Supplier Consolidation: Why it Works and How to do it

Supplier consolidation might be all you need to get a hold of your supply chain management as supply chains get more complicated and the operations become more complex.

In the past, we have talked a lot on our blog about the benefits of having a diverse supplier base, and there are immense benefits.

But what happens when too many vendors supply the same goods or services in your supply chain? Well, it definitely becomes unnecessarily complicated. After all, your suppliers are one of the major stakeholders in your supply chain management.

In this article, we will review what supplier consolidation is, explore why it works for your supply chain, and how to set it up.


What is Supplier Consolidation?

Supplier consolidation is a supply chain strategy that reduces the number of vendors supplying a particular product to a particular or multiple arm of the supply chain.

Many organisations engage multiple suppliers to guide against certain supply chain risks and potential disruptions.

However, engaging the supplier is not the issue. The problem is having enough business for all of them. In a bid to solve a perceived issue, you do not want to create another.

When suppliers become too much for a supply chain or its procurement team, consolidating them can hold a lot of benefits for them.


So, Why is Supplier Consolidation Important?

Supplier consolidation is quite popular with OEM and car manufacturers because they tend to have so many parts go into their overall product. Because of the importance of these parts, they tend to have way too many suppliers for a single item.

However, the reverse can have multiple benefits for these supply chains.

Cost Savings

One of the primary reasons for supplier consolidation is cost savings through economics of scale.

Procurement teams will often have the opportunity to negotiate more favourable terms by consolidating suppliers, such as bulk discounts, lower unit prices, or reduced shipping costs.

This can lead to significant savings in supply chain expenses.

Simplified Procurement

A large supplier pool can complicate vendor management, but dealing with fewer suppliers simplifies the procurement process.

Supplier consolidation reduces the administrative burden of managing numerous supplier relationships, processing invoices, and coordinating orders.

It also helps to speed up the procurement process.

Improved Supplier Relationships

When your supply chain has fewer suppliers, it can better invest and allocate resources to build stronger ties with its strategic partners or suppliers.

This way, the supply chain will enjoy better collaboration, increased responsiveness, and a more bought-in supplier base.

Supply Chain Efficiency

When the supplier base is manageable, it helps improve the efficiency of the supply chain because it will cut down lead times, improve communication across the supply chain, and provide better opportunities for visibility and transparency.

All these will, in turn, dial up the throughput of the supply chain and help mitigate supply chain risk.

Reduced Supply Chain Complexity

When your supplier base is complex, it introduces complexities and vulnerabilities into the supply chain that could be easily avoided. 

You can simply avoid that potential chaos through supplier consolidation.


What are the Risks that come with Supplier Consolidation?

Although supplier consolidation has its benefits for the supply chain, there are risks involved that procurement supply chain managers have to weary of.

Reduced Competition

The good thing about a large supplier base is that it breeds supplier competition. When that pool reduces drastically, it may lead to lesser competition, resulting in higher prices and reduced quality control.

To mitigate this, procurement and supply chain managers can take extra care to ensure suppliers do not slack and that prices are quite fair compared to the market.

Exposure to Supply Chain Disruption

When dealing with a large pool of suppliers, you would be hard-pressed to find a situation where you do not have a supplier handy and ready to fill in to prevent disruptions in the supply chain.

Every reduction that the supplier base experiences, it exposes the supply chain to potential disruptors; however, supply chain managers can work closely with vendors to ensure more commitments.


How to Effectively Manage Supplier Consolidation

To successfully carry out a supplier consolidation, there are steps you must follow for effectiveness.

These are:

I. Define Your Goal

Before consolidating your suppliers, you should always have a clear objective in mind. It can be a singular reason, like reducing cost, complexity, or improving your supply chain’s efficiency.

It could also be a combination of reasons. However, you should always have a solid goal before embarking on the journey.

Defining your goals will provide opportunities to identify potential risks of the supplier’s consolidation and help you get in front of them to maintain a seamlessly running supply chain management.


II. Decide on a Consolidating Strategy

Supplier consolidation can be done for the entire supply chain, or it could be limited to a part of your supply chain management.

For instance, are you consolidating the supplier base for your entire supply chain or just for a location or part of the supply chain?

Your consolidation depends on the current challenge of your supply chain and the goal you had when you set out to consolidate.

Always ensure whatever supplier consolidation strategy you decide to embark on directly tackles the issue you are trying to fix.


III. Focus on Best Performing Vendors

When consolidating your supplier base, always pay attention to your best-performing vendors. Because they are the ones, you want to stick around when the dust settles.

Ensure you let them know on time that you appreciate and intend to keep them on board when it is all over. This way, you engender their loyalty despite the changes your supply chain may be going through.

During a supplier consolidation, it is common to have disgruntled vendors who can negatively impact the suppliers that stay behind. How you handle will, to a great extent, determine the next phase of your supply chain management.


IV. Re-Negotiate Terms

Supplier consolidation is a great time to review many of your contracts with the suppliers left over after the purge. The fewer the suppliers, the more you can leverage the economics of scale principle.

When renegotiating, always ensure you focus on how you and the supplier can help each other. But never try to get the supplier to do beyond its capacity.


V. Monitor & Evaluate

When the dust settles, another important activity to consider is the careful monitoring and evaluation of the new process and how your supply chain is adapting to it.

If there are problems, such as supply chain disruptions, find ways to get the other suppliers to rally around and create a synergy that propels your supply chain forward.


FAQs On Supplier Consolidation


Q1: Can supplier consolidation harm attempts to increase supplier variety?

It is doable. Supply chains dedicated to supplier diversity should carefully assess how consolidating their suppliers can influence their diversity initiatives and look for strategies to keep diversity even as they merge.


Q2. How can I measure whether attempts to consolidate suppliers were successful?

The effectiveness of consolidation efforts can be assessed using KPIs relating to cost savings, supplier performance, supply chain efficiency, and risk reduction.


Q3. Should supplier consolidation be periodically examined and modified, or is it a one-time project?

Consolidation of suppliers is an ongoing process. Review your supplier network frequently and make necessary adjustments to reflect shifting market demands and company requirements.