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Vendor Consolidation vs. Competition

Executive Summary

  • What is vendor consolidation and why is it considered beneficial?
  • What are the key benefits of vendor consolidation?
  • How much would your lab benefit from vendor consolidation?
  • Can you have all the advantages of vendor consolidation and have vendors compete for your business?

Should Vendor Consolidation be the #1 priority for every lab?

Harold Anderson, a contributor to eHow.com, states:

Some companies prefer to have several vendors for each product category they purchase. One of the advantages of multiple vendors is the ability to choose the lowest price. There are also several benefits of vendor consolidation. Vendor consolidation is the act of using one vendor to help reduce the need to speak to multiple vendors for one product. Vendor consolidation can have operational and financial benefits.

Stable Pricing

When a company consolidates down to one vendor it has the ability to negotiate a pricing contract with that vendor that will offer stable pricing for a pre-determined amount of time. In most cases a vendor contract lasts one year, and with controlled costs a company can better plan a budget and chart financial growth. Stable pricing with a single vendor can also help to keep manufacturing costs down as the company knows exactly what the materials will cost for a full year, and it can plan its personnel needs accordingly.

Stable pricing is most important on products that are subject to price fluctuation - such as energy intensive products and fine metals. The more dependent you are on these type products, the higher priority pricing stability should be weighted.

Stable Supply

A single vendor can work with your company to understand your company needs, production schedule and plans for growth. When you work closely with a single vendor, the vendor can help you plan out your material deliveries so that you always have the materials you need to manufacture your products. You can plan delivery dates months in advance to make sure that you are ready to meet customer needs during your traditionally busy times. A consistent supply of products and materials from a single vendor means knowing who to call when product is defective, late or incorrect. It can make materials management easier and less costly.

Bill Paying

Paying company bills when you use vendor consolidation is similar to paying bills when a private individual does debt consolidation. Rather than having several bills to pay that could carry late fees and service charges, you only have one bill to pay to a single vendor. This reduces the accounts payable costs to your company, and it also consolidates several shipping charges down to one charge.

Customer Service

Vendor consolidation saves your company money in customer service. Rather than having to chase down several vendors with missed shipments, defective product and product information; you only need to go to one vendor to handle those issues and get that information. This reduces customer service time and that saves you money on customer service personnel by allowing your customer service department to be more efficient.

The questions we will address are: How well do these four key benefits apply to the small- to mid-size lab?

Stable Pricing – In a production environment where you are producing a product from a fixed set of raw materials, stable pricing may be valuable. The key questions to ask are:

  1. Are you buying a high dollar volume of a limited number of items frequently?
  2. Do you have enough volume of business that a supplier would be interested in constructing a tailored contract for you?
  3. Would you be willing to pay 5 – 15% more today to have the price held firm for 12 - 24 months?

So while pricing stability sounds highly desirable, it’s valuable in a non-production environment is not nearly as important. Without a high volume of stable business to negotiate pricing stability, vendors will be reluctant to offer it. With margins slim, vendors want all the flexibility they can to raise prices when their costs go up.

Stable Supply – We all want the vendor to have the item we want on the shelf any time we place an order. If this is an item that is used by many labs, your odds are good that you have a stable supply by default. If you buy a whole lot of something – and it is mission critical to you – then having a stable supply becomes extremely important. And not just to you. If you have this much business, any vendor is going to bend over backwards to retain this business whether they have a signed contract and 90% of your spend or no contract at all. Having a stable supply isn't necessarily coupled to having a contract. On mission critical items we always recommend an alternate product be qualified. This does not mean that you need a second source; most distributors will be able to help you with this issue without having to go to a second source. The benefit of this approach is that when an item is not available you have a swift conversion to an available item without the drama of reaching product agreement with all stake holders.

Bill Paying – Writing out checks is a pain. The fewer checks you or your accountant have to write, the easier life is and the lower your expenses. The underlying assumption here is that check writing is essential and that paying with a paper check is the only way that this task can be carried out. We agree that reducing the number of accounts you have to track and write checks to is more convenient and a money saver. But is this truly an either/or choice?

Customer Service – we all want to be treated like Norm was when he walked into Cheers. There is nothing like dealing with a single individual who knows all about what you order, why you order, when you order and most importantly cares! And of greater importance is that when you have a problem, they take ownership of that problem until it is resolved to your satisfaction.

The sad fact is that unless you spend millions of dollars a year with your vendor, you are not going to be treated like Norm was. You will likely never talk to the same customer service representative twice!

Is there a better way?

For the last 12 years, while working for a major distributor for a multi-million dollar customer, I worked every day to provide stable pricing, stable supply, consolidated billing and customer service where everyone on that campus was treated like a house guest. Meanwhile I watched my former smaller customers lose their sales reps, be placed into telesales and/or internet sales programs. I was determined to find a way to once again provide the type of service and support that has been taken away as the distributors lost interest in them in an effort to reduce costs by focusing on the larger customers.

The LPS Procurement Services program once again makes it possible to have vendors compete for your business while leveraging the collective strength of all our clients for lower, more stable pricing. And now when the primary vendor is backordered, our clients have multiple other vendors to ensure a stable supply.

And perhaps of greatest importance is that all our clients have a single point of contact. And our job isn’t just to do customer service functions. We continually shop on your behalf! We think this gives you the best of both worlds: the savings associated with vendor consolidation with the advantage of having multiple vendors so that you can choose the lowest price.

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