Vendor consolidation also lowers costs in vendor relationship management and administrative costs because less time is spent tracking supplier performance and maintaining of purchasing agreements/contracts, not to mention fewer vendor meetings, negotiations, phone calls and emails, which inevitably leads to lower administrative costs because there are fewer PO’s to process and invoices to pay. By reducing your supplier base you will also enhance relationships with your chosen suppliers that can help streamline claim/complaint resolution and free-up time for your procurement team. Those left in your narrower supplier base now become more than just suppliers, they become partners; they have a vested interest in making sure your company succeeds.
You can also lower your company’s risk by combining individual components and lower level subassemblies into higher level subassemblies and procuring them from one of your preferred suppliers. This type of consolidation can significantly reduce the number of PO’s issued and order lines received. It also allows the supplier to test the product as a larger unit before delivery, which would result in fewer instances of nonconforming material, and saves time by reducing the number of subassemblies to be integrated at the final assembly level.
You want to start the vendor consolidation process by evaluating the different purchasing categories and determine which ones are ideal to start the consolidation process. Then start looking at each supplier in that category and determine your top suppliers (based on supplier performance and spend) and do some research to see all of their product offerings. Are there other products they offer that you get elsewhere that you could look into procuring from this supplier? Keep going down the line looking for opportunities to consolidate and take advantage of the benefits mentioned above. During this process keep in mind you want to choose the right supplier for your company’s needs. You should consider suppliers with a large product offering, a high level of quality, and that can supply you with the volumes you require. Focus on suppliers that are always looking for ways to improve and are open to getting creative to think of ways to help you achieve your goals.
In conclusion vendor consolidation can save you and your company time and money while also forming more strategic relationships with a smaller supplier base creating a win-win for both you and your supplier. Contact RESCO today to see how we can help you with your consolidation needs.
About the Author
Kelly Grato is Materials and Estimating Manager of RESCO Electronics; a Baltimore based manufacturer electronic assemblies and value added reseller of auto ID equipment to original equipment manufacturers.
Kelly came to RESCO almost 6 years ago and after four years as a buyer for RESCO Electronics, Kelly became the Procurement Manager at RESCO Defense, and almost 2 years ago came back to RESCO Electronics as the Materials and Estimating Manger.
Kelly studied at The Richard Stockton College of New Jersey and Kaplan University. She currently resides in Abingdon, Maryland with her husband.