12 Purchasing Comments that Cost Distributors Millions

Last week we wrote about the right activities for tough economic times.  One of our points was the need for improved negotiations training with our salespeople.  At the risk of repeating myself, I

stated:

“….major industrial firms have gone public with their plans to squeeze their supply chain.  Some have noticed, they can get additional discounts just by “asking” for them.  Customer purchasing types are going to negotiate with our sellers and we need to be prepared.  Based on my observations, most distributor salespeople have not received proper negotiations training in recent history.”

Last week I attended one of SPASigma’s inaugural events called, The Battle for Margin, a two-day seminar developed to assist distributors in growing their gross margins.  Much of the seminar revolved around negotiating with buyers. 

During one of the breaks, I had the opportunity to speak to several distributor salespeople who candidly shared their experiences with buyers.  In a short discussion over a cup of coffee, we came up with the twelve most common comments heard from professional purchasing types.  All agreed they had caved into these comments in the past, and swore next time would be different.

 

Sitting here thinking, most distributor sellers are programmed to please.  It’s in their DNA.  Almost all feel that getting an order is more important than driving gross margin.  Yet, gross margin is the life’s blood of their companies. 

In my thousands of sales calls with distributor people, I have only seen a few who stood their ground when they heard one of these comments.  The truth is, most stutter and stumble around on price objections like they were hearing them for the first time.

Purchasing professionals are trained to ask for lower prices.  Even the smallest concession is a win.  What are you doing to train your guys on the answer to these comments?

Here are a few suggestions:

Comment	Potential Answer
Last time it cost less than that…	How long has it been since you purchased this?  There have been a lot of cost changes over the past several months/years/decades.
You’re close, but this is competitive…	I think this is a pretty fair price.  Does our competitor offer all the same features and services?
You’re just a little out of the ballpark this time.	We might not actually be the cheapest on every order but our services and quality of product have to be worth something to you.
Can you do any better on this order?	I might be able to do better if you were to place a blanket order for 100 units over the next few months.
Sharpen your pencil a bit and it’s yours.	I can’t do anything about the price but I could save you money if you were to package in some of the other products you buy.
You’re going to need to better than that…	Is there something else I need to know about this particular order?  Based on what we have discussed so far, I think we are pretty much at a fair market price.
That’s more than I expected to pay…	On what did you base your expectation?  Maybe I could find you a lower cost solution by moving you away from the premium product.
That seems expensive.	Gee, that is the competitive price in the market.  Am I missing something in your specification?
Your price is too darned high.	What are we high against?  Are we making the right comparisons?  Should we look at value-engineering some of the features out of the solution?
You’re kidding me!	No, this is a good price.  Should we talk to your engineering team about a less feature-rich offering?
Do you want to keep our business?	Yes, your business is very important.  But I can’t sell at a level that costs our company money.  Tell me why you feel I seem like I am not serious about your business.
Come back when you get your costs in line.	We benchmark our business against the best in the industry.  We provide top-quality service at competitive prices.  I want your business so please help me understand why you feel we are out of line cost wise.

Will you occasionally need to adjust your prices downward?  Nearly everybody discovers a situation where selling for a lower margin makes sense strategically.  But, not every time and not when you are providing the best overall value. 

The point of all of this is simple: 
We don’t need to give away margin just because the customer asked – not in tough times, great times or anywhere in-between.

 

BTW – the SPASigma Seminar rocked.

Eliminate the Middle Man and Save

Out on a lonely street of the seldom used two-lane highway between Dubuque, Iowa and Madison, Wisconsin, there once stood a ragged and paint-worn billboard with these words emblazoned in three foot letters: “Eliminate the Middle Man and Save!”

While the sign has likely fallen and the once flourishing cheese factory is gone, the legend lives on in the hearts of untrained purchasing professionals everywhere. It’s one of their dozens of negotiation tools and they’re not afraid to use it on the unsuspecting manufacturer’s sales executive.

Allow me to set the stage for the typical play of this tool…
The purchasing guy’s company uses your product and has for a considerable amount of time. One day, you get a call from the purchasing department. The buyer asks for a meeting but specifically requests you come without your distributor. During the meeting, this procurement guy describes how his company likes your product and wants to strengthen and expand their business relationship with you. (The bait…?)

All sounds good so far, but then comes the well-rehearsed message: the distributor shouldn’t be part of the equation.

There are a predictable list of reasons:
• The distributor is good but doesn’t really add value to this piece of the business
• The customer wants to build a closer relationship with your company for technical reasons and the distributor only gets in their way.
• The customer is evaluating their supply chain and their “consultant” told them distributors are an unnecessary step.
• The customer has identified new business for which you are qualified but doesn’t see how it could possibly work through a distributor.

A defining moment in channel policy.
Very few manufacturing organizations with distributor channels proactively explore the proper response to such a scenario. Like most things associated with the negotiating process, salespeople come to the table unprepared and unaware a negotiation is in progress. On the other hand, purchasing teams actively train in the art of the negotiation. Most are rewarded by their ability to knock down prices without impacting quality. Stripping out the distributor margin while insisting the manufacturer continue to provide all of the services formerly handled by channel partners is a frequently used ploy.

The salesperson is unprepared.
We have already noted few manufacturer sales people realize they are being “played."  This is an issue. Exacerbating the issue, many manufacturers fail to insure their sales teams understand the cost of the transactions handled by the distribution team. For example, when the distributor is removed, orders must be placed, shipping and billing questions handled, expedites responded too and warranty issues explored by staff back at the manufacturer; typically these are more expensive than the distributor alternative. Further, issues like distance, lack of ongoing relationships and inability to quickly drop by the customer to “handle the issue” impact cost and service levels.

Most manufacturers have failed to build a decision matrix for precisely what makes for good direct business and what qualities this business should possess. Instead, untrained salespeople are forced to make subjective decisions with big bottom line impacts.

How to handle this negotiation tactic.
First, allow me to provide some fair balance to this message. I believe some business might need to be done manufacturer direct. Examples include: private label opportunities, business where the manufacturer develops a special product to the customer’s specification and business falling outside of the channels normal market segment (electrical tape sold to hockey teams for wrapping sticks might be an example). And sometimes, opportunities become so large and so price driven that distributors are not part of the equation.

The rest of the time distributors are an important part of the business model. You wouldn’t remove the distributor from the sale any more than you would say, “this is business where we don’t pay the sales team.” The channel is part of the sales team.

So how do we respond to the negotiation push for direct business? Here are a few steps that make sense from my standpoint:

1. Visit with the customer to hear the whole story. Don’t limit your conversation to (only) the purchasing department. Instead insist on talking to the engineering and production teams. Ask pointed questions about their ongoing needs.

2. Push back against price. If the customer starts off with

assumptions that your distributor is making 20, 30 or 40 percent gross margin, and the purchasing guy talks asks for that margin as a price reduction, ask where they got the numbers. Most customers over estimate the distributor margin.

3. Indicate there will not be a major price reduction driven by the direct business. Point to the services provided by the distributor which may be more expensive coming from the manufacturer directly. Point blank ask the buyer if they would want to go direct if the price remained the same.

4. If pricing becomes a bigger point, ask if the customer is willing to make some kinds of concessions in return for the price reduction. More business, blanket orders, elimination of services and/or reduction of warranties all could be tied to reduced price.

5. Offer to bring the distributor into the negotiation. Perhaps the distributor can provide added services or streamline the services they provide to help match the price cost needs.

6. Keep the distributor involved in the process from the very start.

Channel Distrust and Disruption.
Hitting on point number six from above, it is critical to keep the distributor involved in the process from the beginning. Experience dictates, the distributor probably has a better handle on the local relationship than the manufacturer’s sales team. The distributor may know people within the customer who can provided details on the reason for the negotiation; things like pressure from corporate, a loss of a major customer, a new procurement executive making a name for themselves or some mistake the distributor made in the recent past.

If the situation does call for a price increase, look to the distributor before giving away gross margin. Over three decades of work with distributors indicates most are willing to drop their gross margin percentage if presented with facts. And, most are emotional about doing so without some say in the process.

Finally, if the situation does call for a move to direct business, the distributor needs to be compensated for the following:

• Finding and nurturing the business if they originally brought it the manufacturer and developed a strategy for getting the business off the ground.

• Any work they are required to perform should your system break down. Stocking, handling warranty issues, working through customer technical questions all cost money. If you take the business direct, expect to pay for the service requests passed to the distributor.

Eliminating the Middle-man is not a savings.
Distribution is a business model. It does not exist because it’s as American as Mom’s apple pie and the freckle-faced girl next door. It exists because distributors can handle customer relationships more efficiently and effectively than a manufacturer can do directly; at least in most cases.

Manufacturers need to invest in training their sales teams on the distributor model. If your team does not understand the financial drivers of distribution, buy a Profit Report from one of the distributor associations and spend some time understanding it.

How to Incentivize a Distributor Purchasing Professional

The Challenge – How to Incentivize a Distributor

Photo from zazzle.com

Purchasing Professional

After writing tons of articles on the sales process in distribution where I brutally vilify purchasing and procurement types, I received an email with the following:

“Frank, you often make sweeping generalizations about purchasing types. As a former sales guy, I tend to agree with most of what you say. However, my organization (a distributor) has a couple of purchasing people. And while I certainly don’t push them to lie, cheat or steal from our vendors, I would like for them to be more proactive in helping our business make money. Do you have any recommendations for points we should intensify them on? Is it possible for them to do more than just enter orders with our suppliers?”

This was a very good question and one I hadn’t thought about for quite some time. There are many purchasing folks working in distribution. These folks are critical to our organization. Most are hardworking, trustworthy and loyal. A good many are also not working at their full potential, vis a vis, generating revenue for their organization.

I decided to create a list of topics I believe should be included in discussions between distributor management and their purchasing groups. This is my first pass. I hope it generates some discussion here and more importantly, in the conference rooms of distributors.

Let’s start off with a few assumptions:
1. Outside of commodity products, most Distributor Purchasing folks do not decide the manufacturers of products which are going to be purchased.
2. Purchasing people are often responsible for setting inventory levels.
3. Purchasing people are responsible for returns to manufacturers.
4. Purchasing people are often charged with keeping dead stock under control.


Discussion Points
Inventory:
• What is the dollar amount of inventory which has not sold in 180/365 days? Are there ways this number can be improved via returns, inventory swaps or some other method?

• When we stock new product offerings from our supply-partners, do we insist on reviewing the quantities and amounts after 60 days? If so, does the review actually take place?

• How do we calculate a good deal when presented with a seasonal or special buy situation?

• How often do you process returns for warranty items and defective returns from customers? How do you handle suppliers who are slow to process these items?

• What is the inspection process for equipment returned from customers? Are the items in first class shape? Are boxes and packaging in “sale ready” condition?

• If we scrap dead stock, who oversees the process to ensure nothing sellable is lost?

• How do you manage purchasing of commodity products? Are there some products which are completely interchangeable in our market?

Freight:
• Which manufacturers offer freight allowance (free shipping) with certain size orders? Are there times when we miss the freight allowance? Have we attempted to negotiate better shipping terms?

• Do we regularly use our own freight accounts for companies who do not allow freight to avoid hidden mark-ups in the freight cost?

• If we do not receive freight allowance for an item, is the cost of freight calculated into our pricing? (In one instance we discovered a line where freight would have added a full 9 percent to the cost of the item. Incidentally, the typical GM on the item hovered in the mid-20s. A big ouch.)

Special Pricing Agreements (SPAs):
• How do we ensure our company takes advantage of all SPAs available to us?

• If a manufacturer uses ship and debit procedures for customer specific SPAs, how do we track them and what safeguards exist to ensure we get our money in a timely fashion?

Don't let this be you or your team!

Networking with other distributors:
• Do you network with other distributors to cultivate sources for hard to find products?

• What do you consider to be a “reasonable” price over cost to buy products from another distributor?

Supplier Relations:
• Do we regularly review and “scorecard” our suppliers?

• Which of our suppliers provide us with back-side rebates on purchases? How do you manage this group to maximize the rebate?

• Which suppliers provide co-op advertising and promotional items as part of their package of value? How do you work with marketing and other departments to ensure we harvest all of the dollars available?

• Which suppliers are “notorious” for missed shipments, poor shipping documents, quantity errors or other actions which make them difficult or costly to deal with?

Non-stock items:
• How often do you review “non-stock special purchases” to determine if they should become “stock items?”

• Who enters the data for non-stock items into our ERP system? Is there a review process to ensure the proper catalog number and description was used in our ERP system?

Technology-based products:
• Do we have products which need to be rotated due to revision, software or other changes? How do we manage the process?

• When new technologies are added, how do you determine the proper part numbers and quantities to add to our stock?

In closing
This is merely a starter list. Your own list should be far more detailed; however, there are a number of folks without any list. If you are one without a list, feel free to use mine until you get yours fine-tuned.