One of the more valuable lessons emerging from this economy has to be the importance of maintaining strong vendor partnerships. Unfortunately, a large number of companies take an adversarial approach to vendor management. While some do make an effort to find a middle ground, the vast majority don’t. In fact, most rarely take the time to define how best to work with their vendor base. However, it’s those companies that excel in vendor management that are ultimately able to weather the storm and emerge stronger. Given today’s business climate, it just makes sense to adjust your company's approach to this new reality. So, what are the four strategies you should adopt with respect to how your company manages its vendor base?
1. Lower Per-Unit Freight Costs on Incoming Shipments
Your per-unit freight costs on incoming shipments is a huge cost of inventory. Your vendors can play a vital role in reducing your inventory cost of ownership by reducing your freight costs. Lower the per-unit costs on incoming shipments and you’ve lowered your inventory costs, increased your gross profit on sales and improved your bottom line. So, how is this done?
First, determine the per-unit freight costs on existing inventory. Second, determine the current inventory turnover rates of these products and apply a 3% monthly inventory holding cost for every month the product is held and not sold. Third, measure the savings accrued in reduced pricing, and lower freight, through larger volume purchases with your vendors. Be sure to measure these savings relative to your monthly inventory holding costs.
Granted, I’ve just quickly summed up four steps that are really quite involved. However, for more information on how this should work, please refer to the video, the table and the link below.
To read more about balancing inventory carrying costs versus higher volume purchases, please see: Inventory Carrying Costs Versus Higher Volume Purchases
To better understand this process, please refer to Sample Excel Sheet for Freight Costing & Inventory Cost Reduction
2. Find Savings on Cost-Per-Use Items
You must look beyond the sticker price paid for parts. Saving money is far more than merely saving on the price paid for parts and materials. It includes buying products with longer life and stronger cost-per-use benefits. However, in order to clearly identify possible savings, you must be willing to work with your vendors when they propose higher quality, and or longer life products.
Don’t allow your short-term pricing needs to interfere with long-term savings. More importantly, understand that saving money doesn’t always involve buying the lowest priced option. If your vendor touts a longer life product, ask them to show you how it’s possible – with real, identifiable savings!
3. Shorten Turn Times & Reduce Holding Costs
The easiest way to reduce inventory holding costs is to not hold too much inventory, but instead, to ask your vendor to hold that inventory for you. Of course, this is much easier said than done. However, one of the biggest reasons contractual agreements fail is because companies try and weigh too much in their favor. They demand the lowest prices, the best terms and immediate turn times, without committing themselves to higher volumes, or covering some of their vendor’s inventory costs.
Whether your company holds inventory, or your vendors hold inventory for you, somebody, somewhere will have to bear the burden of inventory holding costs. It’s inevitable that your supply chain will have to cover these expenses. If you want to have parts ready with minimal turn times, then you must be willing to share in the burden of carrying costs. These costs are 3% a month on a product’s “COGS” (cost of goods sold). Over a quarter, they become 9%. Quick solution: Split those costs with your vendor. Here’s a table below of what that might look like with another link to a post on how to make this strategy work.
To read about how to make the above approach work, please refer to: Reducing Your Inventory Holding Costs with Contractual Agreements
4. Simplify Product Returns
One of the surest signs of a fractured customer-vendor relationship is when the customer tries to return product and is forced to go through one convoluted return process after another. Some vendors insist that their customers place additional purchase orders (for the same parts) in order to get a credit and RMA (Return Merchandise Authorization) number. Only then can the process of returning product begin. However, it often doesn’t end there.
Some vendors will only issue the credit, or replace the part, after they’ve verified the warranty, the replacement part’s value, or have physically inspected the part upon its return. None of this helps you, the customer. In fact, it often does nothing more than add delays, delays that cost your company business.
Simplifying this process will not only improve your bottom line, but it will also improve your vendor management practices. Each of those aforementioned issues can be handled after the fact. Now, this doesn’t mean your company is given free reign to return product when it wants. That’s not the intention. Instead, it’s to do away with those processes that do nothing more than add unnecessary time, and are simply the result of not having agreed upon conditions with your vendors. Outline a return process that meets the needs of your business and that of your vendor. Doing this will save both of you a lot of time.
I’ve presented four vendor management strategies to adopt given the current economic climate. Ultimately, these are vendor management practices your company should be doing regardless of the state of the economy. Unfortunately, as is often the case, companies tend to wait to change until that point in time when they must change.
Managing your company’s vendors doesn’t merely involve demanding the best possible price, the best lead times and the best terms. You must help them help you! As a career sales professional, I can guarantee that when customers make such one-sided requests, rarely does it produce the kind of results they are looking for.
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