Imagine for a moment that you have a huge customer that has no purchasing controls. Dozens of the customer’s employees can buy from you. Most of time, these buyers are in a huge hurry. They have no purchasing training and they will accept just about any price you offer.
It gets better: this customer is so disorganized that they don’t even know when you charge them different prices for the same product. They haven’t negotiated volume discounts or rebates and they never make you compete with other distributors. They don’t even know how much they buy from you each year.
That would be a very profitable customer for you – and why not? It’s not your fault they’re so disorganized.
The problem for many distributors is that this is the kind of customer they are for many of their suppliers. They have no purchasing controls, processes, measurements or reporting. And their suppliers absolutely love it.
How much profit are you leaving on the table – not only due to discounts you’re foregoing, but also because you could sell at lower prices while maintaining or improving margins – because your purchasing isn’t optimized?
How Major Distributors Buy
All four large distribution companies I worked for used sophisticated purchasing strategies to lower product costs. Common practices included:
- Centralized procurement
- Supplier consolidation
- Establishing pricing tiers with suppliers (buy more, pay less)
- Seasonal buys
- Block buys
- Rebate tiers (“If I buy a million dollars in product this year, you give me a 1% rebate”)
- Disciplined use of marketing co-op
- Line reviews
- Supplier rankings and ratings
- Buyouts of competitors’ stock
- Direct imports and a private label strategy
If you have effective processes for managing these opportunities, you’re in better shape than most distributors. Let’s look at some of the symptoms of a less-than-ideal approach.
How to Know if You’re Losing Money in Purchasing
For several years, I was a consultant and I worked with a large number of smaller distributors. I was dismayed to learn that many distributors leave hundreds of thousands or even millions of dollars on the table through poor purchasing practices.
Do any of these issues sound familiar to you?
- You don’t know how much you buy from each supplier (tip: they do!)
- One of your top-selling SKUs is “Other” or “Special” or some similar term that is a catch-all for products sourced by your inside sales team
- You pay different amounts for the same SKU on a regular basis
- Costs go up immediately with raw material increases but never seem to come down
- You don’t negotiate freight terms aggressively and expertly
- You don’t have pre-negotiated volume discounts if you hit certain purchasing tiers
- You don’t have goals and controls for the co-op your company earns – or there’s a running battle between field and corporate people about how to apply it
- You don’t do line reviews
- You can’t name a specific individual responsible for managing the relationship with every key supplier
- You don’t have any private label brands or a direct-import strategy
- You have lots of people cutting POs and no way to coordinate or measure this process
- Your supply base is limited on key products leaving your suppliers in the driver’s seat
If some or all of these describe how you purchase, you have a major problem. But it’s also a great opportunity, because there are best practices you can apply quickly to lower your costs and improve your profits without raising your prices.
Short-Term and Long-Term Solutions
First, put someone in charge of getting you complete and accurate purchasing information. You must know how much you buy for the suppliers that make up 90% of your purchases, no matter who cuts the POs. When you negotiate with complete information, you are in a position of strength because you understand just how important you are to each supplier and how fast you are growing (or not).
Second, put strict controls on that generic SKU employees like to use just to complete transactions quickly. Make it easier and mandatory to add specific supplier and product information. Forbid the use of this SKU for items that exist in your system and then audit and enforce this.
Third, put in place standard purchasing agreements with your major suppliers and schedule annual reviews and negotiations with them. Pricing from suppliers should be negotiated strategically – not transaction by transaction – or never, as is often the case.
Fourth, make strategic purchasing part of your profit improvement plan. Cost concessions from suppliers are better than price increases from customers. You still see the extra margin fall to the bottom line, but better purchasing terms let you be more competitive with customers, meaning you can grow share – while maintaining or improving margins.
Fifth, develop controls and a strategy for supplier co-op. Many distributors view co-op as “free money” from suppliers and so they don’t treat it with the same rigor they apply to other sources of funds. But it’s not free money. It’s your money that you have paid to suppliers and you are just getting some of it back.
Sixth, identify the right organizational design. Although longer term, to execute consistently on items one through five above, you need to have the right team in place. Whether that is driven by Category/Product Management, Procurement, Supply Chain or Sourcing, the functions and responsibilities need to be clearly defined for flawless execution.
How to Get Started
A fast way to build your expertise is to attend MDM’s upcoming conference, Distributor Pricing & Profitability. It’s in Denver on April 15th– 17thand our pre-conference workshop is, “Strategic Purchasing that Drives Profits.”
In this workshop, long-time distribution purchasing executive Brad Johnson will cover all of the topics mentioned here – and much more. Brad has executive experience in category management and purchasing for distributors like HD Supply, PrimeSource and BlueLinx.
For the full agenda, click here.
Space is limited, so please register soon.
See you in Denver!