Professional Development: Consolidation Of Vendor Bases
By Colin Schnebly
Published in the June 2008 issue of Today’s Facility Manager
Is the facility department unintentionally sacrificing core revenue in order to streamline non-core functions? Corporations today are much different than those of 20 years ago. With continued growth, mergers, and acquisitions, corporations are larger than ever with hundreds, if not thousands, of facilities across the nation. The result creates an immense workload for professionals charged with managing these facilities.
As a result, corporations are moving away from their old ways of operating and adopting new management systems. One of the current trends employed is consolidation of vendor bases to streamline processes and reduce costs. Like the old adage goes, every action has an equal and opposite reaction, good or bad. As time has passed, the long-term result of this new trend has negatively impacted revenue.
The primary goal of any corporation should be protecting and growing its core. It is essential for decision makers to consider how the management of their facilities will impact their core.
Choosing to consolidate vendor bases may result in revenue losses. A national survey conducted by Solus Industries in 2007 found some consequences of using regional or national vendors through consolidation:
- 65% of independent local vendors will stop buying goods or services from a company if they were to bring in vendors from outside their market to perform work.
- 63% of the independent local vendors will most likely persuade others about their impressions of that company in the hope of getting others to stop buying goods or use that company’s services.
Advantages of using independent local vendors were also discovered:
- 90% of independent local vendors would be inclined to buy goods or services from a company if they performed work for that company.
- 83% of independent local vendors would most likely share their impressions of that company with others in the hope of getting others to start buying goods or use that company’s services.
While the above information is logical, many corporations are racing forward with initiatives to streamline processes before testing the waters. Consolidation of vendor bases may negatively impact the core of a corporation and create other adverse reactions, such as increased risk, higher costs, and the elimination of competition.
Consolidation forces facility managers (fms) to rely too heavily on a small group of vendors, which increases the level of risk to their departments and corporations. For example, would someone purchase 10,000 shares of stock in one company or vary the holdings? If that person chose one stock and it failed, everything could be lost. However, diversification produces a slight difference, with losses recouped from other holdings. The same goes for a corporation’s facility portfolio. There is no doubt consolidating vendor bases increases risk on a large level.
Consolidation creates a large workload for a few vendors. These vendors can become overextended, and work is often sublet out to others when they are unable to get to the facility in a timely manner. The supervision of these subsidiaries can be inconsistent and often takes place without the fm’s knowledge. This leads to substandard work, and corporations pay the price over the long haul.
Consolidation requires facilities to be managed on the macro level. Macro management leads to continuous neglect of the bottom line, removing corporations from a true competitive environment. Those using a consolidated base often “bid out” a region in order to achieve competition, yet costs rise rather than decline. Corporations using consolidation/macro management bank on the myth that vendors will win and lose some. The reality is a vendor will never lose money; costs increase as competition is eliminated, travel costs are included, price fluctuations are calculated, and substandard work is performed.
Travel costs are one example. Solus Industries has identified 28% or more of a corporation’s service work budget is directly related to travel costs. These costs are rolled into the perceived competitive pricing. By using a diversified vendor base and a micromanagement approach, facility departments can use independent local vendors closer to their facilities and dramatically reduce expenses. Corporations also reduce the negative impact on the environment, because reduced travel means fewer trucks on the road, less gas used, and a reduction of carbon emissions.
A micromanagement approach equates to having each and every facility bid on individually. This style of management has been discarded in the wave of the consolidation trend. A local, diversified vendor base increases the opportunity to work in a competitive environment and improves the quality of work performed. This true competition results in a 15% or more reduction in overall expenses, and the choice between a consolidated vendor bases versus a local diversified one becomes obvious.
So what is a corporation to do? Diversification of vendor bases is difficult to control, monitor, and track. The staff, money, and resources are often unavailable to fms.
Streamlining operations is the best way to manage this problem. Most corporations start to over analyze the problem, become busy, and end up overspending. An industry consulting firm has developed a criterion to gauge vendor quality accurately. This is the first step, and only after this has been completed is competitive pricing obtained. A competitive environment will develop with a well qualified and diverse base. Properly maintaining a local diversified vendor base is the key to achieving true competition, reducing expenses, and eliminating risking revenue loss. The most strategic approach is one where fms partner with a firm that can identify, manage, and control local vendor bases for several industries, using highly developed techniques and resources to produce the results of cost reduction, streamlined processes, environmental impact reduction, and at the same time, produce revenue increases.
Schnebly is the CEO of Solus Industries, a company specializing in management of facility components.