Tough economies tend to drive a heightened focus on purchasing. I've never quite understood this logic. It seems to me that anyone with budget responsibility should always be thinking of ways to streamline purchasing and get more from their vendors - regardless of the economy.
Take the case of a mid-sized nonprofit organization that, in late 2013, found itself unprepared for an economic shift that led to its first (big) annual loss in over 10 years. In response, the organization took a strategic look at its purchasing practices with a special emphasis on sourcing and vendor consolidation. Their goal was to not only improve their purchasing power with fewer vendors, but also streamline ordering, simplify vendor management and develop stronger, deeper relationships with key vendors.
One of the first areas they tackled was printing and promotional products. This was a strategic area of spend for them, and represented a material dollar amount (just under $4M annually). It was also an area with a lot of different buyers. So they assigned a team to peel back the layers and really assess their purchasing strategies and practices from an organizational perspective. What they found surprised the hell out of them.
VENDORS AND BUYERS AND VENDORS – OH MY!
After analyzing data over a 12 month period, the assessment team found that the organization was using 24 different vendors to provide roughly $4,000,000 of print and promotional products annually. That’s right, 24 different vendors. Yikes! I know what you’re thinking - Why so many? There must have been a reason, right? Well, here is what they discovered.
Over an eight year span the number of employees buying print and promotional products had grown from seven (7) to sixteen (16) – a 130% increase. And as the number of buyers increased, so did the number of vendors. New buyers replaced old ones. Some vendors were replaced, but many more were added. When it was all over, there were simply too many employees buying from too many vendors with no alignment to an overall strategy.
So, in an effort to reign in the process and better manage print and promotional product purchases, the nonprofit performed a strategic vendor assessment to clarify and document needs across the organization. The vendor assessment resulted in two key changes to their sourcing strategy:
First, the team was able to group the needs of all 16 buyers into five common categories, and create a set of common vendor requirements for each category. Second, the team evaluated a variety of different sourcing strategies for the five categories, and ultimately settled on consolidating all purchases with 3 strategically-aligned vendors.
The results of these two initiatives were measurable. The organization not only reduced its hard costs by more than 15% (~$600,000 annually), but they also streamlined a number of other activities related to brand management, ordering, payment and overall vendor management. And for the first time they had real visibility into data – specifications and spend. The ROI on the effort was clear and impactful.
A SIX-STEP PROCESS FOR PERFORMING YOUR OWN STRATEGIC VENDOR ASSESSMENT
You don’t have to wait until you start losing money to get more strategic about purchasing. It just takes desire, the right perspective and expertise, and a process-driven approach. Here are six steps you can follow to do your own strategic vendor assessment:
Pick a category of expense and inventory your vendors.
Dig into purchases to segment what you buy and how much you spend.
Meet with buyers to clarify and document requirements for each segment.
Use those requirements as the basis for evaluating current and alternate vendors.
Create your final sourcing strategy for the expense category from an organizational (not departmental) perspective.
Implement your plan and reap the benefits.
Implementing a strategic vendor assessment doesn't have to be complicated, but it does require a focused effort and a commitment from senior management. It takes work, but the results are well worth it.
So, how is your organization doing in today’s economy? Growing? Maintaining? Major Panic???
The reality is - it really doesn't matter. Smart purchasing strategies should be a priority regardless of the economy or the financial health of your organization. After all, what other initiative can you undertake that, if done right, can provide such a significant increase to your bottom line?
Tom Rogers is CEO of Vendor Centric. You can reach Tom at email@example.com. You can also follow Tom on Twitter @TRogersCPA.