I started my journey with Source One at the beginning of the summer as an intern and more recently, I’ve been transitioning into the Project Analyst role as a full-time team member. One of my first projects that I consistently worked on as an intern and continue to work on as an Analyst involves sourcing direct materials such as electronic components and PCBAs for a client with several divisions. The divisions are located throughout the world and after sifting through each division's invoice data, we found that there was an abundant amount of supplier overlap in addition to many smaller suppliers that some divisions only purchase a handful of items from each year. With that being said, we decided that supplier consolidation would be the best strategy to implement to help this client achieve savings.
With any decision, particularly those bigger business decisions, there are benefits and drawbacks associated with implementing the supplier consolidation strategy. Reduced costs is what Source One strives for, and that is the top benefit associated with supplier consolidation. Especially for companies that operate globally, it might be valuable to take a step back and assess the current state of the supply chain. Taking the example of my current project into consideration, many companies work with distributors and OEMs across the world in combination with working with local companies for similar, if not, the same parts. Companies with a similar set up should strongly consider evaluating the potential impact of supplier consolidation in an effort to reduce the costs of similar (or same) parts that they are buying from multiple distributors or manufacturers. Not only are these companies condensing the number of suppliers they buy from, they are consolidating their spend as well.
Shifting all purchases of similar items to a single supplier will not only reduce per unit cost variances and spend overall, but it will add a level of organization to the supply chain, as the company is minimizing their list of current suppliers without jeopardizing their operations. For example, the billing process that is involved with each one of a company’s suppliers can be difficult to manage if many suppliers are involved. By consolidating the list of suppliers where it is applicable can help ease the process and allow the company to have a clearer billing (or other) process. Having a smaller set of suppliers will simplify the process of tracking communication between the company and the supplier, orders, invoices, etc. Consolidating the list of 10 suppliers to 2 or 3 suppliers will keep the billing process and lines of communication straight forward and will lessen the transactional time spent on the ordering process. Overall, it will condense several necessary processes and engagements between the company and the supplier.
Thinking that supplier consolidation may be just what your company needs? Be aware that although supplier consolidation may be a great way to enhance a supply chain, like many things in life, it is not for everyone. There are some drawbacks that come with this strategy; the biggest drawbacks is that many suppliers do not have every single part that a company may be looking for. In cases like this, it can be difficult to condense the list of suppliers if some of the bigger suppliers on the list do not have the ability to supply one key component that a smaller supplier can. If a company works with bigger suppliers that have more flexibility, there is a better chance of finding a “one and done” type of supplier that will allow them to consolidate their list. However, another drawback is that a company now has to work with a larger supplier; in working with a larger supplier, it can be much harder to develop a solid working relationship with them rather than working with a small supplier. Getting the supplier’s commitment to the company they work with can be harder to maintain, which can lead to unresponsiveness and a less-than-ideal experience.
If you made it through reading the more crucial drawbacks of supplier consolidation, then congratulations, you may still be considering the idea for your company! If you’re thinking of diving deeper into the ins and outs of supplier consolidation, check out our website to see how we can further assist you and your company!