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SGaddis 05-03-2012 06:55 PM

Calulating the Cost of a new vendor.
Good afternoon,

I am trying to find the standard method to calculate the cost of new vendors. Is there an industry standard or Best practice? Is there a standard number people assume or is there a formula that I can utilize?

Currently I have, the time keying the information for each step of the process. I then multiplied that by the average labor rate from the DOL. It seems extremely low. It doesn't account for time lost while waiting for the new vendor setup, because I wasn't sure how to quantify that as a cost. Also intangibles you get from a vendor that has treated you well over the years. I want to be able to answer to the CFO regarding the costs of a new vendor versus using and old one for a little more.

Thank you for any help,


parsons8 05-04-2012 02:33 AM

Costs Associated with New Vendor
Hi Sean! I can appreciate the amount of time you have already spent researching a formula, so that you have tangible $$ amount to share with your CFO. Throughout the years, I have spent many nights at the office researching various topics.

While, I do not know of a specific formula to determine the cost of changing suppliers, I can share with you that there are many other considerations which should be evaluated (some of which are specific to the commodity or indirect services provided by the supplier).

The only information provided for this scenario: Your company has a long-time supplier whose price structure is higher than a new supplier that your company (or CFO?) would like to engage.

Therefore, my recommendation would be to determine the "risks" involved in changing suppliers for the specific commodity/service. Sometimes, the risks associated with change are not worth the cost savings.

I hope this is of some assistance to you, and I wish you success in presenting your business case to the CFO.

SGaddis 05-07-2012 12:58 PM

Thank you for your insight. I am glad to use any help I can get.

I apprecaite it.


anand13sam 09-06-2012 03:35 PM

Hi sean,

You need to have very good reasons to change exiting supplier/vendor. May be you are aware that the competition is not with the companies but one who has the best supply chain. The
classic old metrics are Cost,quality and Delivery. Now the new metrics are Speed,Response and Flexibility. And these factors do cost more. but new metrics take you to a new and High level performance.

In my view maintaining a good exiting supplier is extremely important unless you have valid reasons

anand 12-11-2012 08:13 PM

Some years ago I asked this question and was told that changing suppliers shouldn't be considered unless the direct cost savings were between 2-3 percent.

I have a related issue involving a supplier offering a "one time payment for conversion" incentive as a part of the bid response. I'm having trouble working this into the analysis and am having ethical concerns.

martindj8565 12-18-2012 06:06 PM

What specifically does a "one time payment for conversion" incentive mean or involve?

gokulbhushan 01-02-2013 05:10 AM

Hello Sean,
You can consider the following factor's in association with your New Vendor Induction
1)Vendor Research- Financial rating (ex. D& B rating), Market performance.
2)Vendor training - to accustom them to the ERP's, e-Tools, processes etc
3)If your using subscriptions to any ERP's based on usage, you may want to consider the cost of new subscriptions as week
4)If your replacing a critical supplier- Consider the risk factor associated if the vendor cant cope up and result in any losses.

Mandate an agreement to counter above costs if the new supplier is unable to meet the requirement as your Old supplier does.

Also apart from cost factors, its crucial to consider non-cost factor for you to support your business case to the senior management like
1) Long term advantages you foresee
2) Disadvantages continuing with the same supplier.
3) Moving from single supplier to multi-supplier structure to avoid monopoly
4) Bring in competition for better pricing
5) A similarity in your supplier's and you companies future goals so that tying up with the new supplier can prove advantageous to your company.. etc..

Hope this helps !!

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