Every business should have a clear understanding on their operating costs and should be constantly evaluating this spend regardless of size or how big your company is. What does it mean to be evaluating your spend? If you asked your accounting department to provide a list of the top 20% of vendors in relation to how much money you spend with them annually, this would be a start. This list of suppliers will represent close to 80% of your operating budget. I know, the pareto principle is overused but in this instance is 100% on point.
Prudent business owners will dedicate a large portion of their time or their purchasing department’s time on analyzing this 80% cost. These are your target vendors and where you need to focus your efforts. Requesting price concessions for your guaranteed or long term business and suggesting that they partner with you on productivity improvements are two quick solutions you can key in on.
There are multiple ways to approach this:
1. First drill down and gather specific details on this spend. How many widgets am I buying of a specific product in a 12 month period? This is known as your annual usage. What is our cost to procure these items? Is there a better quality product which will perform the same function and reduce operating costs? Are there like vendors that can provide a similar material or service?
2. Approach your existing vendor directly or by way of a RFQ and request firm pricing for a 12 or 24 month period. In exchange for this commitment, you are expecting preferred pricing. This does two things, stabilizes your costs for the next 12 – 24 months and reduces ordering costs as these commodities can be covered by a contract or supply agreement.
3. Creating competition is the best way to achieve fair market pricing for goods and services. To achieve this, you need to issue a Request for Quotation (RFQ) for the above item(s). If your spend warrants, you should do your homework and pre-qualify vendors for these items. Ensure they are of similar quality by asking for samples and get a sense whether these suppliers can meet price and delivery timelines based on your usage or existing requirements. No use buying something for 10% less than what you are presently paying if the new vendor cannot deliver!
4. It gives the vendor comfort knowing they have your business for the next 12 months in exchange for better pricing. By granting them a contract for the next year, the expectation is the vendor would guarantee they carry relevant inventory in their local branch which would then allow you to reduce on-hand inventory. In this instance you are reducing carrying cost, cash outlay for inventory and achieving a reduction in unit costs. Savings all the way around!
Issuing a RFQ (Request for Quote) to determine present market pricing is always the preferred way of doing business. It is ethical, transparent and begins to condition your suppliers of your intention on monitoring your spend. It sends the message that your company is focused on ensuring you are receiving the best possible product at the best possible price.
If creating a RFQ to help manage costs is on your radar, there are many sample RFQ templates available on-line or the team at RFQPro would love to help you get the ball rolling.
See a list of our templates and forms by visiting our In the Pack Page
Here is to your success — Mark.