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supplier consolidation - A technique to reduce costs
Many companies purchase from too many suppliers, as well as too many different
items. Visualizing the purchasing map can help identify any opportunities for
item and/or supplier consolidation to reduce costs. A good rule to evaluate the current
situation is the 80% - 20% rule.
In most cases, 20% of the suppliers, or items, represent 80% of the total annual
spend. If the top 20% of the suppliers, or items, represent less than 80% of the
spend, supplier, or item, consolidation should reduce costs.
Supplier consolidation consists of assigning the total spend to fewer suppliers. This will provide greater leverage for supplier negotiations and lower costs.If 20% represents more than 80% of the total annual spend, this could also show that there are many low volume suppliers, or items, that should be consolidated as they increase the purchasing costs.
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The percent spend represented by the top three suppliers by category is another method used to evaluate the potential for supplier consolidation. A category groups parts of the same type that theoretically can be purchased from one supplier only. However, it is often necessary to purchase from more than one supplier. Nevertheless, any category where the spend from the top three suppliers represent under 50% of the spend highlights a lack of consolidation. Reducing the number of suppliers in that category will increase the economies of scale and
reduce costs.
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