Vendor Consolidation- What Are the Benefits & How To Do It

Vendor Consolidation August 05, 2020

Jin Hyun

Writer

For Businesses carrying physical inventory, supply chain management can be a rewarding yet complicated endeavor. This is why many companies today are exploring different ways to reduce costs while maintaining productivity.

Vendor consolidation is a major cost-saving strategy that aims to limit expenditures within the inventory procurement process. By reducing the number of vendors involved in meeting consumer demands, businesses can save expenses spent on purchasing inventory and managing these relationships.

Vendor Consolidation and Its Benefits

Vendor consolidation involves reducing the number of external suppliers to only a handful of trusted partners. Aside from simplified supply chain management and decreased purchasing costs, there are a number of additional benefits companies can receive from this practice.

Greater Purchasing Weight

Consolidating vendors allows companies to give higher-volume orders to the vendors they decide to keep. In doing so, they may be able to negotiate a bulk discount through a lower cost per unit. These savings can enable the company to choose whether or not they want to pass on the discounts to their customers through lower prices.

Lower Shipping Costs

Fewer vendors mean less separate shipping-related costs. This benefit can result in tremendous discounts for the company. An added benefit to this is that if a company decides to use vendors that are close in proximity, they'll save even more on freight costs.

Better Time Efficiency

Managing many different vendors can be a drain on resources and time. However, this problem goes away when consolidation takes place and allows the company to focus and improve its vendor relationship efforts on the select suppliers they decide to keep.

Reinforced Vendor Bonds

Companies that are able to invest more time in fewer vendors are able to build stronger and longer-lasting relationships with suppliers. This can lead to an increase in efficiency and better cooperation between the two parties.

Vendor Consolidation Process - 5 Key Steps

It may be difficult to identify when a business is utilizing too many suppliers. If a company ever gets to a point where they need to evaluate whether or not to go through vendor consolidation, there are some key considerations to remember before reaching a decision.

1. Focus on Needs

The requirements and priorities of the business are ultimately the most important. It is also essential to gain insight from various stakeholders to gauge what their priorities are when dealing with suppliers. For some, it may be more important for them to deliver the goods quicker while for others, it could be about securing the lowest possible price. Wherever their priorities lie, the different stakeholders that deal directly with the vendors will be able to fully inform decision-makers about their preferred suppliers.

2. Compare Between Current Vendors

Some vendors may provide unique services or products that are difficult to obtain elsewhere. Therefore it's important as a business to create a chart of the company's priorities and see which vendors provide the most benefits. In charting the services provided by suppliers, it's also wise to include the opinions of key stakeholders within the company.

3. Create a Stakeholder Team

Stakeholders play a very large role in the consolidation of vendors. Therefore it would only make sense to create a team comprised of these professionals to act in the best interests of the company. While these representatives may have their own standards that vendors need to meet, the goal here is to get stakeholders with differing priorities into one group to discuss and put into action a plan for consolidating the full list of suppliers.

4. Reduce Vendors

Working as a collective unit, stakeholders will then need to begin the process of consolidating their vendors down to a collectively agreed-upon number. The team must also come up with certain criteria to help them in their consolidation discussions. Ask questions such as do they deliver the inventory on time at least 75% of the time? Or has the team had more than three negative experiences with a vendor in the past year?

During the discussion, the team may discover that not many of their current vendors are consistently meeting the agreed-upon criteria. In this instance, the team may eliminate too many vendors and thus, will have to research new suppliers to add to their list.

5. Finalize the List

Once the list of vendors has been consolidated down to an appropriate number, the team should then put in a request for information (RFI) from the remaining vendors regarding how they will continue to meet the current needs of the company and address any concerns discovered by the team.

Some of the items that need to be touched on in the RFI include-

Quality of work
Attentiveness to problems
Will the relationship be purely a transactional one or a true partnership?
Range of services offered
Is innovation being implemented to increase efficiency?
Are they big enough to scale for growth?

Once the number of vendors that satisfy the organization's priorities and criteria is reached, the team will hopefully arrive at 2-3 vendors that they are confident in moving forward with. Whichever way a business decides to consolidate its vendors, the best way to do so is through a collaborative and joint effort within a company.