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Using Supplier Negotiation Tactics to Reduce Costs

Effectively cut costs in your procurement department by sitting down at the negotiating table with your top suppliers

By Bridget McCrea

Image of Using Supplier Negotiation Tactics to Reduce CostsFor electronics buyers, inventory control tends to be one of the most challenging aspects of procurement and supply chain management. Making the hurdle especially cumbersome is that fact that purchasing agents are often responsible for costs, contracts, negotiations, supplier selection and market knowledge while inventory managers ensure that products are available on time when needed and with as little investment and risk as possible. With two different departments heading up the charge, the path to inventory reductions can be tricky, at best.

“It can be a lot like herding cats,” says Rich Rafdahl, founder and president of Chicago-based procurement consultancy Cost Reduction Specialists, Inc. The fact that every organization has its own unique perspective on how inventory should be managed can also hamper reduction goals, he notes.

For example, a highly profitable organization may want to invest in additional “safety stock” to maximize fill rates and service levels whereas a firm with cash flow limitations is apt to scrutinize every dollar spent on inventory. “Obviously,” Rafdahl points out, “the latter scenario is by far the more challenging.”

Wanted: More favorable terms

Image of Rich Rafdahl, founder and president of Chicago-based procurement consultancy Cost Reduction Specialists, Inc.
“Typically, cash flow limitations are the primary issues for businesses that carry sizeable inventory to service their organizations,” says Rich Rafdahl, founder and president of Chicago-based procurement consultancy Cost Reduction Specialists, Inc.
In many cases, procurement agents are in the perfect position to take over the inventory reduction cost-cutting reins. Two of the most effective ways to reduce inventory investment and save procurement dollars are by working with suppliers to negotiate more favorable payment terms and/or negotiating with them to reduce minimum order requirements. Neither idea is revolutionary, but when combined the two strategies work in tandem to create a more cost-conscious approach to purchasing.

“Typically, cash flow limitations are the primary issues for businesses that carry sizeable inventory to service their organizations,” says Rafdahl. Assuming that the buyer’s company is in “good favor” with its suppliers, one of the best ways to tackle this challenge is by requesting extended payment terms. For example, if your firm is currently paying its invoices net 15 or 30 days, Rafdahl suggests asking for 60 days or longer.

“If you have been using a particular supplier for a while, it will often accommodate such requests to maintain its position with your company,” says Rafdahl. And even if you are only able to secure net 45 terms, “You have now delayed the payment to your supplier by 15 or more days, which may significantly help relieve the cash flow pressure,” says Rafdahl. This strategy can prove especially useful when your customers are demanding similar extensions. “If you don’t negotiate terms with your suppliers,” he adds, “there will always be a cash crunch.”

Lower minimums, please

The next step is to negotiate reduced supplier minimums – a strategy that many buyers overlook when initially setting up contracts with new suppliers. In many cases, any dollar- or volume-based minimums can push a company to procure more product than it needs, thus increasing inventory (and related costs). “If your company has a good reputation in the industry and has paid its bills in a timely fashion,” says Rafdahl, “then requesting reduced minimums is an excellent strategy.”

And even though phrases like “$5,000 minimum order” may appear to be written in stone on the contracts you initially signed, Rafdahl says there’s always room for negotiation on this key point. In most cases, he says the sales rep or a sales manager will be able to infuse some wiggle room into the terms, but in other cases, you may have to work with the company’s management to spell out the desired terms. “Look at how much you’re buying from that supplier over time,” says Rafdahl, “and come up with a win-win agreement over just how big or small your minimum orders should be.”

The end game

Rafdahl says effectively negotiating extended payment terms and minimum orders are practices that will sit very well with the typical CFO. These approaches can also help position the buyer as a cost-conscious professional who isn’t solely focused on bottom-line pricing. “A lot of times, buyers get so focused on price that they overlook any other potential for soft savings,” says Rafdahl, “and forget the other components that go into improving the overall financial health of their organizations.”

Disclaimer: The opinions, beliefs, and viewpoints expressed by the various authors and/or forum participants on this website do not necessarily reflect the opinions, beliefs, and viewpoints of Digi-Key Electronics or official policies of Digi-Key Electronics.

About this author

Bridget McCrea

Bridget McCrea is a Clearwater, FL-based freelance journalist who covers business and technology for various publications.