Cozy Up with Vendors
Whether you’re selling toy cars or sports cars, java beans or Java software, office supplies or office machines, Band-Aids or banner ads – cozying up with vendors can create opportunities for both bottom-line and top-line growth. What exactly do we mean by “cozy”? It’s all about getting in tune with — and in the good graces of — your key vendors to erode any unnecessary limiting factors and to find ways to spur growth.
We recognize that every business, especially retail, shares a dilemma: optimizing payables over receivables. We’ll share a few concepts that can help you achieve a better balance.
We’ll also show you how a more cozy relationship with your vendors can lead to better industry knowledge, the best inventory mix and the best operational equipment and solutions to keep you on the cutting edge.
IN THIS STEP, WE’LL DISCUSS THESE THREE CONCEPTS:
- Advantageous Payment Terms
- Volume Discounts
- Know Upcoming Products
Advantageous Payment Terms
Stretching out payments
You hate not getting paid on time, right? The challenge is to maintain a healthy inventory supply, which creates revenue-generating opportunities, while you’re operating in a typical environment where inbound revenues are slow. This is a cash-flow challenge and can significantly hamper your ability to run your business strategically.
The trick is to work closely with vendors to negotiate mutually agreeable payment terms.
If they want your business badly enough, they may agree to ease up on the timing of your payments. For example, their current terms might be pay-on-delivery; they might be the typical net-30. But with the right arm-twisting — promises to focus on them for your buying, or other incentives — you may well be able to establish such extended payment terms as net-45 or 60. If their cash-flow constraints aren’t as sensitive as yours, it can be done!
What’s this mean to you? It means you can use revenue from operations, rather than more expensive forms of financing, and this means a better bottom line.
Shortening payment timeframes
Alternately, you might want to do the opposite – pay your vendors early. Does this make sense? Only if they give you a financial incentive. If cash-flow sensitivity is not too bad with your business, you might be able to arrange a percentage discount on payables. The same applies to office equipment and services.
Here’s how it works: Instead of paying on the traditional net 30-day terms, ask for a 2 percent discount if you pay within 10 days. For vendors who are cash-flow vulnerable, it may be very appealing. For you, it means a slight discount on every order. And every couple of percentage points you save here add to your profit margins.
Using basic math, let’s say your business has gross profit margins of 20 percent, and you take advantage of the “Net 10 / 2%” payment terms on a consistent basis. This would result in a 2 percent discount on inventory costs, and would increase your profit margin from 20 percent to 22 percent. That’s a 10 percent improvement in total profit margin, and that’s real money you keep for very little effort.
If you’re in retail, this recommendation is particularly worth considering: Transfer inventory risk to your vendors almost completely. It can be pulled off either by encouraging consignment terms, where you never buy the product, but simply offer it and earn a commission on sales – or by implementing a “guaranteed sale” policy, where vendors must buy back any product that doesn’t sell. This is extreme, but often newer vendors will go along in an effort to prove themselves and their unproven products. This applies whether you’re an online retailer or a traditional brick-and-mortar business.
Vendors love it when you buy in volume. And you might just love them back, if they give you a volume discount.
This can be a win-win for both of you. From your perspective, inventory is less expensive on a per-unit basis. From the vendors’ perspective, they get to move a “block” of items at once. Remember the axiom: It costs less to sell to a current customer because there’s less marketing and sales-related burden. So when you buy big, it’s more profitable for them right off the bat. Don’t be shy about making this point in any negotiations you have.
Here’s a scenario that might help:
Let’s say you manufacture baby toys. Based on your experience with retailers last year, as well as macro industry trends, you’re very confident that orders will soar this year. You need a lot of plastic parts for your creations – 40 percent more than last year – so you can build the products you need and get them onto store shelves in time for the holidays.
This is a classic situation for you to negotiate a volume discount. Tell the supplier, “Not only am I going to order your plastic parts again for my holiday build, but I’ll order 40 percent more, and with current trends, I may continue to up quarter-over-quarter orders throughout the coming year.”
You’ve now set the table. Next for the price cut: “With all the new business I’m bringing you without any extra effort on your part, can we work out a volume discount on this and future orders?”
If wise, the vendor will be grateful for the extra business, and want to keep you happy and coming back.
Know Upcoming Products
The previous two tactics – establishing advantageous payment terms and negotiating volume discounts – are all about increasing your bottom-line. But there’s another reason to cozy up to vendors — an important one — and it can lead to a different form of revenue growth for your business: an improved top line.
Top-line revenue, the total amount that comes into your company, is very sensitive to the relevance of the product mix you offer. If your merchandise is very appealing, you’re likelier to sell more of it. If it’s just so-so, you can expect similarly so-so gross sales results.
It takes a great market sense to have the perfect product mix, and one way to hone it is by talking with your product vendors:
- Take them to lunch or make personal calls: Give them a little personal attention so that they remember you when it comes time to ask them for better payment terms or a discount.
- Discuss trends and sea changes looming in your industry: Discuss how these trends and changes might affect your respective businesses.
- Ask them point-blank where they think the most exciting opportunities are: They might have the next big idea for your business.
- Offer to test their newest products – those in development or soon to emerge:You might even be able to talk your way into exclusive opportunities for launches and limited time offers.
- Suggest creating joint press releases: Work cooperatively to publicize new products and the joint effort to bring them market. There’s no telling how valuable this kind of PR can be. It certainly isn’t expensive – and usually well worth your time.
This is all about tuning in to what’s ahead that’s likely to have maximum sizzle with your customers in the fast-moving marketplace.
Heads up when importing
When sourcing products manufactured in China or the Far East, be aware of the recent increase in the VAT tax which is added to the cost of your goods prior to delivery. VAT tax varies by product classification , Range is 5% to 14%.
If sourcing your product(s) in the far east is a motivated by your belief that the cost will be lower, be skeptical of the following phrases:
“No Problem.”, “Delivery is not an issue.”, “Payment is only by letter of credit or wire transfer.”, “We are compliant with current USA compliance issues for foreign manufacturers.”
To navigate the sourcing of Far East-sourced products, it will save you time and money to work directly with a USA-based freight forwarding/custom clearance company as opposed to an agent. Make sure all samples/products are labeled with “Made in [the country of origin] otherwise customs will seize them.
– Tip submitted by FRANKFRYSTAK
StartupNation’s View: Thanks for the 411, FRANKFRYSTAK. Getting products made overseas seems to be all the rage these days, and there are definite complexities that come with the benefits. Like you advise, don’t be naïve in these situations – get a USA-based expert on your team to make sure this is executed correctly. Also, a tip if you’re making custom tooling for your Far East-sourced product: maintain ownership of the tooling so that if your manufacturer goes sour on you, you can get your tooling moved to a different factory and keep production going.