During a period of sustained uncertainty, procurement has continued to deliver savings and support business growth. With Brexit a constant focus in UK businesses it is unsurprising that reducing cost and managing risk are in the spotlight.
Deloitte’s latest annual CPO survey (2018) found that;
> Cost reduction (78%), new products/market development (58%) and managing risks (54%) remain the top business strategies for procurement leaders
> 56% of procurement leaders delivered better year-on-year savings performance than last year (EMEA region)
In addition, the report found that supply chain transparency is poor, with 65% of procurement leaders having limited or no visibility beyond their tier 1 suppliers. With this in mind, and the prospect of a hard Brexit likely, it makes sense for organisations to reconsider their supplier base.
Consolidating suppliers brings cost benefits across a business. However, some argue that it also brings an element of risk. So, should you do it?
The challenge of multiple vendors
Many businesses find that they have built a large supplier base gradually, with maverick and ad hoc purchasing inflating the numbers. Finding and qualifying suppliers continues to be a big challenge for procurement professionals, along with maintaining quality standards and a stable supply chain. In addition, reviewing supplier performance and compliance is time-consuming. The extra time, effort and workload required to manage multiple suppliers is clear.
For companies using a multi-sourcing strategy, there are further complexities: how can you ensure consistent end-to-end delivery? How can you enforce accountability and responsibility throughout your supply chain? How can you optimise the value and scope of each supplier? These challenges are key in many companies deciding that consolidating purchasing will provide better value.
The advantages of consolidation
Reducing cost is the main reason businesses move to a consolidated model. And rightly so, choosing a multi-category provider will allow you to:
• Reduce the total cost of your procurement
• Deliver process efficiencies, saving time and costs
• Improve accountability
• Strengthen relationships
• Increase quality and compliance
• Increase control and visibility of expenditure
• Improve distribution across your supply chain
It makes sense that supplier consolidation saves money – less time sourcing and managing suppliers, fewer invoices to process, better leverage on pricing. A report from The Hackett Group quantified these assumptions with data showing the cost benefits to consolidation.
Reduced purchasing costs
12% spend reduction
Reduced supplier management costs
Costs saved for each supplier relationship range from £500 - £1,000
A further 10% savings resulting from core pricing and less maverick spend
Hackett Group Supplier Consolidation Research
Despite the clear advantages there is also some risk to consolidating – by way of limitations and inflexibility. However, if there is clear negotiation up front the financial benefits should outweigh the risk for cost-focused organisations.
The shift to strategic sourcing
“Companies are struggling to improve the bottom line, and better management of both direct and indirect spend is an important part of reducing cost… They’ve done what they can with traditional methods, and need to find ways to go deeper.”
Chris Sawchuk, The Hackett Group
A 2019 report, Procurement Key Issues from The Hackett Group, highlighted a renewed focus on “doing more with less”. Priorities include leveraging supplier relationships and enhancing agility.
Procurement teams are focusing on spend management and strategic sourcing in response to increased competition and sustained uncertainty.
• Procurement budgets are expected to grow at a slower pace in 2019 (1.3 percent, versus 2.7 percent in 2018) Procurement Key Issues Report
Whilst strategic sourcing isn’t new, businesses are looking for more ways to improve the bottom line. Consolidation is a key way to lower the total cost of supply, not just the purchase price. It can provide efficiencies across multiple categories and the overall supply chain.
Trusted partnerships on the rise
With 80% of spend accounted for with 20% of suppliers it makes sense to adopt a ‘trusted business partner’ relationship with key suppliers.
The transition from vendor to partner status moves the focus from cost to mutual business benefits. This still brings all of the cost reductions associated with consolidation, such as increased efficiency and visibility, but with less risk. A strategic partnership benefits both parties and negates the risk of using a single supplier. CIPS quoted a PwC study;
“The traditional lines between industries are blurring, with consumers increasingly expecting goods and services to be interconnected, and businesses seeking to make their supply chains more efficient and effective.”
In fact, the number of companies who are adopting this approach to ‘partner up’ is at an all-time high. Joining forces utilises combined expertise and greater efficiency in supply chains.
Choosing the right mix
Supplier consolidation is a smart strategy for cost reduction and improved business efficiency. Yes, it does require time and effort. However, any associated risk can be well managed or negated and the benefits to your company are worth the work involved.
When it comes to reducing suppliers, you need to determine what’s best for your business. You may find that a multi-category supplier works overall but that a specialist category is more effective managed separately. Above all, you need to find the best fit so that there’s a balance between the time it takes to manage your supplier base and the profitability of your business.