Vendor Consolidation Vs. Diversification: What is the Best Supply Chain Strategy?
The pandemic brings the focus back on the classic debate: vendor consolidation or vendor diversification? Which of the two is the right supply chain management strategy. If your sourcing managers are searching for an answer to the question, we have got you covered. The truth is that your supply chain’s digital readiness can make all the difference to the answer.
What is Vendor Consolidation and What are its Benefits?
Vendor consolidation is a strategy to rightsize the existing supplier base and make it more cost-efficient, quality-centric, and stable. A vendor consolidation strategy will require you to map the value and category of procurement against each supplier and procure more industrial supplies from a chosen few suppliers. You can now reduce the number of vendors and reap the following benefits:
- Reduced Purchase Costs: When you purchase higher volumes of industrial supplies from handpicked suppliers, you will have higher bargaining power and ask for discounted prices. You can also explore the option of annual rate contracts to seek effective insulation against price increases.
- Reduced Process Costs: Once you reduce the number of suppliers, you will reduce the number of purchase orders and invoices. You will reduce the turnaround time for placing orders by integrating more line items in each order. You will reduce your process costs.
- Reduced Mismatches in Supplies: One of the hurdles of a large supplier base is many supplier codes, material codes, and supplier catalogs. Vendor consolidation allows your sourcing managers to work with fewer supplier codes, material codes, and catalogs. You will reduce the scope of mismatches between items that you order and those that you receive.
- Improved Supplier Relationships: When you increase your purchase orders’ value, suppliers will undoubtedly accord greater attention to your requirements. You can look forward to stable and reliable supplier relationships over the long term.
What is Vendor Diversification and What are its Benefits?
A vendor diversification strategy will require you to spread out your supplier base and work with many suppliers. Following are the benefits of vendor diversification:
- Opens Multiple Channels of Sourcing: Vendor diversification opens up multiple sourcing channels for your enterprise. It spreads out the procurement risks across a large number of suppliers and reduces your dependence on each supplier.
- Promotes Innovation and New Product Development: Vendor diversification augments innovation and new product development. You can engage with multiple suppliers, browse through their offerings, and select the one that fulfills your requirements.
- Promotes Competition among Suppliers: One of the benefits of diversifying your vendor base is that you have greater flexibility to choose your suppliers for each purchase order. It allows you to create an environment for competitive bidding and opt for the lowest price to get a competitive advantage.
What is the Best Supply Chain Strategy?
The best strategy depends on product category, procurement processes, and technology maturity. In the long run, for large and growing businesses, vendor consolidation provides the scale with reduced costs. The pandemic experience has shown that effective supply chain risk management calls for visibility into procurement.
Digital procurement solutions allow you to leverage analytics, map supplier performance, and make purchasing decisions. You can lean on an integrated platform with an inclusive supplier ecosystem and a single catalog managed by a single point of contact. This way, you can consolidate your supplier base, re-engineer your procurement process, and de-risk your supply chain.