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Vendor Consolidation in Supply Chain Management

written by: Ian Johnson•edited by: Michele McDonough•updated: 10/1/2010

Why do so many companies adopt vendor consolidation practices when streamlining their supply chains? It's because it affords these companies the opportunity to reduce costs by increasing their purchasing power, lowering incoming freight and increasing competition amongst their vendors.

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    Adopting Proper Vendor Management Approaches

    What’s the most common supply chain management approach companies use to lower costs? For some, it amounts to demanding or screaming for the best price while in other cases it involves bouncing around from one vendor to another. Neither approach provides long term savings and neither positions companies among their vendors' priorities. The solution lies in proper vendor management and consolidation of a company’s volumes with a select few suppliers. Commonly referred to as vendor consolidation, it produces both hard and soft costs and lowers a company’s inventory cost of ownership.

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    Don’t Allow the Buyer/Vendor Relationship to Sour!

    A number of companies take an adversarial approach to managing their vendors. Rather than see them as potential partners, they instead approach them with the mindset that they are simply trying to take advantage of all customers. By applying pressure, these companies believe they are improving their chances of getting the best price and lowering their costs. However, vendors know this and will often classify these companies as aggressive and a low opportunity for growth. In most cases the vendor will treat this particular customer as a last resort, will never offer them their best pricing and will forever put them at the end of their priorities.

    The right vendor and the right partnership can lower a company’s purchasing prices, its freight on incoming parts and lower its overall inventory holding costs with aggressive supply agreements. However, the company that treats its vendors as an enemy will never benefit from these cost savings. So, if the solution lies with vendor consolidation, what does it involve and what benefits can a company derive from reducing the number of companies they purchase from?

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    1. Vendor Consolidation Improves Purchasing Power

    The immediate benefit from vendor consolidation is how it immediately increases the company’s purchasing power on parts and materials. By reducing the number of vendors a company buys from, they are in effect increasing the volumes they buy for those vendors that remain. This increased volume puts the company in a better position to negotiate more favorable pricing on materials and parts.

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    2. Vendor Consolidation Lowers Freight Costs

    Morguefile: penywise 

    Not only does pricing decrease, but the costs to get those parts into the warehouse decrease as well. Freight is an extremely important aspect of inventory. By increasing the volumes purchased through fewer vendors, the company is able to ship more product from the same location. More volume shipped means a lower per unit freight cost on incoming parts and a lower overall inventory cost of ownership.

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    3. Vendor Consolidation Improves Quality

    Companies that have strict rules on vendor qualification typically benefit from excellent quality in terms of both the vendor’s products and their services. Vendors appreciate the additional volumes and are therefore more succinct in managing quality from both the perspective of the product itself, and in how they conduct business. Improving quality on incoming parts helps to reduce inventory cost of ownership by eliminating the incidence of returns or delays in manufacturing.

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    4. Vendor Consolidation Increases Competition

    Reducing the number of vendors helps to increase competition among those vendors. Companies are therefore able to benefit from their increased economies of scale by using their volumes to incentivize competition. This in turn helps to reduce costs as vendors compete and offer more aggressive pricing and discount packages to win business. Because volumes are amalgamated to a select few vendors, those looking in have more incentives to pursue business. Volumes speak volumes about a company’s importance, and consolidating vendors is the best way to increase competition for that business.

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    5. Vendor Consolidation Produces Significant Soft Costs

    MorgueFile: ppdigital 

    While the four previously mentioned points all concentrate on hard costs, there are some significant soft costs that can be accrued from consolidating a company’s vendors. One of them includes bill payments. Fewer bill payments and fewer vendors to pay, helps to reduce the costs associated with cutting checks and helps to improve the company’s credit rating as those vendors that remain will paid more frequently. There are also soft costs in terms of procurement not having to handle and track so many different vendors.

    When companies adopt vendor consolidation practices, they are using the most progressive vendor management practices available. These companies are able to streamline their supply chain into working with only the best that remain. Those select few suppliers then make it their mission to service the account in the best manner possible. It allows for immediate cost reductions across the board and incentivizes outside vendors to improve pricing through increased competition.

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