Some of the small business owners I talked to were proud of their longstanding partnerships with suppliers. They talked of the trust and open communication that defi ned these relationships.
That’s great, but how much are you willing to pay for a wonderful relationship with one supplier? Is it worth losing $5,000 annually?
$10,000? More?
In this day and age, there’s nothing disloyal in shopping around for raw material suppliers. In fact, in a volatile environ- ment where suppliers can go out of business overnight or raise prices by 50 percent because of their own fi nancial issues, you would be taking a big risk by not investigating other suppliers. It’s also a risk to believe that all material prices are fi xed and nothing is negotiable. More than ever, suppliers are willing to work with you and consider options to keep your business. Given all this, you should explore the following cost-saving tactics.
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Maintain a minimum of three suppliers for your materials. It’s fi ne to have one primary supplier and two secondary suppliers, but the key is having backups in case anything happens to your primary supplier. One of the company presidents I talked to had a major supplier go bankrupt suddenly. One day the supplier was doing fi ne, the next day it was on the edge of fi nancial ruin. As a result, the company would have been in deep trouble if it hadn’t had two secondary suppliers to pick up the slack.
With transportation costs shrinking and trade barriers disap- pearing, more suppliers from all over the world are available to you. Keep an open mind about new suppliers and make a continu- ous effort to be informed about who the new suppliers are and what they’re offering. In this way, you’ll protect yourself in case a relationship with a current supplier goes bad, and your company will also have lower-cost options. In fact, if you tell a current sup- plier you’re happy that you found another supplier offering the same material for less, the odds are that your current supplier will match this lower price.
Push suppliers for early payment discounts. We save about
$22,000 annually by requesting these terms. Don’t expect your supplier to volunteer that these are available. In fact, you may be the fi rst customer that requests these terms. Be aware, though, that some suppliers are weary of slow-paying accounts, and they are more than willing to offer early payment discounts if someone requests them. Others may be more reluctant, but if they believe you will take your business elsewhere, they may make this concession.
Some small business owners protest that the company’s cash fl ow isn’t great and that it can’t commit to early payments. If this describes your company’s situation, consider opening a line of credit to capitalize on these discounts. For instance, if a bank offers a line of credit at 8 percent, it would still be to your advantage to do it. Suppliers often offer 2 percent net ten-day terms. With these terms, you will save a signifi cant amount of money. In fact, until the
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line of credit interest reaches 24 percent (an unlikely occurrence in the near term), early pay discounts are still a great deal.
Request a consignment arrangement. If you can get sup- pliers to agree to consigned stock, you can both improve your cash fl ow and take advantage of early pay discounts more eas- ily. Admittedly, some suppliers will not want to get into a con- signment arrangement, even though it makes perfect sense for them as well as for you. In essence, this deal allows you to keep a supplier’s products in your inventory, and you’re billed only as the products are used.
We have a supplier with whom we have a consignment agree- ment. While the tradeoff for this agreement is that their pricing is 2 or 3 percent higher than that of other suppliers, we more than make up for that by having the extra time to hold on to our cash.
We count the material at the end of each month, let them know how much we used, and then they send us an invoice that we pay in 30 days. In essence, we are getting 30- to 60-day terms with an average of 45 days. Since our customers pay within an average of 47 days, it means that we don’t end up carrying any inventory.
Ask if they will consider extended terms. Though early pay and consignment terms are better, this is an option if the supplier won’t agree to them. In an informal conversation with your sales rep, ask how long you can go without paying until the rep starts to hear from the accounting department about the invoice. Be straightforward with the rep; explain that you’re trying to be as fi nancially effi cient as possible. The rep may tell you that the offi - cial rule of thumb is 30 days but that they rarely if ever do anything until it reaches 60 or even 90 days. I’m not advising you to wait this amount of time to pay all your materials suppliers but simply to recognize that this may be a bargaining chip. One of the company owners I talked to told me that as a supplier to a number of com- panies with cash-fl ow problems, he offers 90-day payment terms
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because he knows he can’t compete on price. In this way, his 90-day policy becomes a competitive advantage. If you have a supplier like this, you should explore the possibility of extended terms.