5 Tips for Renegotiating Your Supplier Contracts
If you’re a distributor, a good move right now would be renegotiating the contracts you have with your suppliers. Proactive supplier management is a fast, easy way to free up cash right away.
Today let’s look at the reasons why cash flow is an immediate priority for distributors, and some tips on how to do this.
First, Who’s Driving the Car?
When it comes to your bottom line, let’s face it. The manufacturer has always been in the driver’s seat. Today, that’s a catastrophic understatement.
As a distributor, your margins are dictated by your ability to move inventory and drive sales – which, painfully, you've learned is totally out of your control in a pandemic. Factor in the tariffs and rising transportation costs, and well, disaster. So you’re stressed, your end-customers are stressed and, you guessed it, your supplier is too.
Get into your supplier’s head for a moment. Every sales order from a customer is an emergency order, and every purchase order to the vendor is a rush order to increase volume. On certain items, they’re looking at about 5-20x what distributors would normally order.
There’s a whole lot of panic going on. It’s time to readjust terms to protect already thin margins.
How thin are they? Under normal circumstances, the margin for a distributor may range from 3% to 30% of the sales price, depending on the type of products sold. Right now, in the throes of COVID-19, for most distributors (and certainly retailers), that figure sits on the very lowest end of that scale.
So What Do You Do?
Now that so much has changed in supply chain, it only makes sense to go back and update terms with your suppliers. Doing so will drive immediate working capital.
Here are 5 quick-action contract renegotiation tips you can try to combat losses caused by topsy-turvy demand (shamelessly borrowed from MDM’s John Gunderson, VP of analytics and e-business):
- If you have cash to work with, consider asking for a cash discount on manufacturer payments, such as 2% on Net 10, 3% on Net 10 or 2% for 30 days.
- Look at your customer base to see where it would be advantageous to work out special terms, starting with your biggest customer and working your way down to assess risk and exposure.
- Open up a rebate discussion with manufacturers. For example, can you take a prorated portion of year-end rebates?
- Look at incentives to bring in stock, particularly on items you know you're going to sell over the next six months. There may be an opportunity to rework direct terms with manufacturers.
- Manage backorders aggressively, knowing it is difficult to bill a partial order when a product – perhaps a $5 line item – is on backorder.
BONUS Tip for Supplier Management
There is one more highly effective, yet often overlooked supplier management strategy for optimizing the financial picture:
Know. Your. Numbers.
Looking at supplier Minimum Order Quantities and the need to fill trucks economically, your negotiation power goes up substantially when you have real-time data insights about your business, and your suppliers' constraints, readily on hand.
Rather than analyzing a small subset of A-items or fast movers using manual processes, advanced supply chain analytics allow you to run instant cost analyses across all items in the assortment. You can easily optimize things like order cycle, pricing strategy, forward buys (or investment buys) and when it makes sense – or doesn’t make sense – to take advantage of a supplier promotion. And you can do this in just a few keystrokes while on the phone with a supplier.
I hope these tips help you squeeze additional margin during this difficult time. We’d like to answer any of the questions may have; use this link to put 15 minutes on the calendar with a supply chain expert.