Management · October 08, 2020

How Vendor Consolidation Can Save Your Business Money

Vendor consolidation is an increasingly popular supply chain management strategy that big and small companies can implement to drive down costs and free up employee time. If done properly and over a suitable period, businesses can reap significant benefits from this judicious shift.

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Vendor consolidation defined

This consolidation strategy involves more than just reducing the number of vendors. It entails identifying those vendors that are—or could be—core to your business. Intentional consolidation elevates those companies to partner-like relationships. This enables you to focus your resources—such as money, personnel and know-how—on the partnerships you derive the most value from. The objective is to maximize profits and cash flow while minimizing the time spent managing vendor relationships.

An example is a diesel truck repair company that spends thousands on ordering hundreds of original parts and supplies from seven or eight suppliers. This involves constantly checking part availability, price and more—a time-consuming process. By negotiating down to two or three suppliers, that company can consolidate its purchasing power to obtain better pricing and reduce the ordering time and complexity.

Benefits

Vendor consolidation reduces employee workload as they need less time to perform fewer tasks. Thus, you can eliminate overtime or re-allocate employees and reduce staffing costs. Consolidation can also reduce product and management costs. If you consolidate vendors company-wide, you can potentially decrease IT complexity and the software challenges that occur when integrating multiple systems. Furthermore, legal will require less contract management.

Prudent consolidation strengthens vendor relationships, which can move your business from being reactive to proactive. For example, by working closely with your strategic vendors, you could access advanced technologies to source a product that addresses identified trends and perceived opportunities. Preferred customer status or a similar relationship will shorten launch times for new product rollouts, decrease investment costs and improve the ROI on applicable products and services.

Risks

You may be concerned that if you concentrate too much of your business with one vendor that the company could hold you hostage. Even if this doesn't happen, that vendor could still cause major issues if it encountered a problem and you had no back-up. While these are real concerns that you must address with due diligence, contracts and communication, the costs associated with too many vendors and no real negotiating power often outweigh those risks.

Additional consolidation

Outside of the IT department, small and medium-sized businesses tend to have only one to two vendors by category. For example, they use one payroll company, one accounting firm or one insurance provider. Hence, consolidating services often means employing one service provider to handle multiple service types.

Depending on the industry your business is in, your bank may be able to help you. In addition to loans, your bank can provide services such as merchant card processing and sourcing for office equipment and vehicle leases. Focus on working with entities that either deliver an array of services themselves or have deep partner relationships to help you achieve your overall time, revenue and profit objectives.

Getting started

If you have a moderate to high number of vendors, direct each applicable department to document their vendors and the types of products or services they provide. Have the appropriate personnel strategically assess these lists and rank the providers. If the vendors seem insufficient, consider other entities.

Vet each company as you normally would, but add assessment criteria that you would typically reserve for partners. As you narrow your list, remember that concentrating your purchasing with one to two vendors for critical products requires trust and deeper relationships. Work with an attorney to craft a more detailed agreement than the typical purchase agreement.

Remember, your company's health will be closely aligned with your strategic vendors, so you need to conduct due diligence on their financial health before committing. To smooth negotiation, bear in mind that just as you need to mitigate your risks with them, they need to do the same with you.

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.