Effective Strategies for Vendor Consolidation

Businesses often rely on multiple vendors to supply what they can't produce themselves. As the business grows, it may end up with several vendors providing the same products and services. 

This redundancy can cause problems that are easily overlooked because they build up slowly, become part of routine operations, and are overshadowed by the focus on growth and expansion.

Vendor consolidation is a strategy designed to address this problem by:

• Identifying the best-performing vendors for the business
• Reallocating as much spend as possible to them from other vendors
• Terminating relationships with any vendors no longer required

Achieving these outcomes can result in cost savings, improved vendor service levels, and reduced administrative overhead. This article presents a structured approach to help your business determine how to carry out vendor consolidation.

Signs Your Business Needs Vendor Consolidation

The following problems may indicate that your business needs to undertake a vendor consolidation project:

• Cost Management: Increased administrative and transaction costs from dealing with numerous vendors can erode cost savings. Opportunities for volume discounts and better pricing can be missed when buying from many vendors.
• Internal feedback and audits: Input from internal teams may highlight difficulties in managing the current vendor base. Internal audits can reveal inefficiencies, redundant vendors, or potential cost-saving opportunities through consolidation.
• Operational challenges: Managing a large number of vendors can become overly complex and time-consuming. It can lead to difficulties in managing vendor service delivery and quality performance, checking their regulatory and contractual compliance, and inefficiencies and high workloads in procurement, invoicing, and contract management. Redundant processes can be streamlined by reducing the number of vendors, making it easier to monitor and manage vendor performance.
• Quality and service level issues: Variability in the quality of products or services from different vendors can cause consistency issues. Differences in service levels, reliability, and responsiveness among vendors can lead to operational disruptions.
• Risk management: Increased supply chain complexity associated with a large number of vendors can make it harder to prepare for and mitigate against procurement-related risk and vendor business continuity. There may also be concerns about the reliability and financial stability of current vendors.
• Strategic alignment: Some parts of the current vendor base may lack alignment with your business’s strategic goals and growth plans. There may be a need for more strategic partnerships with vendors that can support innovation and long-term business objectives.

Recognising these signs is crucial because it helps identify the optimal time and conditions under which consolidating vendors will be most beneficial. They indicate when the current vendor management strategy may be inefficient or ineffective, prompting the need for a more streamlined approach.

Regularly surveying the key stakeholders in your business who depend on its vendors can reveal any areas of real concern regarding their own operations or the business itself. Those concerns can specify the drivers for determining the need to undertake a vendor consolidation project, and subsequently, planning and implementing such a project.

Analyse Your Vendor Spend

Vendor consolidation requires a deep understanding of your business’s expenditure with each of its vendors over the past 12 months, in a single business-wide currency for easy spend-level comparison.

This information must be broken down into categories, like IT equipment, consulting services, and office furniture. Spend details should be reported for sub-categories of each category. As an example, sub-categories for the IT equipment category might include servers, notebook computers, and printers.

Two types of spend details are required:

• Spend by category + sub-category, by vendor
• Spend by vendor, by category + sub-category

This spend information allows identification of the potential opportunities for vendor consolidation, based on how many of your vendors currently compete in the same product/service sub-categories.

It will also show how many sub-categories each vendor currently services, and its total spend amount.

Use Gatekeeper's Spend Module to help you with analysis

Limit Consolidation Scope

To maximise efficiency and effectiveness, limits must be applied to vendor consolidation efforts. Practicality matters. First efforts will generally deliver the most significant improvements and adding more will only produce smaller and smaller gains.

Such limits can also help minimise the risk of overreliance on a single vendor in any sub-category. This can sometimes occur as an unintended consequence of consolidation.

Consider the use of thresholds like the following to limit consolidation scope:

Pareto Principle (80/20 rule)

• Spend limit: Identify the top 20% of sub-categories that account for 80% of the total spend. Focus consolidation efforts on these high-spend areas.
• Vendor count limit: Consider the sub-categories with the highest concentration of vendors. Often, a small number of categories will have the majority of vendors.

Spend Limit

• Absolute spend: Focus on sub-categories where total spend exceeds a fixed amount.
• Relative spend: Consider sub-categories where total spend exceeds a specific percentage of the total procurement budget.

Vendor Count Limit

• Absolute number of vendors: Focus on sub-categories with more than a minimum number of vendors.
• Relative vendor count: Target sub-categories where vendor count to spend ratio is high.

The specific thresholds for your vendor consolidation project will depend on your business’s unique needs, risk tolerance, and cost savings potential.

This will require the involvement of relevant stakeholders, like procurement teams and contract owners, in the decision-making process. They can provide valuable insights into the importance of specific sub-categories and help determine the most effective approach for consolidation.

Identify Vendors for Consolidation

By combining spend analysis with a limited consolidation scope, you can identify vendors that your business might stop using, either for specific sub-categories or entirely. You can also determine which existing vendors could take over these responsibilities.

The process requires availability and consideration of:

• Certain operational performance information about the vendors being assessed and the presence or absence of any termination rights in their contracts.
• Stakeholder feedback about aspects like vendor criticality, impending finalisation and placement of large or complex orders after lengthy negotiations, or the need to avoid the risks of disruption associated with high levels of change in the vendors used to service any sub-categories.

This outcome-based candidature is driven by characteristics assigned to each vendor after consideration of stakeholder feedback, including reasons why a proposed action with a particular vendor isn’t advisable.

These outcomes are:

1. Relinquish a sub-category

Vendors who are candidates for relinquishing their current ability to service a particular sub-category might typically have the following characteristics:

• Mostly lowest or near-lowest spend in the sub-category
• Mostly average or low performance in servicing the sub-category or managing related risk
• Little or no evidence of innovation in a sub-category expressly designated as requiring it
• Other current vendors are servicing, or able to service, the sub-category

2. Potentially terminate a vendor

Vendors who are prospective targets for termination will have some of the following characteristics:

• Candidates for relinquishing their ability to service all their current sub-categories
• Little to no ability to service other sub-categories in use
• No or few active contracts covering the provision of the current sub-categories serviced that contain unmet minimum spend requirements, disallow termination for convenience, or have a long remaining term
• Not used as a backup for other vendors servicing the same sub-categories

3. Take over a sub-category

Existing vendors servicing a sub-category who could take over the sub-category when relinquished by other vendors should have the following characteristics:

• Mostly highest or near-highest spend in the sub-category
• Mostly good performance in servicing the sub-category or managing related risk
• Evidence of innovation in a sub-category expressly designated as requiring it
• Ability to either easily amend any existing contract to include the provision of products and services in the sub-category, or create a new contract to do so

Identify Potential New Vendors

Once you have assessed the potential consolidation of them, consider whether new vendors might replace one or more existing ones, either entirely, or for specific sub-categories.

Follow your business’s standard procedures for identifying, qualifying, and assessing new vendors to determine their suitability for the consolidation exercise. Suitable new vendors should:

• Have a strong track record of success in servicing the relevant sub-categories and managing related risks
• Demonstrate the capability to handle expected order volumes and meet or exceed pricing, discounting, and delivery expectations in the desired sub-categories

Prepare a Consolidation Plan

Once spend analysis has provided sufficient evidence for undertaking a vendor consolidation project, it’s time to prepare a detailed transition plan. 

Here’s a recommended sequence for consolidation activities:

• Early Termination Candidates: Start with the poorer-performing vendors servicing the highest spend sub-categories who have early termination rights in their contracts. This allows for a quicker and smoother transition to better-performing vendors.
• Phased Consolidation: For the less-capable vendors servicing critical sub-categories or those with contracts that have lengthy remaining terms, consider a gradual transition of sub-categories to other vendors over a set timeframe while fulfilling existing contracts.
• Negotiation for Early Termination: For undesirable vendors without early termination rights that are strong candidates for removal, negotiate a mutually agreeable exit strategy, which might involve offering a settlement fee or a phased termination plan.

Key aspects of consolidation plans include:

• Developing contingency plans to minimise risks such as supply chain disruptions or vendor failures.
• Ensuring all vendors selected for retention or addition have both a history of compliance with relevant regulations and standards and strong service delivery performance.
• Favouring vendors that adhere to ethical and sustainable practices.

This sequencing of events should consider:

• Termination Timing: Check how much notice is required to terminate a contract, and what penalties might apply for early termination.
• New Vendor Onboarding: Determine the time required to qualify, select, negotiate and execute a new contract, and onboard new vendors.
• Transition Period: Assess the time needed to transfer sub-category spend to different vendors.

The initial focus should be on sub-category transfers, shifting spend from consistently undesirable vendors to preferred vendors in those sub-categories.

When replacing undesirable vendors in all sub-categories they service, prioritise the termination of contracts that:

• Allow early termination with notice
• Auto-terminate and are close to their end dates
• Auto-renew but are within their termination notice period
• Have vendors willing to negotiate a mutually agreeable exit strategy that might involve a settlement fee or a phased termination to minimise disruption.

Where no such contracts exist, continue using the applicable vendors for no more than any contractually-specified minimum spend amounts. Or, advise them of your intention to cease using them as soon as possible.

Sequence any remaining candidates for consolidation based on the expected level of benefit, considering the above guidelines. While there are no strict rules, it is essential to look before leaping to ensure a well-planned and executed consolidation process.

Wrap-up

Vendor consolidation is a big deal and it warrants:

• Attention and focus
• A general consensus among stakeholders about how it should be achieved
• A detailed plan backed by solid project management to control its implementation

An ability to quickly pivot if necessary can also come in handy.

There’s a lot riding on the outcome, for your business, its current vendors and maybe even some new vendors.

The aim is for all those outcomes to be positive. That takes thorough investigation, good planning and agility to change course if circumstances dictate.

Solid risk management, continuous monitoring and a feedback loop are essential components to maintain the momentum of consolidation efforts. Leveraging technology and data analytics further enhances the ability to track progress and make informed decisions.

Since vendor numbers tend to increase with business growth, and operating conditions and business requirements can change rapidly, vendor consolidation should become one of your business’s standard vendor management practices.

While the practice should be a standard, expect your approach to vendor consolidation to vary slightly each time, according to the facts about the situation your business is facing at the time a need for consolidation becomes apparent.

To learn how Gatekeeper can help with your vendor consolidation preparation, don't hesitate to get in touch with us.