Many companies are engaged in or considering vendor reduction as a best practice. Doing more business with fewer vendors gives a company more leverage in price and terms negotiations and means fewer contracts to negotiate, greater ease in keeping up with terms, and the possibility of better vendor relations. Vendor reduction benefits vendor master file management, bringing the master file down to a more manageable size and making maintenance easier. A reduction in the sheer volume of vendors on file is a boon to clean up of the vendor master file. Conversely, the analysis involved in an effort to clean up the master file is a key element in vendor reduction. However, the process can be challenging.

Delta Air Lines undertook vendor reduction in conjunction with its implementation of its SAP system. In preparation for the installation of SAP, the project team began identifying the records of vendors in their old system that they did not want to move over to the new system, due either to inactivity or low dollar spend (under $10,000 a year). During the transition, the team counted some 40,000 vendors on file – about a third more than it has today. But after the SAP system went live, it became clear that not all of these vendors should have been purged.

“Some, you find later, you shouldn’t have purged. We learned every day during those months after implementation,” says Mike Koehn, (pronounced Cane) manager of Procurement Services for Delta Air Lines. “It was a constant battle,” agrees Stacey Hartley, a specialist in vendor maintenance, who joined Koehn’s team when the SAP system was being installed.

While the system was in transition, Delta was also making significant changes to its
procurement policy.

Koehn’s team now coordinates with the Supply Chain (purchasing), which represents a total
departure from how procurement was handled at Delta in the past, when business units conducted purchasing.

“Now negotiations are almost all being done by our supply chain department,” says Koehn, as well as contract writing, working with risk management and the legal department, developing RFP’s, and determining best prices. To maximize its influence over vendors, the Supply Chain wants as few vendors as possible, and it is now the sole entry point for vendors wishing to approach the company. “Instead of 70,000 possible buyers out there in the company,” says Koehn, “we now only have a hundred or so in Supply Chain that do Delta’s buying.”

So Delta’s Payables works with the Supply Chain (i.e., purchasing) end of the company to
determine which vendors to switch off. But the onus also is on Koehn’s team to generate its own list of vendors for deletion and to submit that list to the Supply Chain department for
approval. When there are large numbers of vendors to delete, the SAP system can accept the deletion data through an upload, says Koehn. But more often the decision making process is likely to be carried out on a per-case basis, which is time consuming and tedious.

In the SAP system, new ways of filtering out unwanted files are available. For example, vendors who’ve been inactive for two years might trigger a deletion flag.

Despite its mandate from the Supply Chain to reduce vendors, progress over the course of two years hasn’t been linear. Although Koehn and his staff are purging vendors, the vendor base keeps growing. “As of August,” says Koehn, “we still had a vendor base of 18,400 domestic suppliers and 11,400 international."

Other initiatives may help. Delta is reviewing the numbers of vendors for specific commodities with an eye toward reducing to just a few vendors per commodity. Those selected, using a bid process, usually have contract terms that allow them to supply Delta the contracted commodities over a certain period of time. Also, the Internet may help reduce the numbers of suppliers.

Delta has begun moving toward a business to business (B2B) environment, which will allow users to place Internet orders for items they need, regardless of who makes the item. The process can be brand blind to the user, since the Supply Chain will negotiate directly with the product’s producer at the purchasing level and make the materials available at the user level.

Another Example

Bunge North America, which also recently went to SAP, has established a procurement section whose goals include helping the company avoid using multiple vendors for the same service or product. AP Manager John Smith feels vendor reduction will go hand in hand with perks afforded loyal customers. As a specific example, he is looking at the wireless business the company currently divides among AT&T, Southwest Bell, and Verizon. Bunge’s senior management has 120 phones and the sales force uses another 300, generating about $6,000 - $7,000 in bills per month.

“If we cross a certain threshold, say $40,000 annually, we get a Customer Advantage from AT&T,” says Smith. So the company is putting most of its wireless business on AT&T, which in turn has offered to allow Bunge to carry over unused minutes to other cell phone clients among its user base.

Leveraging Your Spend

A clean master file can help in expediting the analysis of purchases, often revealing redundant vendors and other inefficiencies.

Xerox, for one, is so gung-ho on mining the master file for savings that it runs workshops on such topics as leveraging your spend with strategic vendors, says Paula Bellavia, director of AP. “You may have 100 print vendors, but if you know how much you’re spending with all the others, you can negotiate and take it down to two or three. You’ll probably want a few rather than just one. But that can leverage your spend.” Xerox gets to that kind of analytical data through a cash-flow reporting system, which groups payments into categories.

Post audit firms have raised the state of the art when it comes to slicing and dicing vendor
files and spend files based on different commodity types, says Bellavia. APEX Analytics, in
Greensboro, SC, is among today’s elite providers of such reports.

Xerox is bringing its A/P area onto Oracle nine years after it began using Oracle for its
manufacturing operations. Purchasing is already on Oracle and in the process of moving more applications into that environment. Those applications include a centralized supply file that was just added and will be active by the middle of next year.

Bellavia’s team is currently involved in setting up vendor files according to Oracle standards,
which will also prepare them for the Internet environment to which Xerox is moving. This
process entails setting the vendor up at the header level, with all remit information –
including payment and order sites for each vendor. Bellavia admits the process is a little more laborious with an off-the-shelf program versus their custom, legacy program. The vendor form is very standardized with extensive fields requiring several screens for questions, whose purposes are not immediately obvious, Bellavia says. For the time being Bellavia’s team will be entering vendor information into both the legacy and the Oracle systems, which will run in tandem until any bugs are worked out.

Control

Consolidation of vendors will inevitably mean shifting control as well. With decisions being
made daily on which suppliers can stay and which must go, turf battles are expected. At
Sun-Maid Growers of California, purchasing wants to be in charge of the supplier master, which seems to fit with the organizational structure. However, Sun-Maid’s A/P department also wants control of the supplier master, because purchasing only uses 35 percent of the supplier database, says Dianna Essepian, A/P manager, who joined Sun-Maid when it upgraded from a Lawson to a QAD system. Although they try to work together to offer support and share information via email, the struggle for jurisdiction over the supplier database goes on. For now, changes to the supplier base have to be approved by a third party, the finance manager.

Although the QAD system is not currently configured to purge vendors, Essepian says there is no immediate problem with that. Sun-Maid has 4,100 vendors on file, and about 75 percent of them are active, having sold something to the company within the past 12 months.

In the course of installing its Lawson software, Orlando Regional Healthcare System, underwent a drastic reduction in its inactive vendors. There are now 7,500 vendors, of which 4,500 require purchase orders. The A/P organization is split between purchase orders and non-purchase order activity, the latter handled through purchase cards. P-cards have enabled Orlando to delete several hundred and possibly 1,000 vendors, says Amy Coats, the A/P manager for ORHS.

“Everyone agrees the key (to reducing vendors) is standardizing,” says Coats. Standardizing makes it easier to reduce vendors by having specific suppliers for specific items. “Nursing knows that we order that item from this vendor, because we have a contract with them. Don’t go off and order something from that vendor – it’s not necessary; we already have a contract in place.”

In addition to standardizing, the other major boon to reducing vendor files has been the
P-Card.

Related materials (some related materials and links may be to other websites that require registration or subscription):

P-Cards Aid Vendor Reduction
Fresh Starts Hold Promise in Vendor Management
Taxing Work — the Hunt for W-9s
System Issues in Vendor Management
Security Issues in Vendor Management
Cleaning Your Vendor File