Defining Customer Benefits in Supply Contracts: Essential Negotiation Strategies

As the vendor in a supply contract, how would you define the benefits of these contracts for your customer? Would you focus solely on the savings your customer enjoys by committing to a long-term contract, one where your enterprise is able to reduce your customer’s pricing through their economies of scale? Or, might you focus more on how these contracts help your customer reduce their turn times on finished goods? Most vendors assume these are their customer’s main benefits. However, other vendors understand that there are additional benefits, ones they can outline with their customers in order to strengthen their own negotiation position. 

The Benefits of Contracts

As mentioned, most vendors define their customer’s benefits under those aforementioned criteria. The customer saves money and shortens delivery on time critical parts. However, doesn’t the customer also save on freight? Don’t these contracts also help reduce the customer’s own carrying costs of inventory? Doesn’t the customer eliminate issues pertaining to inventory obsolescence and damage? Ultimately, when you retain inventory for your customer, aren’t you also helping to reduce their financing costs on inventory? You are.

Contracts do far more than simply lower your customer’s prices and delivery times. Understanding these additional benefits is vital to positioning your company as a trusted partner and to defining your enterprise’s unique value proposition. We’ll review each benefit in detail and show how your company can use them to distinguish your product and service offering. 

 

The above video explains the differences between a Kan-Ban agreement and a Blanket Order agreement. 

 

The above video explains how a Kan Ban manufacturing system works from the finished good inventory backwards through the value chain. 

Here are four direct benefits of contracts for your customers. It's essential that your salespeople know how to properly accentuate these selling points to customers. 

1. Lower Financing 

Every month your company holds inventory for your customer is yet another month they save on their own cost of capital. Lower financing is a direct benefit of entering into a contract. Your customer is able to save a considerable amount of money simply by having your company hold inventory for them. The best approach is to apply a dollar value to this benefit before negotiating any contract. For instance, let’s assume your product’s sticker price is $10,000.00, and that your customer’s yearly interest rate on financing is 5%. Your customer’s daily rate is this 5% divided by 365 days, or 0.0137%.

Every day you hold inventory for your customer, your customer ends up saving $1.37. Over 30 days, that amount is increased to $41.10. In an ultra-competitive global economy, where every dollar saved in financing goes directly to your customer’s bottom line, this amount is substantial and worth noting.

2. Lower Freight Costs

 

Your customer’s costs on incoming shipments play an extremely important role in their ability to derive profit on sales. Lowering your customer’s freight costs is another huge benefit of supply contracts. Much like quantifying your customer’s savings on financing, your enterprise can dollarize the impact of your customer’s freight savings in much the same way. After all, your customer defines their gross profit by taking their own pricing and deducting their own product’s COGS (cost of goods sold). Freight is an incredibly important part of a product’s COGS. Take the costs from your historical shipping quantities and compare them to the new quantities your customer will now be taking through larger volume shipments. Use this variance to your advantage.

 

One contractual agreement you can run that can lower your customer's costs of freight, and yours as well, is to run a vendor consignment agreement as outlined in the tables and video above.  

3. Reduced Inventory Carrying Costs

Most companies apply 3% as their monthly carrying cost of inventory and the biggest drivers of this 3% include the costs of inventory damage and obsolescence. As the vendor in these agreements, your company is assuming all of the liability for damage. Your customer isn’t concerned about damage until that product arrives at their facility. Time is essentially on their side! In addition, your customer is likely to only take product from you when they’re guaranteed to make a sale. As such, it’s not a stretch to assume that your customer’s cost of damage is eliminated altogether once they enter into a contract on supply with your enterprise. Can you use this to your advantage when structuring a particular contract? You absolutely can.  

4. Increased Gross Profit 

Bottom line, each of these benefits ultimately means your customer will increase their gross profit on each and every sale. Lower prices, lower freight and faster turn times on delivery, means your customer is able to shorten their own product to market lead times. They’re entering into this contract for more than just saving on price. They’re pursuing this agreement with your company because it’s a value-add for them. 

The intention here isn’t to imply that as the vendor, you should use strong-armed tactics in negotiation. Nor is it to imply that your customer should be grateful for the opportunity to purchase from you. Instead, you should use these points to accentuate your value proposition. Understanding your customer’s benefits within these contracts allows you to distinguish your product and service offering. If all you do is focus on your customer’s savings, and shortened lead times, then you’ll never have a customer who truly understands the sacrifices you’re taking as the vendor. However, if you outline these benefits and their appropriate costs, then you’ll be able to better position your company to negotiate a stronger agreement.

 

To learn more about B2B negotiation, please see Sales Negotiation: Defend Price, Customer Scare Tactics & Managing Concessions