How much does it take your business to generate $1.00 of profit? Is it $8.00 in sales, $10.00 in sales, $12.00 or more? More importantly, do your managers and employees know the answer to this question? Some companies simply have no idea, while others are keenly aware of what it takes to generate a dollar of profit. Whatever the amount is for your company, be aware of the importance of that $1.00 of profit. Why? Because you can generate the same returns with strong vendor negotiation strategies by reducing your inventory cost of ownership. Every dollar saved in purchasing and inventory management, through strong vendor negotiation, improves your profit and goes directly to your bottom line.
The Importance of Strong Negotiation Skills in Vendor Management
Understand that price is not the only factor with respect to your company’s inventory costs. It’s an important aspect of that cost, but it’s wrong to assume that it’s the only cost. There are other costs and the best companies make it a point to proactively pursue every possible cost reduction when negotiating with vendors.
Having strong negotiations skills in purchasing and supply chain management doesn’t mean that one only concentrates on price, yells or demands a better price, or uses price alone as their sole reason for awarding business to vendors. So, what are these other considerations? More importantly, when negotiating with vendors, what are the top five strategies to pursue that will help lower your company’s inventory cost of ownership?
1. Pursue Savings Through Cost-Per-Use
Saving money doesn’t always mean securing a lower price. Sure, getting a better price on parts and materials is an extremely important aspect of lowering inventory costs. However, cost-per-use is also an important factor.
Purchasing something that is more expensive, but that lasts longer, is another way to save money. Better quality, fewer defects and less incidence of failure, adds to savings as well. Therefore, go ahead and negotiate that lower price but be cognizant of the benefits of cost-per-use reductions. If your vendor touts the benefits of cost-per-use with their products, ask for documentation or proof. If not available, then make sure to test those claims yourself.
2. Payment Terms
Negotiating payment terms can pay huge dividends. Whether it’s getting an extension on terms, or pursuing discounts for prompt payment, both are excellent ways to reduce costs. When negotiating prompt payment discounts, most vendors will grant net-10 day terms with a 1% - 2% discount on invoices.
Negotiating either an extension to your terms, or a discount for prompt payment, will help improve cash flow. When negotiating payment terms, leave it for the last part of the negotiation – concentrate on securing other concessions first, and then close with payment terms.
3. Separate Freight From Price
Freight is an extremely important aspect of a company’s inventory cost of ownership. The cost of freight to get parts in and out of your warehouse should always be included in your inventory cost assessment. Even if your company has a delivered price for parts from your vendor, you can be assured there is a mark-up on that freight cost. It’s a service they are offering you as a customer. As such, your vendor is probably adding something extra to that freight cost.
When negotiating with vendors try and separate freight from their delivered price. You may have the ability to secure a better freight rate. At the very least, you must know what that cost of freight is to get those parts into your warehouse. To learn more about strategies to reduce freight, please read: Essential Ways to Reduce Freight Costs on Incoming and Outgoing Shipments
4. Use Volumes and Vendor Consolidation
Vendor consolidation is an approach that produces both hard and soft costs. Those hard costs come from increasing your company’s volumes and purchasing power to secure lower pricing and lower freight on parts. Shipping more parts and materials from fewer locations will reduce your cost structure and produce soft costs in fewer bill payments, fewer vendors to manage and more free time.
When confronted with a vendor that can reduce both price and freight on parts, be sure to pursue volume consolidation with them. Matching volume for pricing is one of the easiest ways to reduce a company’s inventory costs.
5. Pursue Contractual Supply Agreements
As mentioned, vendor negotiation includes far more than simply demanding better pricing. The last item on our list includes lowering costs by pursuing contractual supply agreements with vendors. Your company’s inventory cost of ownership includes retaining parts and materials that remain in your inventory for extended periods. These parts can become damaged beyond use; becoming a total loss. In addition, there are monthly holding costs, (typically around 3% of the inventory value on hand) that come with holding inventory.
The longer inventory is held, the more expensive it becomes. When your vendors hold parts for your company, you immediately reduce the incidence of damage to inventory and reduce those holding costs. However, don’t expect your vendor to hold those parts forever. After all, they have holding costs as well.
To read more about the benefits of contractual agreements read Supply Chain Management: Running a Better Supply Agreement. If you want access to a sample Kan-Ban agreement go here. If you want access to a sample blanket order agreement, go here.
In my career as a sales professional, I’ve come across purchasing managers and companies who knew how to negotiate with vendors and those who didn’t. They understood that vendor negotiation was an involved process. They used several negotiation strategies to get their desired results.
The best companies would often start with pricing and work various angles on volumes and cost-per-use benefits. They would then move onto negotiating payment terms, inquire about freight costs, and our willingness to hold inventory for them. However, they always had a well thought out plan when negotiating with me. They were fair but firm and always held me to my word. In response, I held them to theirs and the ones that respected the negotiation process always got my company’s best service.
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