A Guide to the Vendor Consolidation Approach
Procurement professionals are always looking for new ways to maximize profitability and minimize expenses to improve their company’s bottom line. Although vendor consolidation is an excellent way to do this, it’s also one that’s often overlooked.
In this article, we’ll break down what vendor consolidation is, its benefits, and a step-by-step vendor consolidation strategy that companies can implement today to stay ahead of the market.
The benefits of vendor consolidation
Vendor consolidation is the process of amalgamating a company’s suppliers so that the company can shortlist them based on a thoughtful analysis that aligns with their specific requirements, packaging needs, prices, and other relevant attributes.
If done correctly, the vendor consolidation benefits can add value to operations and streamline procurement and inventory management, all while helping to significantly reduce tail spend.
Reduced costs
When a company has a small circle of trusted suppliers, the company generally has more buying power. As a result, market leaders can negotiate for better pricing and terms and conditions. This eventually means significant cost savings, especially when sourcing spare parts in bulk, which often results in discounts through reduced per-unit costs.
The saved money can now be reinvested into other areas of the business that return a higher ROI. Furthermore, fewer vendors mean that procurement teams don’t have to allocate other resources to administrative processes associated with vendor-related processes, such as tracking invoices.
Stronger vendor relationships
Suppliers play an integral role in the success of any business. Having reliable suppliers means organizations can source parts on time, in the right quantities, and without sacrificing quality.
Vendor consolidation makes it possible to lean into an established relationship with a trusted supplier for multiple needs. It helps businesses cultivate stronger relationships based on accountability and performance, which can translate to strategic pricing plans and delivery schedules.
Improved quality control
Every additional supplier used by a procurement team introduces a new possibility for complication. If not managed properly, teams can experience unplanned downtime that result from shipping delays of customer orders, increased costs, or reduced quality.
Having a tight-knit group of suppliers means companies can have direct lines of communication with fewer intermediaries in between. If there are any issues, these can be identified and quickly resolved before the issue amplifies into something bigger.
This not only makes procurement processes more simple, but it makes them far more reliable, too.
What to consider when consolidating vendors
To maximize the benefits of vendor consolidation, organizations should consider some factors to help make informed decisions regarding their consolidated procurement plan.
Here’s how to start.
Determine the costs associated with each vendor, including not just the upfront costs but also ongoing expenses such as maintenance, support, and upgrades. Consider the total cost of your partnership over time, not just the short-term expenses.
Companies need to carefully review their contractual obligations as well. What are their terms and conditions? What action should be taken if they don’t deliver products that meet the desired quality on time? What’s their return policy? Evaluate the capabilities of each vendor to determine which can provide the most comprehensive services and support.
When consolidating a vendor, it’s important to consider their previous track record of services. Have they consistently delivered parts on time? What’s their commitment to data privacy and security? What’s their offering on integration with business-specific systems and compatibility with new technology?
Creating a consolidation strategy
Determine your desired outcomes
The outcomes of one company are not going to be the same for another. Therefore, before procurement teams rush into consolidating their supplier network, it’s important that they take a moment to assess their specific goals. Prioritize what your company wants most and make a list of qualities you’re looking for from a supplier.
This makes it simple to clearly communicate with suppliers about potential contract terms and KPIs. Companies with vendors who fully understand their needs will experience reduced production downtime, lower costs, and reduced shipping delays.
Gather data and metrics
By tracking data and metrics, organizations can monitor the progress of their vendor consolidation initiatives and make adjustments as needed.
However, seeing how complex today’s supply chains are, it can be difficult to manually collect, store, and evaluate vendor data. Not only are traditional systems slow and prone to error, but they simply can’t adapt to a supply chain landscape that’s changing rapidly.
A material management software can eliminate all these problems by not only standardizing data collection practices but by also harmonizing all vendor-related data into a central hub to provide supplier insights from day one. With just a tap of a finger, managers can access data regarding cost, efficiency, lead time, delivery duration, and quality assurance. Better yet, managers can also easily identify gaps in performance and take corrective action.
What’s more, businesses can also integrate relevant Key Performance Indicators (KPIs) to benchmark performance. By gathering data and metrics, organizations can make informed, data-driven decisions about which vendors to keep, which to consolidate, and which to replace.
Draft a comprehensive contract
A contract clearly outlines the terms of vendor partnerships, including the services to be provided, associated costs, and performance benchmarks.
Another important benefit of a well-defined contract is that it protects the interests of both parties by establishing clear expectations. This helps to minimize misunderstandings and disputes that may arise in the future.
As supply chains become increasingly complex, it can be easy for important contractual information to get lost. This is especially true if businesses are still using manual methods to record data, resulting in data silos and missed procurement opportunities.
A cloud-based solution can house vendor insights in a single location where they can be accessed anywhere, anytime by the relevant stakeholders. These tools harness the power of natural language processing (NLP) to extract important details regarding contracts. This makes it easy to measure supplier performance and avoid rogue spending.
By drafting a clear and comprehensive contract, organizations can ensure that their vendors are kept accountable and that their vendor consolidation initiatives are easily implemented.
Support your vendor consolidation strategy with the right tools
Supplier consolidation is an effective method to add value to your company and improve its bottom line. Although it’s easier said than done, the right tools will allow market leaders to simplify the vendor consolidation process and reach their goals faster.