Consolidation

One of the simplest ways to reduce costs is to reduce the number of suppliers. It is not unusual for an organization to deal with hundreds or even thousands of suppliers. In some cases this may be unavoidable. However, new suppliers are often added over the years but older suppliers continue to be used, for the same products and services.

Using multiple suppliers for a similar product means that volume-based discounts are not being realized. This is the simplest way to get a discount. Suppliers love providing large volumes as this reduces per-unit costs. They reward customers with discounts to encourage large sales.

Surprisingly, this is often overlooked by many organizations, particularly in non-core areas.  Because non-core expenses are generally ‘small ticket’ items, volume-based discounts are not seriously considered. The savings on a small ticket item will be small and not ‘worth the bother’. However, across multiple products, these savings will add up. 

By simply taking the time to review suppliers, an organization can consolidate to the lowest cost provider. While some may argue that the lowest cost is not always the best option due to quality, tracking and supply concerns, it does tend to be less of an issue with non-core items. 

What may not work well for core products and services can work well with non-core expenses. 

In terms of what this might mean in overall savings, consolidating several suppliers to one or two suppliers for the same products and services can easily yield discounts of 20% or more. If an organization has $10 million in annual non-core expenses, this means a savings of $2 million per annum! That’s significant for any organization.

This does not include productivity gains and savings in labour. By simply reducing the total number of suppliers, the amount of time saved processing invoices, updating accounts, time spent ordering and communicating with suppliers and other administrative functions can be significant. This reduces hourly labour, reduces errors and improves tracking simply by having fewer suppliers to deal with. 

The issue might be which suppliers to keep and which ones to eliminate. Although pricing is the key factor, particularly with respect to non-core expenses, it is not the only factor. How you approach consolidation and how you implement the strategy will determine the results.