Vendor
consolidation is one of those supply chain management strategies that is fairly
easy to understand and just as easy to implement. It involves reducing the vendor base, using the company's economies of scale to lower prices, lowering incoming freight costs, improving quality, strengthening supply agreements, and then using these benefits to
define the company's new vendor acquisition criteria. It's a continuous process and one that produces significant cost reductions.
The Benefits of Consolidating Your Vendor Base
When thinking of vendor consolidation, think simply of reducing your vendor base to a select few partners, ones you trust with your business and ones that will help you reduce your inventory and supply chain costs. Ultimately, it’s about rewarding your business volumes to your best vendors, ones that will reduce your prices, reduce your per-unit freight costs on raw materials, improve your quality and allow you to lower your holding costs of inventory. The end result is a more efficient supply chain.
In itself, consolidating a company’s vendor base is simple. However, it’s wrong to focus solely on the price paid for raw materials and finished goods. After all, reducing prices doesn't work if it means you must hold inventory for longer periods; in this case, your company's savings will be eroded by high carrying costs. Ultimately, what’s required is the willingness to focus on the following five benefits.
1. Increased Purchasing Power
Simply put, amalgamating your volumes with a reduced supplier base will allow you to lower your prices. Instead of spreading out your purchases amongst multiple vendors, you’ll reduce your vendor base and award higher volumes to a select few suppliers, ones you know have excellent quality and ones who will reduce your prices. It’s about using your volumes to your advantage.
2. Lower Freight
Your company’s cost of freight on incoming parts is a huge cost of inventory. Lower these costs and you reduce your cost of goods sold (COGS) and improve your gross profit on sales. Focus on those suppliers closest to your facility, ones that will reduce freight costs through larger volume shipments. However, it’s never just about buying more than you can afford to hold; it’s about finding that happy medium between buying too much or too little inventory. The following video provides insight into comparing carrying costs versus higher volume purchases.
The above video is from the post: Inventory Carrying Costs Versus Higher Volume Purchases
3. Improved Quality
When companies think of quality, they immediately think about the quality of the raw materials and finished goods they purchase. While important, it’s equally important to make sure that your vendors’ service quality is up to the task of managing your business and its volumes. Expand your analysis of quality to include the following criteria:
- Strong After-Sales Service & Support
- Strong Customer Service
- Flexible Credit Management
- Strong Market Knowledge
- Product Innovation
4. Stronger Contractual Agreements
This process will allow your company to pursue stronger contracts and agreements. Ultimately, your agreements should reduce your carrying costs of inventory by reducing the costs of damage, obsolescence, financing and theft. There is one basic outcome to remember; as long as your suppliers share in the costs of holding inventory, your company will reduce its cost structure. However, don’t assume your vendors will hold inventory for you indefinitely – they have carrying costs as well. Instead, split your holding costs between you and your supplier.
The above table describes how to split your 3% monthly holding costs of inventory and is from the post: Reducing Your Inventory Holding Costs with Contractual Agreements
5. Improved Vendor Acquisition Strategies
When thinking of consolidating your vendor base, think of how the entire process will simplify your vendor acquisition criteria. Once you’ve completed this process, you’ll have a much better set of criteria with which to select new vendors. You'll have a better definition of pricing, freight, service and quality. Finally, you will be able to clearly define the types of supply agreements that work best for your supply chain. It’s a continuous process and one where the improvements made on each of these aforementioned steps are used to define how your company selects new vendors.
Vendor consolidation works because it reduces your supply chain management costs. Ultimately, you want to work with suppliers that will help you lower costs across the board; not just on price, but also on freight, on service and credit, and most importantly, on your company's costs to hold inventory.
When you reduce your supplier base, you lay the groundwork for continually reducing your costs to run your supply chain. However, don’t try to stack the odds in your favor by trying to get your suppliers to absorb all of your holding costs through your contracts. Instead, focus on sharing those costs and sharing the responsibility of managing your business's volumes.
Comments