Using supplier consolidation and strategic sourcing to reduce costs
Unlocking value by streamlining supplier consolidation and strategic sourcing
Procurement teams everywhere are usually focused on one thing: keeping operations moving along smoothly while ensuring businesses can access the materials and talent they require to get the job done.
But too often these teams are stuck managing fragmented supply chains, forced to sift through overlapping vendor tasks while putting a stop to value leakage.
Sound like a familiar problem? It might be time to engage in supplier consolidation and strategic sourcing. Together, these two activities give procurement teams and the businesses they serve a way to unlock greater value within their supply chains while reducing administrative burdens and improving efficiency.
The end result? A more resilient supply chain, stronger vendor relationships, and greater value in your operations.
Supplier consolidation and strategic sourcing explained
First, what exactly are supplier consolidation and strategic sourcing?
These two tasks are focused on uncovering cost savings within your day-to-day operations, particularly when it comes to the suppliers and vendors you work with.
Let’s get some quick definitions out of the way:
- Supplier consolidation is the process of reducing the number of suppliers you work with to access greater cost savings and value.
- Strategic sourcing is the process of developing supply channels at the lowest total cost. It accomplishes this by analyzing procurement data and market conditions to help you access greater value.
Supplier consolidation is relatively self-explanatory; you’re trying to optimize the number of partners you rely on, reducing administrative burden and eliminating redundancies.
But strategic sourcing requires a bit of a shift in your thinking.
Traditionally, there’s a tendency to put all a business’ eggs in one basket when it comes to sourcing and suppliers. The historic goal of sourcing has been to access materials and services at the lowest possible cost, relying on bulk discounts and high purchase volumes to keep those costs low.
As we’ve written about before, this is very much a mindset found in finance departments—keep costs low, spend less money, and get more bang for your buck. Strategic sourcing looks at the price of materials and services as one element of total cost.
Strategic sourcing seeks to analyze every part of a company’s operations, including the value provided by suppliers. In contrast to traditional sourcing’s emphasis on low costs above all else, strategic sourcing seeks to maximize value while reducing total costs.
The benefits of supplier consolidation and strategic sourcing
Conducting supplier consolidation and strategic sourcing is a great way for procurement teams to help communicate the value they’re finding to the organization at large.
Beyond that, there are numerous benefits that stem from these tasks:
- Operational efficiency: Working with fewer suppliers helps streamline communication, invoicing, and logistical concerns.
- Better risk management: The more suppliers you work with, the more moving parts you need to track—and the greater the risk you face. Consolidating your suppliers helps make regulatory compliance and adherence much easier.
- Improved supplier collaboration: Reducing the total number of suppliers you rely on can lead to stronger relationships, letting you leverage the contracted talent you work with on more complex projects that provide mutual benefits and success.
- Lower procurement costs: As part of your strategic sourcing efforts, you may be able to access better discounts and contract terms.
- Enhanced supply chain resiliency: Reliance on a select number of strategic suppliers and sources creates a more resilient supply chain that's less prone to disruption.
Getting started with supplier consolidation and strategic sourcing
Now that you’ve got a better understanding of what supplier consolidation and strategic sourcing are, it’s time to put them both to work in your own business to unlock greater savings.
Getting started with supplier consolidation and strategic sourcing takes some careful consideration and planning, but is easier than it looks once you get down to brass tacks.
Broadly, there are five steps involved in this process:
- Leverage technology
- Assess your suppliers
- Analyze supplier performance
- Communicate with suppliers
- Implement and monitor
Let’s dig into each one.
Leverage technology
Your first step in this process is to arm yourself with the right technology to help you tackle the vast amount of data you’re about to assess.
You already have a wealth of data about your job sites, the contractors that work on them, and the suppliers that provide you with materials or equipment. The problem is that this data is often decentralized, making it much harder to get an accurate picture. The solution? Get the right technology in place to help you manage all your supply chain tasks.
These tools help you unlock greater efficiency and automation, in turn eliminating manual tasks so you can focus on the real work of procurement.
Assess your suppliers
In periods of growth, it’s typical that you wind up working with a range of contractors and suppliers with overlapping areas of expertise. That’s beneficial when you’re expanding your operations and taking on new projects, but it can cause headaches when you’re looking to reduce costs.
Conducting an inventory of the suppliers you work with, their associated costs, and the benefits they provide is a great starting point for your consolidation efforts.
Analyze supplier performance
Once you’ve got your inventory of suppliers, it’s time to start benchmarking their performance. This is a data-driven task that requires a wealth of information about your supply chain operations, but is critical for accurate assessment.
Evaluating supplier performance takes time and consideration. Some factors to keep in mind include:
- Does this supplier adhere to contract terms?
- Do you have other suppliers that offer similar materials or services?
- What are the proven cost savings to date resulting from this supplier?
As you’re identifying and analyzing your suppliers, check in with your team to get a better sense of the working relationship you have. This will help you build a detailed picture of how they fit in with your business operations.
Communicate with suppliers
By now, you’ve got the information you need to make informed decisions about the suppliers you rely on. This is the point where you need to reach out to the suppliers you’ll continue working with and those you won’t be.
For the partners you will continue working with, this may be an opportunity to renegotiate contract terms to access greater value for both parties.
Implement and monitor
By this point, you’ve already taken big steps towards consolidating the number of suppliers you work with—so it may seem a bit odd that we’ve still got this step around implementing your efforts.
The point we want to stress here is that these efforts, like all your supply chain management activities, isn’t a one-and-done task. Once you’ve implemented these strategies, it’s important to continue to monitor supplier performance to make sure you’re getting the most out of these relationships.
Next steps
Supplier consolidation and strategic sourcing are powerful strategies for businesses looking to optimize procurement, enhance supplier relationships, and reduce costs.
By carefully selecting your key suppliers and building long-term strategic partnerships, you’re in a better position to drive efficiency while mitigating the risks associated with a disruption in your supply chain.
Not sure where to get started? Our ebook, Contractor Management Blueprint, explores how one business enhanced contract compliance, freed up administrative time, and saved $59 million by implementing these strategies and more.