Forging a relationship with a vendor is a little like romance. If it’s all about money, you’re in trouble.That’s why John McManus, president/founder of travel supplies cataloger Magellan’s, can consider a vendor negotiation successful even if he doesn’t end up with the lowest price.
“We benefit very much by being given access to new products before other catalogers,” McManus explains. “The first question we ask is not about profit or how much money can we make. It’s ‘Is the product going to make travel more comfortable, safe, and rewarding for our customers?’” An affirmative answer trumps pricing considerations almost every time.
The fact is, a culture of “just go get the best deal” can backfire in the long run, says Ronnie Goldfinger, chief executive of Distributoys.com, a Wheeling, IL-based toys distributor that works with retailers and online merchants. “It’s all about relationships. If your buyer is good to you, you try to be good to your buyer.”
HELP THEM HELP YOU
Part of building relationships involves educating vendors on how working with you can benefit them. “Every seller wants to sell,” says Charles Dominick, president of Moon Township, PA-based Next Level Purchasing, which provides online training and certification for purchasing professionals. “Show them the benefit of working with you to get a better price.”
At Santa Barbara, CA-based Magellan’s, “we chat with them about how getting their product out in how many million catalogs is the same as purchasing a display ad with Islands magazine or National Geographic Traveler,” McManus says. “That helps them understand they can grant us the lowest price while still making a profit.”
Likewise, Minneapolis-based Northern Tool & Equipment Co. can provide considerable exposure to vendors through 22 catalog titles, more than 50 brick-and-mortar stores, and a Website, says vice president of merchandising Mark Kauffman. That’s one reason the $700 million company is up front about asking its vendors for marketing funds and slotting allowances to offset the advertising costs of being on a key page in the catalog or on the Website, Kauffman says.
That’s well and good for a large firm like Northern Tool, you may be thinking, but what about for my much smaller business? Good news: Merchants increasingly have the upper hand in vendor negotiations. With consolidation and the growth of big-box stores, suppliers have fewer options open to them. “The retailer community is shrinking, so retailers have more power now even if they’re not very big,” Goldfinger says. As a vendor, “you’re not going to pick a fight with somebody over what could be a minor point in the long run and have them walk away, because it’s very difficult to replace that business.”
An executive from Collections Etc., which specializes in inexpensive gifts, says that the Melrose Park, IL-based cataloger manages to keep its prices low in part by finding vendors’ point of pain. “You want them to make as little as possible, knowing what their pain factor is,” says the executive, who wishes to remain anonymous. “At what price will he walk away — that’s what you try to hit.” And merchants can detect fairly easily when they have hit a vendor’s rock-bottom price, Kauffman says. “They start to panic. You can see it in their face. They say they have to walk away or ‘I just can’t do it.’”
Not that Northern Tool wants to put vendors in that position, he adds. By eliminating a vendor’s profits, merchants are also taking away the supplier’s ability to reinvest in product development. “Retail is nothing without vendors,” Kauffman says. As a result, “we take the leadership role in helping them sell their product. We want them to be happy dealing with us.” To that end, Northern Tool sometimes gives small vendors a break on advertising allowances, which typically run from 2% to 5% of product sales, in order to be able to sell a new product.
It’s not enough to outline the benefits to a vendor of working with your company. You also have to know which benefits are nonnegotiable for you.
Magellan’s, for instance, requires vendors to pay a fine if they aren’t able to ship product after they have accepted and agreed to the company’s purchase orders. The penalty ranges from $3 to $7 per item, depending on its price. And Northern Tool expects return privileges, electronic data interchange (EDI) compatibility, and product liability insurance.
That said, Northern Tool offers its own product liability program if vendors don’t have their own policies, and it will refer vendors in need of EDI to a third party that will set them up for a fee, Kauffman adds: “We are a sales-oriented company. We want to take the barriers away.”
That’s one reason Northern Tool holds an annual vendors’ conference. The company spells out what it is looking for and encourages suppliers to come to Northern Tool first with new products and innovations. The venue is also an ideal time to discuss what terms the company expects before it will accept a product. “We try to get them to own a certain amount of our inventory through payables,” Kauffman says.
PLAN FOR IT
No matter what your priorities, having a step-by-step plan can bolster your position in the negotiation process. Yet many merchants just wing it. For example, although Northern Tool employs 24 buyers and places 8,000-10,000 items in its master catalog each year, “we really don’t have a formal process for negotiation,” says Kauffman.
Northern Tool’s buyers are guided by a purchasing sheet that includes information on the factors to cover during vendor negotiations, such as insurance, comarketing funds, and payment terms. But the process is largely left to the individuals involved. “We want to have some entrepreneurial spirit with our merchants,” Kauffman explains.
Still, the more prepared you are, the greater the edge you’ll have during negotiations, says Dominick of Next Level Purchasing. “The biggest mistakes in negotiations are made when you are surprised. Think through the various situations so that you’re not surprised.”
With a regimented program to guide you, you’re less likely to be distracted from your ultimate objectives. “Don’t get fooled into just the lowest price. Focus on the total value,” says Dennis Gawlik, a spokesperson for Tempe, AZ-based trade organization Institute for Supply Management. “Oftentimes people get the lower price, but when you add up all the costs, you’re actually paying more, and the company doesn’t get the benefit,” says Gawlik, who is also managing director of supply chain at Alaska Airlines in Seattle and former director of procurement for Seattle’s Best Coffee.
SIX STEPS TO SUCCESS
To be ready for the negotiation process, Gawlik and Dominick recommend the following steps:
- Profile the merchandise category
What does the category consist of, and who are the players? Learn as much as you can ahead of time about the suppliers’ needs and wants.
- Develop a sourcing strategy
Consider whether the item is a commodity or a strategic purchase, then come up with parameters, such as your least acceptable price, Gawlik says. Identify all the variables in the transaction, such as warranty, payment terms, delivery, return policy, and contractual terms, adds Dominick. And have a contingency plan at the ready. Before you begin discussions, know the answer to the question “What happens if I don’t reach agreement with this supplier?”
- Develop a supplier portfolio
Keep your eyes open for new entrants to the category, those that have upgraded with new technology to put them in a better position, and those that supply similar products. The more alternatives available, the more leverage you’ll have.
- Execute the strategy
Send out a request for price, request for quote, or request for information survey. Then score the suppliers objectively. It’s important to do this before you enter into discussions because “your objectivity can be skewed by the heat of the moment,” Gawlik says.
- Begin discussions
Some buyers like to go through the easiest terms first to build a consensus. Others start with the most-challenging issues, knowing that if they can’t come to an agreement, the deal will dissolve and the other factors won’t matter. During discussions, ask open-ended questions, Dominick suggests: “Instead of ‘Can you give me a discount?’ ask ‘How much of a discount do you typically offer to customers of our size?’”
Create uncertainly over whether the supplier will get your business, Dominick continues. Always have alternatives, and mention them. In addition, let vendors know your reluctance. For example, you might say, “I thought about your proposal but wasn’t really comfortable with the price.” Keep in mind that in negotiations, knowledge is power. While you want to learn as much as you can about the vendor, you also want to conceal from the vendor any information about your company that could hurt your bargaining power.
Be creative in your approach. Use the information you found while profiling the category to look for ways the transaction could benefit the vendor, Gawlik says. Does the supplier have a product that it needs to move quickly because it is perishable? Is the vendor already in the catalog arena, or will your business represent a new market? Does it need to expand?
Seattle’s Best, for example, scored points with a vendor by agreeing to buy its broken peppermint sticks, Gawlik recalls. The coffee company used the broken candies as a topping for specialty drinks during the holiday season. “The more you’re becoming a partner, the better you can negotiate more value terms for the best total cost,” he says. “Be open to creativity. See what are the options and how you can benefit both people.”
And no matter what, ask for a discount. “The dangerous thing is for smaller companies to assume they’re too small to qualify for a discount,” Dominick says. “That’s a surefire way to leave money on the table. Always ask — and in fact, ask twice.”
- Benchmark your results
Analyze what went well during negotiations and what went wrong. Write up what you learned during the process and how this information might enhance your position in the next round.
Willamette, IL-based freelance writer Ann Meyer has written about business for The Chicago Tribune, among other publications.