When times are tough we turn to jokes, like the one about the trader who said, “This is worse than a divorce. I've lost half my net worth and I still have a wife….”
The economic crisis has been no joking matter, though. The last six months have been tough for most of us. Turnover and therefore profits have done a sharp nose-dive. That’s why I was surprised when one of my clients told me their profits have been steadily increasing even though turnover is down. What is the secret, I asked?
No big secret really, he replied. We are just buying smarter.
They recently employed an experienced buyer whose job it was to grow profits by reducing raw material costs. Sounds obvious, doesn’t it?
All of us can do the same and here are some ways to go about it.
I don’t think changing away from an existing loyal supplier is a good idea as your first option. Primarily because it is not fair on them and also because of the risk involved to you. So first try to get a better price from your existing supplier, by for example:
Just say your supplier imports the product, stores it in a warehouse then delivers it to you. If you can use that much, ask him for a price for a full container delivered to you direct from the port. He should be able to give you a better price because it cuts out the logistic costs of warehousing and delivery.
Try asking for a price for bags packed loose in the container, especially if it comes from a country where labour is cheap and pallets are dear. Usually, this option means more tons can be packed per container, so there should be a saving on the freight cost per ton. The labour and pallet costs at your end will need to be added, but there may still be a saving on the final price.
Or ask him if there is a price saving if you take it in bulk bags, instead of small bags (as long as you can handle big bags, of course).
Getting a better price based on volume may sound impossible since your volumes are down. But how about giving your supplier an order that covers four month’s supply? Order 200 tons for delivery 50 tons per month for the next four months, for example. This makes it a big order, which should qualify for a discount.
Paying earlier is never popular with clients because they always want to pay later rather than sooner. However, it is very popular with suppliers! Most will be keen to give a discount for cash or advance payment terms. It is all to do with the cost of money in the end, isn’t it?
As a supplier, I am not fond of the last option – just asking for a better price, because there is no give-and-take to it. However that’s business, I suppose. It happens all the time. Many suppliers will drop the price to keep your business, especially when threatened with a lower price from the competition.
OK, so you’ve tried some of the above and you are still not happy. The next step is to change to a cheaper supplier. Now you need to manage the risk of changing to a product from a different source. You don’t want it to have a negative effect on your product and cause you to lose sales. What are some ways to reduce this risk?
I suppose these are all pretty obvious and you do them every day. However, did you think of using a new product in a 50:50 blend with the old product before changing over completely?
Every little saving on each input cost will go straight to the bottom line. What a neat way to grow profits with minimal cost and effort.
If one company can increase profits in these difficult times, then so can you.
So, what's the difference between an Investment Banker and a pigeon? The pigeon can still make a deposit on a new BMW.
Keep on smiling and let's hold thumbs that the difficult times will soon be over!