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Aug 11 2010

Pros and Cons of Regional/National Vendor Agreements

Keith J. McMaster

President

Firefly Legal, Inc.

 

Today I ate a cheeseburger from a famous food chain: McDonald’s.  It was just your standard cheeseburger: thin patty, partially melted cheese, two small pickles, onions, ketchup, mustard, thrown between a somewhat smashed white bread bun with yellow wax paper holding it all together. No matter what McDonald’s you go to, the description above describes the same cheeseburger; however, McDonald’s is not the only company that serves hamburgers across the United States.  Just as McDonald’s advertises “over ‘x’ many hamburgers sold,” there are just as many fast food and sit down restaurants that serve hamburgers as well.  Some companies such as Burger King and Wendy’s, follow a similar business model of McDonald’s while others choose to create and craft their own style of burgers, and based on a particular region, the product can vary greatly.

The differences in business models are very typical of most other industries as well.  Some companies choose to become national companies while others prefer to stay local or regional.  These same companies are all trying to sell their potential customers on the benefits of their product.  Sometimes the benefits include knowing that you will get the same consistent product from any of the locations across the US and other times a localized product may be better.

With consolidation of companies happening throughout many industries, more and more national products are being offered.  The question is whether it is a good or bad thing for you, the consumer, or for your company to work with these national vendors.  After much research, I have found that there are many advantages as well as disadvantages that go along with “placing all your eggs in one basket.”  But before we explore the pros and cons it is most important that you research every company that you plan to do business with whether it is regional or national.

Research the Market:  As a business or consumer, the research begins with analyzing the overall market.  According to A.T. Kearney, a global management consulting firm, it is important that key industry trends and growth patterns are identified as well as the prospective vendor’s position in the market.[i]  The prospective vendors must also be analyzed.  Researching the background and overview of the company as well as their strategy will give insight as to the synergies that can be created by partnering with a specific vendor.  Other key factors to consider are the vendor’s finances, annual revenue, the key products and the value difference that can be achieved by partnering with each vendor.[ii]

Assess Your Own Needs:  Once the research is complete on the market and prospective vendors, a company must then look at itself.  A company needs to know how a national or regional business partner will affect the staff and workflow of the organization.[iii]  AllBusiness.com recommends that a “spend analysis” be conducted before choosing a specific vendor.  Beyond just comparing pricing, the products, service levels and total costs should be considered.[iv]  If a company has completed research on the market, the prospective vendors, then internally, choosing a company to partner with will be a much easier task.  Once a provider is chosen, it is always important to test that company in either a small area or with low volume to make certain that the deliverables are exactly what you were looking for.[v]  Along the way, choosing between the national vendor and regional vendor you will discover many advantages and disadvantages to choosing either direction.  Keeping an open mind and unbiased opinion will help you to know which type of vendor will work best for your company.

 

 

Identify and Weigh the Pros and Cons:  Upon researching various different consulting firms, websites, and actual companies themselves, a pattern of advantages began to rise above many others that were listed.  To simplify, there are five major advantages that your company or firm can reach by using a national vendor:  leverage, competitive pricing, quality and stability, strategic planning, and a reduction of costs.  Each of these listed also include some of the less prominent advantages and will be touched upon as well.

Advantages of a National/Sole Vender:  Leverage is the first major advantage that a company gains by choosing a national vendor.  As the other benefits upcoming are explained, leverage plays into each one of them.  The more work that you put into the hands of the national company, the more “weight” you carry with your vendor.  Many times, your organization will receive greater attention, better service, superior support and find that work is completed in a timelier manner rather than spreading the work among many different vendors in different areas.[vi]  As we go through the next four benefits, think of how leverage plays into each one of them.

The next great advantage is competitive pricing.  In today’s economy, competitive pricing is paramount to the success of all companies. “By ordering from one source, your business is able to take advantage of volume discounts.”[vii]  The enhanced buying power allows a company to choose the lowest or best price, negotiate a “flat rate,” or control the costs by creating a stable and uniform pricing structure.  “With controlled costs a company can better plan a budget and chart financial growth.”[viii]  In today’s economy, maintaining your bottom line is vital to the success of your company and receiving competitive pricing helps to work that bottom line upward.

Although negotiating a competitive price is good, the pricing will not help you if your quality suffers.  Again, this is where a national vendor has an edge up on some of the regional competitors.  “Some of the greatest advantages of having a single supplier is that you can be assured that the quality of the materials you bought are consistent.”[ix]  This not only holds true for materials but also for services.  Consistency and stability play significant roles with the quality of the product or service of a national vendor.  Many times, a national vendor can provide a higher quality product or service at a better price with less complexity than a local or regional vendor.

As your relationship grows with a vendor, other advantages begin to form and take shape.  No longer do you have a buyer/seller arrangement but rather a business partner relationship.  This new business partnership can bring a company to new places it has never been before.  “It is likely that the vendor will understand your organization’s needs, growth plans and production schedule.”[x]  The vendor will take the time to learn the organization’s specific requirements[xi] and learn the company’s strategies[xii] and help with continuous organizational improvement.[xiii]

Finally, many organizations have been directed to “do more with less.”  The thought of reducing costs does not only come from favorable pricing from your vendors but also the hidden costs that can be reduced on your bottom line.  Using one national vendor saves time by only having to contact one vendor, whether it is for placing an order, following up, or handle issues that arise.  Time and costs can be saved by the finance departments by dealing with just one vendor.  If there are shipping costs to and from, those costs are also consolidated.  Time spent training employees are reduced to that one specific vendor.  Some companies have “noticed a substantially reduced demand on their in-house staff, sometimes even being able to reduce their in-house overhead.”[xiv]  Other companies have noted that the in-house staff becomes cheaper as only standard skills are needed.[xv]  This can result in fewer employees and a reduction in overhead expense.  These hidden costs are added on to the competitive pricing received and can result in larger than expected costs savings.

While there seems to be many reasons for using a national vendor, there are also downsides to be aware of as well.  Both the advantages and disadvantages need to be taken into account to determine if a national vendor fits well with a specific organization.  Once again, simplifying the disadvantages, there appears to be four categories:  overpricing, becoming “locked in,” newer refined products or services offered by other vendors, and unforeseen events with the vendor’s business.

Potential Disadvantages of a National/Sole Vendor:   While competitive pricing does seem to be an advantage of partnering with one vendor, costs of pricing are definitely concerns to watch closely.  The vendors you partner with are in the business of making money and profit.  The vendor you choose may not be driven by the same standards as your organization; rather they are driven by the profit made by selling to your company.[xvi]  An organization may lose the ability to shop around or negotiate a lower price.[xvii]  After a contract is signed, hidden costs may be discovered.  The contract is usually drawn up by the vendor and that contract may be slanted in their favor.  Most contracts should be reviewed by the organization’s legal counsel and with that comes a fee unaccounted for when signing up with the vendor.  Also, if additional tasks are required by the vendors that are not covered in the contract, usually there will be an additional fee attached.[xviii]

Once a contract or agreement is in place, you as the organization are now “locked in.”  Unless your organization brings a large enough volume to create leverage, there are not many changes you can demand of that vendor.  In addition to that, a vendor can become complacent.  Either they know that you are “locked in” or that “you cannot find a better supplier than them.  Thus they may not provide you with the necessary service you deserve.”[xix]

Next, in almost any industry, new technologies and greater sophisticated products and services are offered by competing companies all the time.  Unfortunately, if your organization has signed on with a particular vendor that is not offering any of the newest gimmicks or gadgets, your organization either will not be aware of them or may be unable to get them.  A perfect example is dealing with the cell phone providers.  New phones come out on almost a monthly basis but only certain companies provide the new phones.  When you are locked into a contract, you either have to wait until the contract expires or your provider offers an even “hotter” model.  Your business partner may not have access to the newest products.  However, companies that are using multiple vendors can mix and match the best available components to create a flexible solution.[xx]

The final and possibly most important disadvantage is dealing with the unforeseen events with a vendor.  There are many events that can derail a business partnership:  the finances of the vendor become stressed, acquisitions occur, legislation changes, a bitter relationship forms, etc. Organizations become dependent on what products or services a vendor can provide.  In cases “where an unforeseen event happens and affects your supplier adversely, your business will likewise suffer.”[xxi]  Also, the effects on your organization must be considered if a vendor merges with another company, goes bankrupt, or out of business completely.

Although, there are many strong advantages and disadvantages to using a national or regional vendor, some organizations prefer to use a hybrid approach to handle their business needs.  Some companies prefer to have a single provider but have a strong back-up option ready in case the primary option fails to perform.[xxii]  Others use a “best-of-cluster” approach where vendors are selected based on the specific needs they can fill.[xxiii]  Several organizations use regional vendors where there are already strong relationships built and then use a national company to fill in for the regions where there are no relationships.  The hybrid approaches allow for many of the advantages while reducing risk on the downside.

When evaluating any regional or national vendor, it is important that an organization takes its time before choosing what path to go down.  It is important to remember to research not only the prospective companies but also the market and the effect that each company can have on your organization.  Many companies would rather choose one business partner, others prefer to use many different regional vendors, while others like the combination of both.  Analyzing all the advantages of each company while also paying attention to the disadvantages and how they affect your organization will definitely pay dividends in the long run.



[i] A.T. Kearney. (2006). Procurement Transformation Initiative Category Profile (SPD-PS002a) Vendor Market Analysis MRO.

[ii] A.T. Kearney, 2006

[iii] Kelly, B. (2002, August). Single-Source Strategies: One-Stop Shopping for Health Care Software.Retrieved June 21, 2011, from HealthData Management: http://www.healthdatamanagement.com/issues/20020801/7239-1.html

[iv] Tice, C. (n.d.). Could You Benefit from Vendor Consolidation? Retrieved June 21, 2011, from AllBusiness: http://www.allbusiness.com/manage/finances/13281339-1.html

[v] Professional Retail Store Maintenance Association. (2010, June). Get Involved. Retrieved June 21, 2011, from Vendor Management Local vs. Regional/National Vendors: http://www.prsm.com/GetInvolved/content.cfm?ItemNumber=863

[vi] Professional Retail Store Maintenance Association. (2010, June).

[vii] Verified, Inc. (n.d.). Vendor Consolidation Brings Big Benefits. Retrieved June 21, 2001, from Verified Label: http://www.verifiedlabel.com/Knowledgecenter/know-vendor-consolidation.aspx

[viii] eHow.com. (n.d.). Benefits of Vendor Consolidation. Retrieved June 21, 2011, from eHow.com: http://www.ehow.com/list_6578580_benefits-vendor-consolidation.html

[ix] Heche, O. (n.d.). Advantages of Having a Single Supplier. Retrieved June 21, 2011, from ArticleRich: http://www.articlerich.com/Article/Advantages-Of-Having-A-Single-Supplier/227599

[x] BenefitOf.net. (n.d.). Benefits Of Vendor Consolidation. Retrieved June 21, 2011, from Benefits Of: http://benefitof.net/benefits-of-vendor-consolidation/

[xi] Heche, O. (n.d.).

[xii] Kelly, B. (2002, August).

[xiii] SupplyChainDigest. (2004, May 25). ISM Article Weighs Pros and Cons of “Single Sourcing”. Retrieved June 21, 2011, from SupplyChainDigest: http://www.scdigest.com/assets/Newsviews/04-05-25-2.cfm?cid=511

[xiv] Professional Retail Store Maintenance Association. (2010, June).

[xv] Stansberry, M. (2005, July 27). Perils and plusses of a single-vendor infrastructure. Retrieved June 21, 2001, from SearchWinIT.com: http://searchwinit.techtarget.com/news/1111012/Perils-and-plusses-of-a-single-vendor-infrastructure

[xvi] Bucki, J. (n.d.). Top 6 Outsourcing Disadvantages. Retrieved June 21, 2011, from About.com: http://operationstech.about.com/od/outsourcing/tp/OutSrcDisadv.htm

[xvii] TechRepublic. (2004, September 17). Discussion on: Single vs. Multi Vendor Approach. Retrieved June 21, 2011, from TechRepublic: http://www.techrepublic.com/forum/discussions/7-147223

[xviii] Bucki, J. (n.d.).

[xix] Heche, O. (n.d.).

[xx] Mcorley. (2011, April 6). One Vendor or Many? Tips for HMI Design with Indusoft. Retrieved June 21, 2001, from InduSoft: http://www.indusoft.com/blog/?p=593

[xxi] Heche, O. (n.d.).

[xxii] Heche, O. (n.d.).

[xxiii] Kelly, B. (2002, August).

 

Keith McMaster is CEO of Firefly Legal, a leading process serving management company. Firefly works with clients, both nationally and regionally, and prides itself on tailoring solutions to fit either scenario.

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