The supply chain is the backbone that supports multiple processes of production and distribution for a retail business, whether a retailer is selling products online, through brick-and-mortar stores, or both.
As with any other major business component, within the supply chain there is always room to further streamline operations, reduce costs and negotiate with partners. Contrary to popular belief, it does not require being a retail giant to save big when it comes to the supply chain. These five tips for supply-chain negotiation can provide significant savings for small and large retailers alike.
Because these tips apply to different aspects of supply-chain management, it is important to be organized, methodical and structured in applying them. You must keep in mind that the supply chain is broad – it extends beyond a retail company to include both suppliers and customers – and requires administration and operations across elements that are not always top of mind: delivery frequencies, order size, order volume, etc.
Research the space/vertical
Especially for those getting into e-commerce for the first time and new to the supply chain, it is imperative to conduct research to understand the supplier landscape. Consider using platforms such as Maker’s Row, which provides ample resources to get started, including resource materials and the ability to get referrals from seasoned industry professionals.
When evaluating supplier options, it can be tempting to get drawn toward those with the lowest pricing. However, cheap is most certainly not always better. Especially if there are one or two outliers at the bottom of a range, ask how it is that their rates are so low compared to the competition.
Once a connection to one company in the supply chain is made, there is quickly a snowball effect. One introduction leads to another across and along the supply chain.
Investigate suppliers for stronger negotiations
While the saying is ignorance is bliss, it is absolutely costly. Do your balance sheet a favor and study up on suppliers’ production economics. Use this knowledge to build and leverage relationships with many different suppliers for the same manufacturing service. This is the way to establish and increase your “buyer power.”
By approaching potential partners and demonstrating knowledge of how their operations work, it reduces any window they have to take advantage of a new customer. Even mentioning that there have been conversations with someone else that offers the same service helps show that every penny counts. And when looking at the supply chain, pennies quickly add up.
Financing terms represent another tool for containing costs
As with any negotiation, always keep BATNA (best alternative to a negotiated agreement) in mind. If there are several vendor options, take advantage of your buyer power and do not hesitate to be more aggressive in asking for the exact pricing and level of service desired. This process of talking and negotiating with many vendors not only benefits cost analysis, but will also provide flexibility for building redundancy into your operations.
Know the exits
Never sign exclusive contracts without some kind of “out.” Remember the previously mentioned concept of “buyer power”? There is also a dynamic of supplier power vs. buyer power. To avoid giving into terms that are counterproductive to business objectives, make sure to counter the effects of any concessions by diminishing elements of supplier power, such as advanced cancellation periods. Advanced cancellation periods require giving a supplier notice within a designated time period before termination of a working relationship.
Depending on the agreement, this can be exclusive or inclusive of if the supplier is at fault for delivery delays or below-standard goods.
Eventually, and hopefully, unit volume increases as business grows. When this happens, it is the strategic time to approach shipping carriers to ask for bulk discounts. The way to do it is by being upfront about competitors’ prices and presenting data about forecast savings that could be gained by switching vendors.
Shipping is a commoditized industry so e-commerce companies are sometimes surprised how low shipping services are willing to go with their rates. When walking into FedEx stores or visiting them online, the prices displayed are retail prices. All shipping carriers, including other major players such as DHL and UPS, have wholesale rates and discounted wholesale rates under special contracts based on volume commitments.
Always be respectful
Above all, build solid relationships and treat your vendors with respect. Burning bridges is counterproductive, especially given that many supply-chain professionals have known each other for years. Establish healthy partnerships with vendors through good communication, to the point that they feel bought into your success. With this mind-set, vendors will appreciate that their level of service and quality will have a meaningful impact on both your business and their own.
By employing these five tips for supply-chain negotiation, retailers can uncover significant cost savings.
Thatcher Spring is chief executive officer of GearLaunch.