Vendor Management And Negotiation

Preface: Optimizing vendor costs, or purchases, is an opportunity to increase profits for any business. Astute negotiating with vendors can often lead to an increase in gross profit and net income percentages. Consider yourself a good negotiator? Is that D10T the better deal in a box? Let’s say it practical.

Vendor Management and Negotiation

What would your business do without good vendors? Maintaining supportive affinity with vendors is vital to a successful business; albeit a top priority. Vendor terms, discounts and payment negotiations, can reduce your cost of goods sold and increase net income with a little extra effort; the greater your cost of goods sold, the more value your business can obtain from optimal vendor negotiations. For instance, if your cost of goods sold is $870,000, a savings of 2% on vendor terms is $17,400. If cost of goods sold is 60% of sales on $1,450,000, for either the month or the year, then your net income increases 1.2% from good cash management using vendor discounts. If cost of goods sold are say $2,500,000, a 2% cost reduction is $50,000. It’s easy to see, negotiating vendor terms can be as important as advertising to increase revenue.

Vendors are people, just like your customers. You should learn the names of those in the accounting department who send invoices and process payments. Who has key decision making authority at the vendors to negotiate discounts? Treat your vendors the same way you want your customers to treat you. If cash is restricted, tell your vendors, be proactive in communicating late payments; a good vendor will have stringent terms on payment, but most often understand if you communicate honestly the situation. Yet, if you can pay something towards the balance, it is always advisable to do so.

Before you begin negotiating vendor terms, research thoroughly the company and acquaint yourself with the products the vendor supplies. You may be aware that the vendor supplies stroopwafels, but do you know what other products they merchandise. One discipline, to manage vendor costs, is to research the vendor website and any marketing documents to gain an increased knowledge of their target market. Will your business be .05% of their yearly revenue or 5%?  Review competitor’s prices and payment policies to obtain industry options. If you want a line of stroopwafels for inventory, it may be more convenient to purchase from a distributor who can negotiate volume discounts than from the stroopwafel boutique. Yet, price is not always the key factor. If you are purchasing circuit boards, your due diligence is significantly more important. Price may be one component, but supply channel bandwidth, lag times, and quality, with an optimal in-the-field success rate may be more important. If you are purchasing commodities such as 2×8 lumber or propane fuels, vendor discounts can be valuable, significantly valuable. Don’t over negotiate, but put in the effort to get good deals.

Negotiating must include incentives. If you have your research in hand, you will know what incentive you can offer. Negotiating options include: (I) Referring new business, if you have contacts that you can refer to the vendor you have value to leverage, (II) Volume guarantees, if you can guarantee you will order $150,000 a year, a vendor may consider a valuable discount opportunity in entirety, (III) ACH or credit payment access, if the vendor has the comfort of having access directly to your checking account, and payment is certain, you add value to the relationship. Avoid being abrasive or negotiating vendor terms without an incentive plan in place; but combine new business referrals, volume guarantees, credit payment access, and additional values, and you gain stellar negotiating strength that can increase your revenue profitability.

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