Opt for better vendor management through consolidating vendors, especially when it comes to cutting costs and building relationships.
Filling gaps in your vendor services can be as difficult as filling gaps in your management team. Vendor management can be a big headache, as you constantly need to monitor various service-level agreements, negotiate new agreements, send out purchase orders, track deliveries and keep your eye on new products and services you might want to procure. One way to reduce all these headaches is to keep things simple. Consolidating suppliers has become a common-sense trend across the business landscape. Let’s look at why consolidation can work for you, and then explore how to do it well.
5 Benefits of Vendor Management and Consolidation
1. Economies of Scale
Scaling up can reduce cost and enhance efficiency. According to Intuit QuickBooks, the more you buy from a single vendor, the more bargaining power you create and the better prices you can negotiate. These direct benefits related to cost also extend to delivery costs, better warranties, the availability of better offers and customer loyalty programs (which bring you an array of benefits).
2. Raising Your Profile as a Buyer
When you buy more, you get more attention from any vendor, according to Entrepreneur. For instance, if you buy a product from five different vendors, each vendor may perceive you as a small customer not worthy of much attention. It’s not fair, but it happens. However, if you consolidate your needs for that product and purchase from a single vendor, you’ll now be a higher-profile customer worthy of more vendor attention — not just regarding price but in all aspects of the customer-vendor relationship, including service.
Most businesses operate according to the Pareto Principle, which says that 80 percent of your revenues are generated from just 20 percent of your customers. So keeping your big customers happy is priority number one — it’s exactly the same for your vendors. When you buy more from one vendor, you can trigger the Pareto Principle and may get more attention and responsiveness from said vendor, which is exactly what you want.
3. Reducing Your Supplier Management Costs
By consolidating, you reduce the administrative costs of dealing with so many vendors. You’ll have fewer contracts and service-level agreements to monitor, not to mention fewer vendor meetings, negotiations, phone calls and emails. You also may have better communication with the consolidated vendor, which can help streamline claim/complaint resolution. By reducing your supplier base, you can also make it easier to integrate your systems with your supply chain.
A report from The Hackett Group sums up the scope of the reductions in supplier management costs: “While lowered purchase price represents the largest source of hard-dollar savings from supplier consolidation, reduced process cost (i.e., increased efficiency) may be the largest opportunity. With fewer suppliers, the number of separate transactions falls, as does the amount of time it takes to manage those suppliers.”
4. Having a SPOT
As the procurement function becomes more complex and dynamic, especially as technology quickly evolves, you may find that you’re getting increasingly stretched by added responsibilities. Vendor consolidation may help you improve your time management by having a “single point of contact” (SPOT) for several categories. When issues arise, you’ll know exactly who to call (your SPOT), and may get problems resolved faster since your vendor is likely motivated to maintain a strong business relationship with you.
5. Enabling More Process Automation
The Hackett Group report makes it clear that vendor consolidation is a driver of process automation that will bring your costs down and allow your people to perform more strategic, value-driving functions. “[H]aving a smaller number of suppliers makes it easier to automate interactions with them,” says the report, “which in turn drives down the process costs and frees up staff to make further improvements.” It’s a virtuous cycle. As the number of your vendors goes down, your ability to automate vendor interactions goes up. Your people can stop doing manual processes related to vendor management, and can be freed up to help grow your company.
The Right Way to Consolidate
First, bite off one chunk of spending at a time. Examine all of your purchasing categories and determine which ones are best suited for consolidation. Look at your supplier base. Are some suppliers offering adjacent products or services that you’re purchasing from somewhere else? If so, you have a clear opportunity to explore vendor consolidation and its many benefits.
Second, find the right supplier, a company who can best manage your consolidated purchasing needs. You should consider a supplier with a large enough product/service portfolio to accommodate you, one who offers a high level of quality, can supply you in the volumes you’ll require and has sufficient geographical reach to deliver no matter where you are (or plan to be in the future). You should also work with a supplier who’s innovative in keeping up with emerging market trends, because you’ll want access to innovation, too.
Finally, contact the vendor and explain what you want to do and why. While the initial process of negotiating any vendor consolidation may take some time, the long-term benefits are clear.