A Basic Guide to Vendor Consolidation
Cut costs and improve efficiency
Vendor Consolidation is a supply chain management strategy where companies reduce their supplier base to just a few trusted partners, with the goal of streamlining the procurement process, improving the quality of business operations and most importantly, cutting costs.
There are several ways the strategy can positively impact a company’s bottom line, including reduced operational costs and back-office expenses, but one area where it’s often most beneficial is in inbound freight management. Shipping large volumes of freight from fewer suppliers can cost considerably less than receiving multiple shipments from multiple suppliers.
There are certainly times when narrowing the circle of suppliers is worth the effort. If you’re currently using multiple suppliers for the same products, using this strategy can lead to:
Reduced shipping costs
A good inbound freight management strategy, with fewer vendors and closer proximity, can add to the bottom line and improve profitability. Instead of sourcing 2,000 units of a particular product from 15 different suppliers in different locations, you can source the same products from 2 or 3 suppliers and pay for fewer trucks going to fewer locations.
Better pricing on bulk orders
Buying a higher volume of goods from fewer suppliers presents opportunities for ordering in bulk — a purchasing method that often results in discounts through reduced per-unit costs. Purchasing more for less gives you the power to drive down customer costs or direct those savings to your bottom line.
Use vendor consolidation to transform bland relationships into solid partnerships. Trying to manage too many suppliers can feel more transactional than personal. That’s why it’s ideal to partner with a few reliable suppliers that understand your business and work hard to meet your requirements.
More time spent focusing on your business
Managing several suppliers takes time and resources you may not have. Through consolidation, you can focus on more important things like product improvement, maintaining productivity and managing customer relationships.
The idea is simple: reduce the number of providers you work with to those that are most effective, and create a smaller, more efficient supply chain.
While the concept is straightforward, the execution is a little more complicated, and it’s unique to each company. Here are some basic steps you could take to evaluate the suppliers you’re considering as long-term partners:
Step 1 — Form a focus group
Forming a focus group of stakeholders is a helpful way to prioritize business goals and determine which vendors are best qualified to help you meet them. This team may consist of members of your procurement, executive, legal, IT, human resources and accounting departments who understand the organization’s strategy and can offer valuable input.
Step 2 — Determine your current status
Review your current supply chain and vendor network to get a baseline of where you are and where you want to be. Some questions to start with are:
- What vendors are you currently sourcing from and where are they located?
- Are you sourcing the same products from multiple vendors?
- Are there vendors you’re only sourcing a few products from? Could a vendor you’re sourcing more from supply these products instead?
- Have you had negative experiences with any vendor that has resulted in increased costs?
- Which vendors are easiest to work with?
Step 3 — Establish metrics and goals
Once you know where you are and where you want to be, move to setting goals and determining the metrics that help measure those goals. For example, if receiving on-time deliveries from your vendors is critical to your business, you can set a specific on-time delivery goal and begin measuring vendors against it.
Step 4 — Analyze and categorize current vendors
Conducting a supplier analysis is a simple way to compare and categorize providers. Create a spreadsheet that lists the agreed-upon metrics, and then organize each supplier into three groups:
- High performing (meeting nearly all goals)
- Low performing (meeting some but not all)
- Underperforming (unable to meet few or any goals)
The findings may surprise you — vendors that seem easy to work with may not be meeting the goals, while others may be exceeding expectations.
Step 5 – Select the best vendors for your supply chain
Based on the analysis of current vendors and their ability to help your business reach its goals, you can begin making consolidation decisions. While there isn’t a set number of vendors to keep, those you continue doing business with should add consistent value.
ArcBest vendor management services
Once you’ve consolidated your suppliers to those who add the most value to your business, The ArcBest Managed Solutions team can work directly with you to help create an effective inbound freight management strategy that’s designed to lower costs and meet your business goals. Find out more about our Managed Logistics solutions.