What is vendor consolidation? What are the benefits of reducing a company’s vendor base? Vendor consolidation is quickly becoming a practice endorsed by several companies who view it as the ideal way to reduce purchase prices, and freight, on incoming parts and materials. Vendor consolidation savings go beyond just saving money on freight and prices.
Included in these savings are the soft costs of paying fewer bills through accounting, managing fewer vendors for inventory and purchasing, and amalgamating purchase history information through a select few suppliers. So what must companies understand when deciding to pursue this option?
Vendor Consolidation Leads to Increased Purchasing Power
By reducing the vendor base, companies can increase their purchasing power, leading to the likelihood of securing better pricing and terms. Increased purchasing power allows companies to amalgamate their volumes together, and maximize pricing. In addition, they can strengthen their negotiating position on supply agreements and credit terms. From this, a company can negotiate longer terms, such as net-45 or net-60, or go for further price reductions on prompt payment initiatives and get a 1%-2% discount on net-10 payments.
The purpose is to pool together a company's volumes in order to lower a company's total cost structure. This could include lowering the company's inventory costs with contractual agreements on supply, or just lowering the per-unit freight costs on incoming parts by using those aforementioned volumes and economies of scale. Here are some of the benefits of vendor consolidation.
What is Vendor Consolidation? Strategies to Reduce Inventory Holding Costs
1. Vendor Consolidation Leads to Lower Freight Rates
Freight can be maximized so that the individual per unit cost of freight for incoming parts and materials is lowered. Freight is a very important cost of inventory, and any way a company can reduce its impact, is a step in the right direction. Shipping from multiple suppliers, can often leave companies with fluctuating costs on freight, and subsequently, fluctuating gross profit margins. However, lowering freight allows a company to both lower costs, and level out its gross profit margins.
2. Vendor Consolidation Lowers Soft Costs
With some estimates at $50 to $75 to pay invoices or cut a check, reducing the number of payments by reducing the vendors a company pays, can add a significant savings in soft costs. In addition, there is the benefit of inventory and procurement professionals better managing their vendors, and having more time to spend on analysis, as well as inventory management and planning.
3. Vendor Consolidation Leads to Product Development Improvements
When companies have more business with suppliers, they can parlay that volume into improved product and service offerings. In essence, the company can become an active participant in its vendor’s new product development initiatives, and this can over time, position the company as a market leader. Suffice it to say, the company’s position of importance in its vendor’s eyes, allows it to strongly influence the direction the vendor pursues.
4. Vendor Consolidation Allows for Stronger Contractual Agreements
Looking for ways to lower your inventory costs? Well, the best way is not to carry any inventory. Sounds simple doesn’t it? While we all know you can’t completely do away with inventory, carrying less, means less month to month carrying charges, and lower incidence of that inventory getting damaged. As long as that inventory remains in your vendor’s warehouse, your company isn’t liable for any damaged incurred to it while sitting on the shelf. With the proper contractual agreements in place, the supplier will have the responsibility of holding product, and your company can reduce a large cost of inventory.
When it comes to managing vendors, there must be an understood value of importance and relevance to a company’s business. When companies fracture their volumes across too many suppliers, it can often become a logistics, pricing and freight cost nightmare, to manage.
These points above have outlined some of the benefits, but over time, there are others, and it is incumbent upon companies to investigate them further. Use your company's volumes to your advantage. Lower your per-unit freight costs and secure those contractual agreements on supply.
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