How do I consolidate? By Item Description or By Vendors?Chapter 06
Chapter 06 — Consolidate by Item Description or by Vendors?
Continuing from Chapter 05, we will now proceed towards the High No. of Vendors and High-Frequency PO cases. In this chapter, we will try to see how to find actionable insights; whether to consolidate by commodity description or by vendor name.
3. Sitting Ducks
By sitting ducks here, I mean obvious ones to consolidate to get some cost-saving. Let’s start with our first one.
3.1 High Number of Vendors (More than 5) & High-Frequency POs (More Than 12) | Strategy: Consolidate by Materials
Here a simple rule to remember:
Always look for the smallest pool with highest value to reduce.
To find our smallest pool with the highest value, we will see our two possible options.
Option 1: Arrange by Vendor Name
I will first arrange my items according to Vendor Name. To do so, arrange your pivot rows according to the picture shown below. Focus on “1” in the picture. After doing that, let us arrange their spend in descending order.
The most important thing here: We have 1069 vendors on this list. Also, our top 10 vendors account for $ 17.4 M.
I hope you are following along so far to remember that for each of the commodity descriptions shown here, we have more than 12 purchase orders in a year. So, we can possibly discuss a contract with these vendors.
Option 2: Arrange by Commodity Description
I will arrange my items according to Commodity Description. To do so, arrange your pivot rows according to the picture shown below. Focus on “1” in the picture. After doing that, arrange the spend in descending order.
As done above, the thing to notice here is we have 313 items on this list. Also, our top 10 items account for $ 20.1 Million.
For each of the commodity descriptions shown here, we have more than 5 vendors. So, we can possibly do a reverse auction for our these items
Top 10 items for Option 2 have more possibility in terms of spend consolidation and also there are lesser items in the list (313 items for option 2 vs 1069 for option 1), hence, I will choose option 2 to form my strategy. As option 2 suits for a reverse auction, we can organize reverse auctions with the vendors and choose only one or two vendors. Not only we can negotiate better to get some cost-saving but also reduce our vendor database effectively to these items.
Done. Let us move on to the next part now.
3.2 High No. of POs and Multiple Vendors for Same items (Between 1 and 5)
Remember, the data we are seeing in the picture below has the following characteristics :
Contract Is Not Done, High Number of POs and Each Commodity is being procured with at least 2 and a maximum 5 number of vendors. This is an ideal condition to call for a contract and get some savings.
So, I will keep this chapter short and to the point, I will not go into the details of which items and their vendors. These details can easily be obtained by putting in relevant columns in the pivot table. You can follow the steps of 3.1 and get the actionable insights.
Done. This was easy!
So far, in this journey, we have addressed the sections highlighted in green as shown in the picture below.
Chapter 07:
In this chapter, we will go in advanced techniques now as we have captured savings by covering our basics. We will try to see how best we can explore cost-saving opportunities where a standard consolidation exercise won't work.
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