Strategic Relationships in Supplier Management

Posted by: Seva Procurement on Apr 24, 2014 at 5:55 pm |

Often times we have found that food service operators believe that procurement strategy should be based on conflict and competition rather than partnership.  In other words, some operators believe that getting the best price means nothing but hard negotiating and keeping a supplier’s proverbial feet to the flames.  In reality, negotiation is only one piece of creating a larger, more successful food & beverage procurement strategy.  Any successful procurement solution will attempt to understand and reduce supplier costs.  By so doing, operators are able to achieve a food & beverage procurement program that is more valuable than one that is based solely on competition and negotiation.

It is important to note that though negotiation is not the only piece in the supply chain puzzle, it is an important one.  It is also worth noting that fair negotiation and competition is not something that most suppliers are opposed to, as they understand it to be a natural part of doing business.  The issue for suppliers comes when operators demand more from a possible contract than negotiation alone can realistically produce–a negotiation without any attention being paid to reducing the supplier costs, as well.  Negotiation alone can only drive so much value from the supply chain before demanding more of suppliers will just result in the need to try and make back losses in other areas of your account.

This concept is one of the main reasons that the traditional bidding out of products, “cherry picking,” among several distributors will always result in a weaker overall procurement strategy.  In theory, bidding out products each week would seem to make sense, as it seems to guarantee that competing distributors would try and put forth the best price to win a product bid. In reality, however, there is a fundamental problem behind this type of procurement strategy: it doesn’t take into consideration the cost of this practice on the distributor.

Some operators might wonder why this should be a concern of theirs.  It is because it is a fundamental economic truth that if the supplier/production costs are increased, then ultimately this cost will be passed on to the consumer–first you as the operator when you pay the invoice and then to your customers in the form of higher menu prices.  This is why negotiation, alone, can never produce the best possible food and beverage procurement program.  A valuable procurement program will seek to lower supplier costs, as well as using negotiation, to get further savings passed on to the operation.  In other words, procurement strategies should seek to address and reduce supplier costs and then negotiate the best price available under the new cost parameters.

Of course, understanding what these supplier cost factors are and how you can reduce them is not always an easy process, especially if you do not have the benefit of a procurement manager or team.  That being said, one of the easiest ways that your operation can help manage the distributor cost is by managing your drop size.  For example, while three deliveries a week might be a nice convenience, can you get by with two?  By decreasing the number of deliveries that need to be made, as well as increasing the overall volume of each delivery, you are substantially reducing the cost of delivering your product, in return you should be able to reap the value of this in the form of lower prices.  Further, we believe it is always in the best interest of an operator to try and enter into a prime agreement with a distributor that guarantees a minimum percentage of total purchases to that distributor.  While this percentage will vary based on each operation and the products that they can realistically get from a broadline distributor, the truth remains that if you can guarantee volume and larger drop sizes to a distributor, the will typically agree to a cost-plus arrangement that will lower your overall cost of food.

Another cost that is often overlooked by some operators is the cost of money.  Unlike credit card companies, distributors do not have true “late fee penalties” and higher interest rates on balances past due.  That being said, the cost of money is a substantial cost for them, just like it is for other types of creditors.  And just because distributors don’t invoice this cost as “interest” or “penalties” doesn’t mean that they are not marking your products up accordingly to reflect how you pay your bills so that they can again recoup some of this cost.  Therefore, while many operators try and push their payables out as far as possible, there is a significant cost to this for both you and the distributor.  Again, understanding this enables you to go to your distributor and commit to set terms that you can follow, and in return negotiate a more valuable distribution contract that reflects your ability to reduce this cost for them.

In closing, negotiation is a fundamental aspect of any procurement program, but it should not be done in a manner that does not take into consideration supplier costs.  Understanding these costs can ultimately create an even more valuable procurement program.