Bigger isn’t better when it comes to a supplier base.
That’s the conclusion businesses are coming to.
More businesses are rationalizing and consolidating their supplier base to gain a competitive advantage through reduced costs, more collaborative supplier relationships and less risk of supply chain disruption. These are some of the reasons that top-performing procurement organizations have 18 percent lower operating costs and 28 percent fewer full-time equivalent than their peers, per The Hackett Group. In some cases, businesses are settling on a single supplier for certain commodities.In fact, top-performing procurement organizations have consolidated their purchases among 78 percent fewer suppliers than their peers, according to The Hackett Group’s research.
Why are businesses keen in whittling down their supplier base? Here are six compelling reasons:
- Reduced costs: Working with too many suppliers raises costs associated with product acquisition, supplier payments, shipping, and potentially, tax reporting and exchange rates. In a traditional paper-based accounts payable environment, it’s also extremely costly to collect and manage tax documents and payments information from lots of suppliers.
- Increased staff productivity: In an environment with lots of suppliers per category, purchasers waste a lot of time determining who to buy from, and accounts payable staff can become consumed with collecting tax documents, paying suppliers and keeping supplier payment information up-to-date. Consolidating suppliers results in a more effective approach to buying, and more efficient supplier payments. As a result, employees can spend more time on activities such as ensuring contract compliance, strengthening supplier relationships and migrating suppliers to electronic payment methods such as virtual card and ACH.
- Better bargaining power: Consolidating supplier relationships enables businesses to place higher-volume orders with the remaining suppliers, creating a more valuable relationships in the eyes of your suppliers and potentially resulting in lower cost of goods and services and more leverage when trying to convince suppliers to accept electronic payment methods. Better bargaining power may also help businesses earn incentives such as free products.
- Streamlined supplier management: Managing supplier relationships is one of the most onerous aspects of procurement. Having lots of supplier relationships also makes it difficult to nurture a beneficial relationship with each supplier. Consolidating supplier relationships enables staff to dedicate more time to monitoring supplier performance, ensuring contract compliance, and onboarding suppliers to electronic payment methods such as virtual card.
- Deeper supplier relationships: Strategically selecting suppliers can help businesses develop collaborative, mutually beneficial working relationships, such as the sharing of resources and knowledge on new product development, customer marketing, and market penetration.
- Less risk: An unwieldy supplier base can open the door to global supply chain risks such as poor product quality, inconsistent product delivery, contract non-compliance, and weak supplier management – all which can significantly damage the brand and reputation of a business. Paying geographically dispersed suppliers via paper checks also can be challenge, leading to potential supply chain disruptions. It is no wonder that 77 percent of supply chain executives surveyed by The Hackett Group have made it a goal to reduce supply chain risk.
Think your business might have too many suppliers? Then it might be time to perform a spend analysis of your supply chain function. A spend analysis should include three questions:
- How much your business spends overall
- How much your business spends with each supplier, and on which goods and services
- The performance of each supplier in your base
Performing a spend analysis is an integral part of developing an electronic payments strategy.
Businesses with a spend analysis program spend considerably less to purchase goods and services compared to their peers without a program, according to APQC’s Open Standards Benchmarking. A spend analysis program also helps businesses identify suppliers to target for electronic payments.
Importantly, a spend analysis will start your business on its way to consolidating its suppliers.
EML helps businesses manage the challenges of paying its suppliers. Contact us to learn how our solutions can deliver operational and strategies benefits, no matter the size of your supplier base.