Volume Consolidation and Single Source Suppliers
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Volume Consolidation and Single Source Suppliers
When streamlining a supply chain, an organization has many options to consider. Some will haggle with their current vendor to obtain the best prices. Others will simply move from vendor to vendor, depending on price. However, neither of these ways works for long-term savings. Many of them decide on proper vendor management and consolidating the organizations volumes with a few choice suppliers. This is called vendor consolidation and produces hard and soft costs as well as lowers the organizations inventory cost of ownership. Vendor consolidation also allows an organization to reduce their costs by increasing their overall purchasing power, lowers freight costs coming in, and increases the competition among all of their vendors.
Vendor Consolidation Improves Purchasing Power
The fastest and largest benefit that vendor consolidation gives is the increase in purchasing power on parts and materials. When an organization lowers the amount of vendors that they work with, they are increasing the overall volume of parts and materials that they buy from the remaining vendors. This larger volume puts the organization in a much better position to negotiate better rates on these parts and materials.
Vendor Consolidation Lowers Freight Costs
Vendor consolidation also lowers freight costs for the organization. When the volume of parts and materials purchased from the remaining vendors, they are dealing with larger orders coming from the same place and thus lowering the freight cost. This is a huge advantage as it gives the organization a lower per unit freight cost and a lower overall inventory cost of ownership.
Vendor Consolidation Improves Quality
When an organization implements vendor consolidation and imposes a strict set of rules and guidelines for the remaining vendors, they will get a better quality from the vendor, with regards to service and products. These vendors have a larger volume from the organization and will view that favorably and make sure that they are on top of their products quality and ensure that the organization gets quality service as well. This will also help the organizations inventory cost of ownership because there should be less returns or problems with manufacturing.
Vendor Consolidation Increases Competition
This seems to be an obvious benefit to point out, but it is still a benefit of vendor consolidation. When an organization reduces the number of vendors that they work with it increases the competition among the remaining vendors, helping the organization to receive more aggressive pricing strategies and additional discounts from their remaining vendors.
Soft Cost Reductions with Vendor Consolidation
There is also a reduction in soft costs that come along with vendor consolidation. The first and most obvious is that of bill payment. If there are fewer vendors and bills to pay, it takes less cost of paying them through cutting checks, tracking, etc. Procurement receives a reduction in cost as well, as there arent so many vendors to keep track of. When an organization slashes its vendors to only the best remaining, that is the type of service and product that they will receive, in turn, allowing for even further cost reductions. There will also be increased competition from outside vendors that an organization is not using, to help break into the select few.
Challenges with Single Supplier
Volume consolidation can be taken to an extreme as well. There are many factors involved in a vendor being considered appropriate. However, going down to just one single supplier comes with its own set of risks. There are two different ways for an organization to have just one supplier: single source procurement and sole source procurement. There are differences between the two.
Single Source Procurement
“Single source purchasing refers to purchases from one selected supplier, even though there are other suppliers that provide similar products” (“Sole/Single Source Procurement: Problems, Challenges & Potential Solutions”). If an organization decides that they are only going to buy Dell computers, then that is an example of single source purchasing. However, this is different than sole source because the organization has the option of changing suppliers but has chosen not to for whatever reasons that they may have.
Sole Source Procurement
“Sole source procurement however refers to those purchases where there is only one supplier that provides the product. Usually these are unique products that you cannot find anywhere but only through one supplier or manufacturer” (“Sole/Single Source Procurement: Problems, Challenges & Potential Solutions”). This usually happens when the supplier is providing a unique product that cannot be found anywhere else.
Single Source Problems and Potential