By: Beroe Inc. --
12 May, 2019
Buyers can leverage distributor-manufactured rather than company-manufactured products. Some suppliers manufacture products such as remanufactured toner cartridges, pens, and notebooks.
Negotiations over distributor-manufactured products can lead to a reduction in the spend for the buyer.
The current focus is moving to environmentally friendly and green products. Such products generally cost 10–15 percent more and are preferred by the supplier due to higher profit margins. Buyers need to know if these products are really necessary.
There may be situations in which suppliers provide an expensive product for the same product description as a cheaper alternative. For example, the offer price of office sticky notes is 2.90 pounds, whereas the same product branded as Post-it notes is 4.89 pounds. It is possible that buyers may end up paying more if they do not have a clear understanding of the price differences between other manufacturers’ products.
As an emerging practice, buyers are comparing the rates quoted by different suppliers to understand overall price differences. Hence, the price benchmark should consider factors such as overall spend, volume purchased, and the type of products being compared.
Information about the supplier’s past performance can be extremely valuable when negotiating a new relationship, even when the buyer has a good supplier management program in place.
For example, if the supplier successfully increased all its prices prior to contract renewals, review of its performance against a key metric, which is 95 percent for the buyer but 98–99 percent for the supplier’s other customers, provides the buyer more leverage in negotiation for an increase in fees.
Buyers can leverage in negotiation if they engage with suppliers via a hybrid model and consolidating suppliers would bring an annual cost saving of 8–12 percent.
The buyer can enter into negotiations by consolidating the products after examining its usage, which could bring a cost saving of 40–50 percent on a product level and may account for 5–10 percent of the overall contract value.
Setting an ordering schedule every quarter as per the location and buyer’s requirements can achieve a cost saving of 3–4 percent, which would enable the buyer to leverage in negotiation.
Rebates on the volume procured can be optimized up to 8–12 percent by engaging the products of a single manufacturer. Buyers can depend on the manufacturers’ products for more discounts.
The rebates on subsequent spend can be negotiated at the contract level. These rebates are offered if the spend increases by a particular value, say 1 percent for the first $500,000 increase in spend and an additional 0.5 percent for the subsequent $500,000.
Negotiating rebates on the size of the order depends on the value of the order, which can be optimized by cost savings of 0.5–2 percent.
LiVE Event: Category Management For Procurement Professionals