Vendor Consolidation Case Study
Problem: Company Downsizing Hurting Performance and Bottom Line
A medium-size manufacturer of high-performance cutting tools, located in the Midwest, derived much of their business from the automotive industry. During the economic recession and subsequent decline in sales, costs rose and downward pressure on profits led to staff reductions. Our client's parent company was also in the process of being acquired.
Layoffs in the procurement and accounting departments resulted in higher-level managers taking on the procurement of low-volume, low-cost MRO consumables from over 65 primary suppliers, and managing the resulting payables. The large number of weekly transactions placed added pressure on all back office functions, and purchase prices and related acquisition costs were inadequately managed.
Impact on Business
The volume of MRO transactions made it difficult for procurement professionals and managers to keep up with higher-level, production-related purchasing demands. Similarly, the accounting department suffered from protracted payables, and discount opportunities were reduced.
The backlog in procuring repair and replacement items affected maintenance department projects. In an attempt to reduce overall costs, too much attention was placed on reducing MRO prices by sourcing items from multiple vendors, creating more work and yielding little in overall savings.
An analysis of the prior 6 months of MRO purchases revealed multiple areas for improvement. Too many items with a line value of less than $50.00 were being shopped to multiple suppliers. Satisfying one end-user purchase request for multiple parts often resulted in the placement of multiple purchase orders across several suppliers. The man-hours devoted to this activity were disproportionate to the actual expenditure. In addition, it made leveraging volume to get better prices or preferred service more difficult.
Managing this activity resulted in protracted purchase order turnaround, which caused maintenance back-up and out-of-stock conditions. The large number of purchase orders resulted in increased work in the receiving department, as well as an increase in payables.
After reviewing the purchase order detail, PenCo identified numerous opportunities to consolidate their purchases to PenCo. In most cases, reductions in purchase price or stabilized prices were realized.
By mutual agreement, any MRO purchase order with an aggregate value of $250.00 or greater or with a line value of less than $75.00 were automatically given to PenCo to supply. Working with the end-users, we agreed on acceptable brand substitution. POs, confirmations, and invoices were done electronically, via e-mail, to reduce cycle time.
The customer's maintenance and purchasing departments collaborated with PenCo on major projects to ensure that consolidated requirements were provided, when needed, at a fair price.
Vendor Consolidation Results: 75% Reduction in MRO Suppliers
The customer reduced the number of its MRO suppliers by 75%, with a corresponding reduction in POs and resulting payables in excess of 75%. MRO purchase orders were turned around within hours, with the majority of supplies received within 48-72 hours.
Buyers could devote more time to higher value-added work, such as production and capital expense projects. Stock-outs became rare; many more maintenance department projects were completed on time.
Overall product acquisition costs were reduced by nearly 12% in the first year alone, and prices were contained to lessen industry inflation rates in the out years.
For more about our successful vendor consolidation programs, please contact PenCo today.