A question frequently arises when a supply management pro is considering supplier consolidation: Are there any benchmarks or guidelines on how much I can save by undertaking supplier consolidation?

It’s an important question, because it’s frequently necessary to provide estimates of savings when building a business case for supplier consolidation.

By the way, the new lingo for supplier consolidation is “supplier rationalization.”  Supplier consolidation, by the very nature of the term, requires a reduction in suppliers.  Supplier rationalization, on the other hand, doesn’t require a reduction—instead, it means that you have the right mix of suppliers.  I think it’s more about being politically correct than anything else.  Sort of like using “right-sizing” instead of “down-sizing.”  So, for purposes of my explanation here and because I’m not always politically correct, I’ll just call it what it really is: supplier consolidation.

Back to the question…  While there’s a fair amount of supplier consolidation pseudo-benchmarks floating around the Internet, the answer is that you’re going to have to figure it out yourself.  The reason is that the question is extremely fact-specific...

First, what do you mean by savings?  The definition of “savings” means different things to different people.  Do you mean just the savings from having fewer suppliers to manage?  Do you mean those savings plus the savings that you’ll get through better pricing from the remaining suppliers (who should offer you better discounts because of the “same size pie, bigger pieces” result of supplier consolidation)?  Do you mean those savings that you’ll get because you can, as a result of supplier consolidation, focus on more strategic procurements where you can negotiate greater savings?

Second, what’s your spend mix?  Meaning, how much direct versus indirect?  What categories of spend?  Direct spend will arguably save more because there are more costs involved (e.g., logistics costs).  Certain categories of spend affect savings—I’m likely going to save more by reducing the number of suppliers providing hazmat (think MSDS) than I would from suppliers providing courier services.

Third, and speaking of political correctness, what’s included in your possible areas for saving?  If you’re in procurement, do you really want to guesstimate what the A/P savings will be based on pseudo-benchmarks?  Your A/P manager will hate you if you suggest some unachievable guesstimates in your business case...

Fourth, what are you really going to save?  Many pseudo-benchmarks assume that you will be able to reduce headcount and systems costs.  Are you going to be able to RIF some procurement or other support staff?  Maybe.  If you have Oracle iProcurement, are you really going to achieve lower system costs by having a smaller pool of suppliers?  I don’t think so.

Finally, what are the risks / costs you’re going to introduce as a result of supplier consolidation that will affect savings?  If you reduce your number of suppliers, are you going to spend even more time managing them because you’ve become more dependent on your supply base?  Are suppliers going to gig you on price over time because you’ve reduced competitiveness through reducing suppliers?

Unfortunately, you’re on your own in terms of estimating savings for your supplier consolidation business case.  But, if you do some basic research on the Internet, you’ll come across enough material to get you thinking in the right direction.  Just think of all of the possible costs that flow from a supplier relationship—here are but a few:

• RFPs or other types of competitive bids
• Contracts (procurement and / or legal review)
• Purchase orders
• Paying / Reconciling invoices
• Managing suppliers
• Certificates of insurance
• Contract compliance / audit
• W-9 processing
• MSDS / Safety compliance

I’ve created some example formulas for myself that might help get you into the right frame of mind in terms of quantitatively calculating potential cost savings.  If you have any other suggestions that you think might be helpful for others, let me know or post a comment.

• Annual PO cost per supplier = ((Total current year costs of staff generating POs / Total number of supplier POs generated for current year) * (Total number of supplier POs generated for current year / Total number of suppliers with spend for current year)) + (Total current year depreciation and maintenance costs for supporting systems / Total number of suppliers with spend for current year)
• Annual contracting cost per supplier = (Total current year costs of staff contracting with suppliers / Total number of suppliers contracted with during current year) + (Total current year depreciation and maintenance costs for supporting systems / Total number of suppliers contracted with during current year)
• Annual management cost per supplier = (Total current year costs of staff managing suppliers / Total number of suppliers with active contracts) + (Total current year depreciation and maintenance costs for supporting systems / Total number of suppliers with active contracts)
• Annual invoicing cost per supplier = (Total current years costs of accounts payable staff responsible for supplier payments / Total number of invoices paid for current year) * (Total number of invoices paid for current year / Total number of suppliers with spend for current year)) + (Total current year depreciation and maintenance costs for supporting systems / Total number of suppliers with spend for current year)