After my recent post about Vendor Consolidation, I figured it would be ideal to discuss the two extremes of vendor management that most companies adopt. While there are those companies who believe it’s best to spread out their demand among multiple suppliers, there are an equal number of companies that believe it’s best to keep business between one or two key suppliers.
For proponents of having multiple vendors, the believe is that it will lead to increased competition for business, and therefore lower overall prices. For proponents of businesses having all their demand with one or two key vendors, the belief is that they can dictate the terms of service and pricing, by being their vendor’s number one priority. However, there are pros and cons to both approaches, and it is essential for companies to understand them.
Dangers of Spreading Volumes Through Too Many Vendors
Several companies believe the best way to get the best pricing, is for vendors to fight it out amongst themselves. Nobody can argue that increased competition is good for pricing. However, sometimes companies can operate with on a misconception of their company’s total worth in the eyes of their vendors. They may believe they are offering high volumes and a great opportunity, but are they? Companies must learn to evaluate their volume offerings to their market, and ask the kinds of questions that prove their volumes are worth pursuing. Here are three issues with having volumes spread amongst too many vendors.
- Lack of Volumes: If by spreading out demand to multiple vendors, the company is fracturing its volumes, then these individual lower volumes will never be enough for any one vendor. If the company’s volumes are too low to begin with, then the possibility of competition is low, and subsequently, the pricing won’t improve.
- Unrealistic View of Priorities: Several Companies operate in a vacuum. They may be a large company in a small industry, but still small in their vendor’s overall priorities. This misconception about how big the company’s volumes actually are, can lead to a company believing it has a lot of potential to offer a supplier, when in fact it doesn’t.
- Potential for Indifference: If there is always competition for all the volume, but no individual supplier ever wins out, then why try and win it in the first place. A number of companies become so enthralled about keeping competition between their vendors, that each vendor themselves eventually becomes indifferent and ambivalent to winning more business, because it’s not realistic.
What is Vendor Consolidation? Strategies to Reduce Inventory Holding Costs
Dangers of Keeping Volume to One or Two Select Vendors
On the other side, are those companies that award all their volume to a select few vendors. By doing this, the idea is that the company will dictate terms on pricing and service, and become their vendor’s number one priority. Not a bad idea.
However, if that vendor suddenly encounters financial or quality problems, what will the company do then? What happens if over time, the company loses touch with the market it buys from, and the consequences mean a reduction in quality, well developed products and a stagnated pricing level? These are the drawbacks of amalgamating all volumes through one supplier, and they are summarized below.
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Issues with Quality: Imagine a situation where a company has a large volume of its business with one or two key vendors, and one of them suddenly has quality issues for an extended period of say, a couple of months. Better yet, one of the vendors suddenly goes bankrupt, and the company doesn’t have any other approved vendors to take its place. This happens more often than people realize, and when it does, there is little the company can do to resolve it.
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Lack of Product Improvements: If that vendor lacks the product development strength of their competition, then the company will be left with an outdated and antiquated product line offering. In a number of cases, having your business with one or two select vendors, can lead to missing out on the market’s best product offerings.
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Issues with Credit and Terms: At some point, all that business with these vendors will actually work against the company. This is especially true when it comes to credit and terms, and if the company continues to run into its limit, or past its terms, then having shipments delayed because of payments, can often be catastrophic.
With both ends of this spectrum representing extremes, obviously, the goal is to find that happy medium. Companies must not spread out their volumes so much as to fracture their purchasing power, and at the same time, they can’t limit their ability to benefit from new product developments by only purchasing from a select few companies.
Perhaps the best approach, is to have that preferred vendor list, but always keep new vendors qualified, and throw them a bone every once in a while. Over time, it should help protect the company against the dangers of either of these extremes.
Choose the Right Supply Chain Strategy: Make it an Easy Choice
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