Can Supplier Consolidation Truly Save Cash?
PurchTips - Edition # 222 January 25, 2011
By Charles Dominick, SPSM, SPSM2
Is Savings Through Supplier Consolidation A Myth?
Reducing the number of suppliers they do business with is a common procurement department goal. Driving it is the belief that supplier consolidation saves money.
But does supplier consolidation truly save money?
The answer is "maybe." Simply reducing the number of suppliers you use does not, by itself, save money. Supplier consolidation only saves money when at least one of the following three results is realized:
Result #1 - Headcount is reduced. Procurement, accounts payable, and receiving staff all deal with suppliers. So having fewer suppliers to deal with should mean that a proportional decrease in headcount - and, thus, personnel costs - is warranted, right? You may argue that having fewer suppliers will free up procurement professionals to do more strategic work. And your thinking would be safe if Result #2 is true.
Result #2 - The consolidated spend is leveraged and lower prices are negotiated. It's Procurement 101: the more volume of business you do with a supplier, the higher discounts you should be eligible for. With the same volume being supplied by fewer suppliers, you should be pushing for and receiving lower prices.
Result #3 - Work billed on a per-supplier basis is reduced. I can't think of many examples where you incur and can associate a common cost with each supplier. One thing that comes to mind is the pending legislation in the USA that will require businesses to file a 1099 form for every supplier with whom they spend $600 or more per year. Companies are likely to outsource this annual work. So, because there is a specific task done for each supplier, fewer suppliers will mean fewer tasks done which will mean lower costs.
It should now be clear that supplier consolidation is a means to an end, not an end in itself. If you have implemented, or are considering implementing, a supplier consolidation goal, be sure to have a plan on how you will direct your supplier consolidation to produce these results. If you are just doing supplier consolidation for the sake of having a lower number of suppliers, you're doing it for the wrong reason.
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