Supplier Management: Why Consolidation Remains The Key To Cost Reduction

Supplier Management: Why Consolidation Remains The Key To Cost Reduction

Earlier this year, Deloitte published its annual CPO survey. It found that cost, risk and digital are the top priorities for global procurement teams. With uncertainty and growth being a constant focus in many businesses, it is unsurprising that reducing cost and managing risk are in the spotlight.

  • 79% of procurement leaders focus on cost reduction
  • Almost six in ten see managing risks as a priority

Concern around Brexit and any upcoming trade deal was the highest risk cited by UK participants. However, there was also a 12% increase in procurement risk, which includes factors such as price instability, supply chain disruption and supplier bankruptcy.

Against this backdrop, it makes sense for organisations to reconsider their supplier base. Consolidating suppliers brings cost benefits across a business, but does it also bring an element of risk? And if so, should you do it?

The challenge of multiple vendors

Many businesses find they have built a large supplier base gradually, with maverick and ad hoc purchasing inflating the numbers. Finding and qualifying suppliers continues to be a big challenge for procurement professionals, along with maintaining quality standards and a stable supply chain. In addition, reviewing supplier performance and compliance is time-consuming. The extra time, effort and workload required to manage multiple suppliers is clear.

For companies using a multi-sourcing strategy, there are further complexities: how can you ensure consistent end-to-end delivery? How can you enforce accountability and responsibility throughout your supply chain? How can you optimise the value and scope of each supplier? These challenges are key in many companies deciding that consolidating purchasing will provide better value.

The advantages of consolidation

Reducing cost is the main reason businesses move to a consolidated model. And rightly so; choosing a multi-category provider will allow you to:

  • Reduce the total cost of your procurement
  • Reduce workload across your business
  • Increase quality and compliance
  • Increase control and visibility of expenditure
  • Improve distribution across your supply chain

It makes sense that supplier consolidation saves money – less time sourcing and managing suppliers, fewer invoices to process, better leverage on pricing. A report from The Hackett Group quantified these assumptions with data showing the cost benefits to consolidation.

Benefit    Saving
1. Reduced purchasing costs 12% spend reduction
2. Reduced supplier management costs  

Costs saved for each supplier relationship range from £500 – £1,000

3. Reduced non-compliance  

A further 10% savings resulting from core pricing and less maverick spend

Hackett Group Supplier Consolidation Research

Despite the clear advantages there is also some risk to consolidating – by way of limitations and inflexibility. However if there is clear negotiation up-front, the financial benefits should outweigh the risk for cost-focused organisations.

Spend strategies

  • Priority: 80% of spend with 20% of suppliers
  • Tail: 20% of spend with 80% of suppliers

With 80% of spend accounted for with 20% of suppliers, according to the Pareto Principle, it makes sense to adopt a ‘trusted business partner’ relationship with these suppliers. This transition from vendor to partner status moves the focus from cost to mutual business benefits. This still brings all of the cost reductions associated with consolidation, such as increased efficiency and visibility, but with less risk. A strategic partnership benefits both parties and negates the risk of using a single supplier.

There are also advantages to applying this principle to tail spend, by consolidating 80% of suppliers into a main ‘long tail’ provider. This enables a strategic relationship with the tail supplier, bringing soft cost reductions, instead of ad hoc, tactical purchasing.

Choosing the right mix

Supplier consolidation is a smart strategy for cost reduction and improved business efficiency, but it does require time and effort. However, any associated risk can be well managed or negated and the benefits to your company are worth the work involved.

When it comes to reducing suppliers, you need to determine what’s best for your business. You may find that a multi-category supplier works overall but that a specialist category is more effective managed separately. Above all, you need to find the best fit so that there’s a balance between the time it takes to manage your supplier base and the profitability of your business.

Find out More

Contact us if you would like to know more about how we can help you consolidate your supplier base.

Sources:
https://www2.deloitte.com/uk/en/pages/press-releases/articles/cpo-survey-2017.html
http://blog.deltabid.com/top-10-biggest-procurement-challenges
http://www.mypurchasingcenter.com/files/6213/8929/0096/Hackett_Group_Supplier_Consolidation_Research_Article_1.pdf