Digital Dealer - July 2018 - 25

cess about supplier management, defining who is in
charge of supplier additions,
the process to bring new
suppliers aboard, you will
be overseeing chaos and
increased expense. And
suppliers will love you for
it...they want just a piece
of your business...hoping
that that piece will grow over
time to a bigger piece. You
can control this process
with a well-defined set of
purchasing and approval
policies that limits supplier
decisions to a selected few
in the organization.

WHAT ARE THE HIDDEN
COSTS OF A LARGE
SUPPLIER BASE

For every supplier in your
system, the following will
occur:
1. A meeting with one of
your managers to understand the supplier value
proposition
2. The initial purchase
order to process the transaction
3. Set-up of the supplier in
the system
4. Completion of a 1099
or W2
5. An invoice to review,
sign and code for accounts
payable
6. Expense posted to the
system
7. A check cut to the supplier
8. A manager/owner to
sign each check
9. Stuffing the check into
a pre-printed envelope
10. Postage to mail the
check
Now...let's assume this internal process costs your organization $75.00 per check
($75 to $125 is common).

Now repeat that process
each month, twelve times
per year.
Typical Example:
 500 suppliers checks
per month x $75.00 per =
$37,500 per month
 500 suppliers per
month x 12 months = 6,000
transactions or $450,000
per year
Optimized Example:
 250 suppliers checks
per month x $75.00 per =
$18,750 per month
 250 suppliers per
month x 12 months = 3,000
transactions or $225,000
per year
If you are adding office
staff, payables staff, and
management to deal with an
increased supplier base...
you are wasting a lot of
money.

HOW MANY SUPPLIERS
ARE ENOUGH?

Do the math...if you have
130 expense categories...
having a primary supplier in
each expense category and
a backup supplier in each
category would tell you that
260 active suppliers in your
supply base is optimal. If
you have a bigger group,
there may be some rationale
for having more suppliers in
a particular category (towing
or HVAC maintenance)
given the geography and
suppliers' capability.
OTHER COSTS OF
LARGE SUPPLIER BASE

There are other significant
costs of a large supplier
base...those too are difficult
to quantify, but you know
they exist.
 Loss of leverage -
spreading $100K in spend
among five suppliers will

generate less aggressive
pricing than leveraging that
spend with one supplier...
which increases your prices
and your costs at the unit
level.
 More risk - more suppliers equals more contracts,
more agreements, certificates of insurance, bonds to
manage
 More chaos - too
many suppliers result in
employees uncertain which
suppliers to use
EIGHT STEPS TO
OPTIMIZE YOUR
SUPPLIER BASE AND
REDUCE COSTS

If you are interested in
getting a handle on this
problem, these eight simple
steps will help you optimize
your supplier base.
1. Pull a vendor spend
report out of your system
2. Code each of your
suppliers according to the
130 expense categories
3. Count up each individual supplier per category and
total by category
4. Implement purchasing
policies that limit the ability
of others to add suppliers
and define a process
5. Set supply base
objectives for the year- two
suppliers per category with
few exceptions
6. Develop a preferred
supplier program- two
suppliers in each category
(preferred and approved)
7. Reduce your suppliers
to those most competitive,
reliable and service-oriented
suppliers in each category
8. Measure and report the
changes, and then enjoy
your new profitability
Large supplier bases are
D I G I TA L D E A L E R . C O M

costly and inefficient. Management time, back office
support time, executive
review and signing of checks
all add up to waste and extra
costs. Large supplier bases
also sub-optimize your
purchasing power - your
leverage to obtain the best
pricing, terms and service
levels in each expense category. You have thousands
of dollars, maybe millions of
dollars depending upon the
size of your organization that
is being wasted every day
due to out of control supply
bases. It is the responsibility
of executive management
to get their arms around this
issue and lead the organization to a more efficient
solution. The benefit will be
increased efficiency, less
cost, and greater profitability.
If you are interested in a
set of purchasing policies to
help you with this process,
send me an email at:
daustin@strategicsource.
com, we will be happy to
assist.
DOUG AUSTIN is the
founder and president of
StrategicSource, Inc., the
leading provider of Spend
Management Services
(strategy, spend mapping,
sourcing, process improvement
and audit) for the automotive
and truck dealerships, and
various other vertical markets.
Doug is a veteran of the U.S.
Marine Corps, a graduate of the
University of St. Thomas, and a
speaker at various conferences
and 20 Groups. Doug has
acquired 30+ years of line, staff
and executive experience in
Spend Management and Supply
Chain Management in various
vertical markets. Doug is also
a trainer, speaker, consultant
and business owner. EMAIL:
daustin@strategicsource.com

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Table of Contents for the Digital Edition of Digital Dealer - July 2018
