Consolidating the supplier base can result in dramatic cost reduction. In Rick’s Materials Management Manifesto, the sixth element is, Too Many Suppliers Spoil the Soup. Many companies have a proliferation of suppliers, with many providing the same part or commodity. While the buyers may not have intended to develop a large base of suppliers, using RFQ’s for competitive costing, allowing engineers to select suppliers, having different buyers buy the same thing, and lack of coordination across large organizations can result in a large number of suppliers that provide similar commodities and parts.
Here’s how consolidating your supplier base can cut costs:
- Concentrated purchase volume results in greater volume discounts.
- Avoid the trap of different part numbers for the same part bought from different suppliers, which results in more inventory, numerous part stocking locations, obsolescence and increased transactions.
- Maintain control of purchasing, to prevent Engineering and other non-purchasing related buyers from choosing suppliers that aren’t optimal for service, quality and cost.
To reduce the number of suppliers, first prepare a simple list of where the money is going for the current fiscal year. List the supplier, the amount spent, and the key commodities bought. Then look for duplicates and commodity consolidation opportunities. As a general rule in small and middle market companies, if more than a dozen suppliers represent about 80% of the total spend, you have opportunities for consolidation.
One final note, as you undertake a consolidation program, use the opportunity to negotiate higher volume discounts, early payment discounts, and development of VMI and Kanban processes to reduce inventory. The results can be dramatic and make for great soup!
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