Eliminating upward margin creep with suppliers can both provide lasting savings and enable longer-term agreements to be signed confidently. It is not as difficult as you many think to accomplish such a feat; all you have to do is commit to create strategic relationships with suppliers. You can do this in 5 steps:
1. Drive aggressive fixed pricing for high volume SKUs
Before you can accomplish this step, it is a necessity to naturally have a very thorough knowledge of what your company buys and be able to produce clean detailed data on those items. When working on this step, keep in mind that a reasonable target for most categories is to create fixed pricing for 60-80% of your spend. Your RFP process should identify these items and seek deeper discounts or lower markup for these high volume items.
2. Create a solid economic model to manage future high volume SKUs
What you want to do here, is drive the suppliers to articulate the model used to price these items and agree that future core items (high volume items) will be priced according to the model. This has an extra benefit of eliminating expensive “shopping” by stakeholders for new items. Each year 30% to 50% of items purchased, especially in categories like MRO, are new items. So, after the third year of the contract, you may have only 20% of the high volume items priced according to the original discounts or markup. Suppliers taking advantage of this pricing can lead to the creation of very attractive profit margins.
3. Create a pricing model to manage everything else
It is also important to negotiate a pricing model for the non-core list items, the sporatic, one-off buys. Generally, this is a blanket discount to list or fixed markup.
4. Require manufacturer verification of annual pricing changes
Suppliers should be required to submit verified manufacturer pricing increases in order to alter core item pricing. It keeps you in the know and has the added benefit of increasing the negotiation strength of the suppliers.
5. Manage SKU turnover with regular core list rewrites
Item turnover is the undoing of the value of core item pricing. Even if you have driven down the margin on the low volume items, your core item pricing will still be more aggressive. It is important to regularly rewrite your core list, a process that should be agreed upon by the supplier prior to initial implementation.
For a more in depth explanation of each step, read our whitepaper on “Creating Lasting Savings in High SKU Count Indirect Categories”. In our whitepaper you will find a more thorough Click the link below to download.
Image provided by Flickr user: JeanFrancoeur