Ray Collis

What Is The Cost Of An Extra Supplier?

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The consolidation of suppliers can be seen as either an opportunity or a threat.  In this insight we will calculate what a customer can save by cutting supplier numbers.  These savings can be used to build a powerful argument for the customer to place more of their business with you.

To find out the cost of an extra supplier, watch the video or keep on reading.

In Search Of Savings

Buyers are focused on achieving savings and that entails negotiating hard with suppliers. However, there may be a strategy that your customers could employ to deliver significant savings, while at the same time maintaining, or perhaps even improving, your margins. That strategy is the consolidation of suppliers.

Supplier Proliferation Costs Money

If your customers are using many suppliers to supply them with the same products and services as you supply, then they are wasting money. Helping your customer to consolidate more of their orders with your company can save them money, while saving your margins too.

How Many Suppliers Are There?

Perhaps your company is one of 5, 10, or maybe even 20 suppliers of the same products of services to a particular customer.

Maybe your supplies account for between 5% and 15% of their purchases. Imagine if that figure was 55% or 75%.

Think of how the extra volume and improved economies of scale, could enable you to offer improved prices to the customer. Well, that is only one of the ways that the customer could save.

Calculating The Cost

In order to understand the potential savings to the customer from consolidating the number of suppliers let’s examine the cost of adding another supplier.

What does it cost to add another supplier? That is an important question because:

-It can reveal how pressing or otherwise it is for a customer to cut supplier numbers and therefore help you to determine how likely it is to happen.

-It is a selling point for sourcing more of their requirements from you, or giving you more of their business.

In order to understand the potential savings to the customer from consolidating the number of suppliers let’s examine the cost of adding another supplier. To do this we will examine the activities associated with a new supplier under a number of headings.

In this example we are examining the costs associated with a strategically important supplier, one supplying critical sub-components for example. However, you can use the basic framework of the analysis to tailor it to your product, or service category.

The Activities Involved

The first heading is labelled ‘Selecting‘, including supplier search and screening, supplier briefing, supplier selection, contracting and negotiation. There may be a number of people involved in some of these steps -in this example the number used is 3 people. These activities would be undertaken yearly, or may be once off in terms of supplier set-up.

The next group of activities is labelled ‘Managing‘, including supplier meetings, supplier correspondence and the process around supplier reviews. Here it is again assumed that 3 people would be involved and that these activities would be undertaken on a quarterly basis. In that the number of days involved quickly adds up.

The final group of activities is labelled ‘Processing‘, including order and payments processing. The time and cost involved here depends upon whether a system is in place for example. However, queries around missing invoices, credit notes, etc. can be time consuming.

Other aspects of the procure to pay life cycle, such as managing inventory/stock from the supplier, may also be included here. in our example these activities involve one person and are calculated on a quarterly basis.

Calculating The Cost

For the purposes of our example we have taken the average salary of the people involved to be $60,000 per annum  with overhead allocation and expenses of 20% of salary.

That figure works out at a daily cost of 327 per person. That is the figure that we use to find out the total cost of adding a supplier, multiplying our total days figure of 67.5 by the daily cost of $327 to get $20,091 as the cost of adding another supplier.

It is important to note that this cost excludes lost discounts because of failure to leverage bulk buying. That could be as much as 3%, 5% or 10% off the cost of the goods or services bought.

The Motivation To Cut Supplier Numbers

Based on our method of calculation that is an annual cost, so over 5 years that amounts to over $100,000 as the cost of an extra supplier.

Every 5 years:

10 Extra suppliers costs $1 million plus!!

100 Extra suppliers costs $10 million plus!!!!

These are costs that as a supplier you can help the buyer to cut by encouraging the buyer to consolidate more of his, or her business with you.  It is the numbers-driven rationale for the buyer to stop adding and start subtracting suppliers.

The calculation above is an essential part of explaining why the buyer should place more of their orders with you.  It is how you turn consolidation from a threat, into an opportunity.

Buyers are losing on the cost of selecting, managing and processing suppliers, so too are sellers. So the question is:

How much can you help your customer to save by consolidating more of their orders with you?

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