- Huyett Marketing Department
- 02/02/2023
As supply chain volatility slowly settles down and companies begin focusing on long-term supply chain management, the term “vendor consolidation” – or “supplier consolidation” – may come to mind as a popular strategy. But what exactly is it? Why is it in such high consideration? How will its implementation affect a company’s bottom line, efficiency, and business relationships?
What is Vendor Consolidation?
Vendor consolidation – or
supplier
consolidation – is when a business reduces the number of suppliers in their supply chain and relies on fewer partners to provide products in larger quantities. Many businesses adopt this strategy for three main reasons: to save money, increase efficiency, and improve supplier relationships.
Benefits of Vendor Consolidation
While each benefit can be broken down into details, the high-level motivations for consolidation boil down to:
- Cost Savings: Companies are more likely to earn discounts and leverage buying power from their suppliers when they buy in large quantities due to economy of scale – when the cost of production decreases as product volume increases.
- Increased Efficiency: Fewer suppliers mean fewer shipments to receive, fewer fees to pay, less paperwork to file, and less overall labor needed to manage processes.
- Better Relationships: When relationship-building energy is focused on a select few suppliers, those relationships generate more value, trust, and mutual teamwork.
So what typically happens to make companies consider consolidating suppliers?
Vendor Consolidation Catalyst
Supplier consolidation tends to happen when companies refocus on long-term solutions after a supply chain disruption. This strategy has slowly generated interest over the last ten years, but markedly picked up steam following the supply chain upheavals starting in 2020. During hard times, companies tend to lean on supplier diversification as a short-term response. A typical reaction might go like this:
- Supply chain is running smoothly with few suppliers.
- A major supplier experiences a failure, like the Toyota p-valves supplier fire in 1997.
- The company implements the short-term reaction of diversifying suppliers to mitigate a complete loss of production.
- The company commits major resources to the diversification process and incurs an uptick of fees, shipping costs, and labor resources to manage the growing supply chain complexity but is reassured by the product availability.
- The effects of the initial supplier failure subside, and the company has room to refocus on long-term strategies.
- The company begins to consolidate suppliers again as normalcy returns and resources are better spent on leaner processes.
While supply chain failures are relatively abnormal, the recent global upheavals have caused companies to reprioritize supply chain resilience techniques. Consolidation and diversification each hold merit as a strategy in respective instances. However, the cost of reactively jumping back and forth can stretch resources thin. So why commit to consolidation?
Consolidation as a Long-Term Strategy
To understand how consolidation provides long-term solutions, we must look at the long-term issues of supply chain diversification and how consolidation combats those issues. A case study survey of successful consolidations revealed key inefficiencies and costs that companies face with an overly diversified supply chain.
1. Low ROI:
Time must be spent placing multiple purchase orders, managing shipments, and sometimes assembling final products from across vendors. The labor costs involved in these processes, particularly with low-cost products, can take its toll on a company's bottom line.
Mitigation:
Companies who source large volumes from fewer suppliers will have fewer points of contact to upkeep, less administrative overhead, and more manpower to devote to growing their business, rather than just managing it.
2. Fees:
The more suppliers a business utilizes, the more risks there are for “nickel and dime” fees to build up. Many suppliers charge fees for small orders, which is more likely to happen if orders are split between multiple suppliers. Additionally, shipping fees add up, especially on small shipments.
Mitigation:
Supplier fees and add-ons diminish when there are fewer suppliers tacking on those fees. Also, small order and small shipments fees are less likely to occur, as companies will be placing larger orders.
3. Lost Buying Power:
Buying power refers to a company’s ability to purchase products from a supplier at a reduced cost, typically because the purchase is high-volume. When those purchases are split among different suppliers, that power to access discounts can be lost.
Mitigation:
When a company brings significant purchasing power to a supplier, that relationship not only strengthens monetarily, but also signals to the supplier that this customer may become a key stakeholder and deserve prioritization.
4. Underdeveloped Supplier Relationships:
Diversified suppliers means diversified relationships. A business may not be able to invest the time in truly partnering with a supplier, especially if the total spend does not warrant that time.
Mitigation:
Having fewer suppliers to invest in means more resources go towards those investments. When suppliers must choose where to focus efforts on growing their customers’ business, well-established relationships are key.
5.
Sequential Losses:
The larger a supply chain gets, the more interdependent it becomes. If one of those suppliers experiences a loss in production, the initial hit to the company may be small. However, the chain reaction of that loss will be harder to trace throughout the supply chain, and sequential losses will be harder to predict and plan for.
Mitigation:
A loss in production will have negative effects, regardless of consolidation or diversification strategies. However, when the supply chain is easier to track, the losses will be easier to predict. Suppliers may also prioritize correcting these losses for customers with established relationships.
6.
Inconsistent Products:
When the same product is sourced from multiple suppliers, the differences in manufacturing could cause inconsistent service to the end customer. This could result in more reworking processes, which costs time and money.
Mitigation:
Fewer suppliers mean fewer surprises with product design. Companies can offer consistent products to their customers and handle fewer complaints about design variations. They will also save any resources previously dedicated to correcting these issues.
7.
Standardization and Quality Risks:
If products come from multiple sources, then quality and performance standards become harder to monitor and violations become harder to trace.
Mitigation:
Similar to product consistency,
quality may be easier to monitor when the pool of variation risks is smaller. Additionally, any quality violations will come from fewer sources, which may eliminate time needed to identify root causes.
8.
Product Replacement:
For companies who receive parts for end-user products, the task for replacing those parts becomes much more tedious if multiple suppliers are involved and pieces must be individually sourced.
Mitigation:
With fewer suppliers, companies will have fewer contacts to trace if the need for product replacements or upgrades arises.
How to Develop a Vendor Consolidation Strategy
Supplier consolidation tends to happen when companies refocus on long-term solutions after a supply chain disruption. This strategy has slowly generated interest over the last ten years, but markedly picked up steam following the supply chain upheavals starting in 2020. During hard times, companies tend to lean on supplier diversification as a short-term response. A typical reaction might go like this:
- Supply chain is running smoothly with few suppliers.
- A major supplier experiences a failure, like the Toyota p-valves supplier fire in 1997.
- The company implements the short-term reaction of diversifying suppliers to mitigate a complete loss of production.
- The company commits major resources to the diversification process and incurs an uptick of fees, shipping costs, and labor resources to manage the growing supply chain complexity but is reassured by the product availability.
- The effects of the initial supplier failure subside, and the company has room to refocus on long-term strategies.
- The company begins to consolidate suppliers again as normalcy returns and resources are better spent on leaner processes.
While supply chain failures are relatively abnormal, the recent global upheavals have caused companies to reprioritize supply chain resilience techniques. Consolidation and diversification each hold merit as a strategy in respective instances. However, the cost of reactively jumping back and forth can stretch resources thin. So why commit to consolidation?
Set Goals
Your process should begin with setting broad goals that will meet your company’s individual needs. These can include:
- Reduced labor in the receiving department
- Streamlined management process
- Reliance on the most trusted suppliers
- Reduced shipping costs
- Reliance on fewer transportation routes
- Enhanced supplier relationships to help combat future supply chain failures
Analyze Current Suppliers' Performances
Next, conduct a strategic evaluation of your current suppliers. Audit your existing supply chain landscape to determine:
- Locations of your current supplier base
- Redundant purchases between suppliers
- Underused suppliers with potential
- Historic relationship issues
- Logistics pain points
- Any other important elements to build your baseline
After this process, begin identifying which of your suppliers:
- Offer price breaks with high-volume orders
- Meet deadlines
- Offer a range of products in quantity breaks that suit your business needs and the ability to source new products as your build your business
- Vet upstream suppliers for quality, reliability, speed, and fair pricing to pass on to you
- Demonstrate resilience during supply chain failures
- Demonstrate historic ability to build relationships with their suppliers
- Instigate proactive communication with their customers
- Provide personal, customized customer service to business partners
- Help manage and optimize their customers’ product lines
- Engage in business-building activities (reviewing market and product data, generating customer referrals, participating in line walks, etc.)
- Prioritize supplier relationships to ensure they provide quality, reliability, and adaptability
- Will be open to performance evaluations
Many suppliers will meet at least a few of these requirements, but not all will offer the combination of benefits your business needs to grow. Focus on the suppliers that are
experts in delivering that unique set of services.
Narrow Your List and Begin Consolidating
Once you have identified the suppliers who will help you meet your goals, begin the process of transferring purchases from your eliminated suppliers to your new list. Establish connections with the contacts on your list to learn more about how they do business, how they communicate with their customers, and how to build a two-way street with them.
Huyett as Your Supplier
Discover how Huyett can help you consolidate your fastener supply chain by offering:
- A robust product line of quality fasteners from worldwide trusted suppliers
- Regional Distribution Support Team members who engage in business-building activities
- Personal, friendly, and expert customer service
- And more!
If our business services and product lines (including
key stock and machine keys,
pins and wire forms,
retaining rings,
grease fittings, and more) offer the business growth and streamlining opportunities your business needs,
contact our Sales Team today.
