Are you paying too much?

How to better negotiate with your vendors

“The current state of the economy is quite a challenge and it’s hard to drive top-line sales growth,” says Tony Lego, entrepreneur and franchise owner of Expense Reduction Consulting (ERC) and presenter at the Knowledge is Power workshop sponsored by Bushnell & Company.

“More revenue that doesn’t increase profit is not the answer. You are not going to make up a negative with more volume,” Lego continues. “Selling your items or providing your services at a loss, are you going to be in business long? No.”

Lego says that with just a 20% cost reduction in your indirect/overhead costs can provide you a 30% net profit improvement. “This just shows how businesses need to focus both on top line growth and bottom line, back-end frugality, if you will,” says Lego.

Some of indirect/overhead items slipping through the cracks include travel lodging, printing, equipment maintenance, UPS FedEx, employee health benefits, freight, general business insurance, merchant card processing, office products, packaging, telecommunications, temporary labor, and waste management.

“For a smaller to mid-size business, one of these may not add up to a lot of money, but if you take three or four and start adding them up, its 10, 20, or 50 thousand dollars a year,” says Lego. “These are opportunities that are definitely out there.”

Areas to focus on

Lowering supply costs can be accomplished by having a focus on several areas:

•Center lead supply purchasing. Assign one person to conduct purchasing activities and monitor inventories because they can develop expertise in procurement and negotiations, help to lower supply costs over time and evaluate suppliers, and reduce duplicate efforts within organization. Be sure you balance the associate cost to the purchasing savings/value.

•Internet shopping. The Internet brings the supply industry to the desktop and can be a great source for product research and pricing because in some cases, you can deal directly with the manufacturer or authorized distributor and you can conduct product and price comparisons.

Just be sure you determine which supplies to source over the Internet, as you do not need to buy all of your supplies there; you structure your Internet shopping efforts as it can be time-consuming; you are dealing with a safe and secure website, on that displays the Secure Socket Layer (SSL) logo and you are not providing any personal information.

•Employee compensation program. A basic incentive program to share a small percentage of the savings can yield big rewards to your bottom line and it provides your employees a reason to look out for profit improvement. Ensure you clearly define the program by establishing minimums and maximums, and you communicate and show how saving impact company health/profit

•Inventory control. As important as supply price/value is the amount of inventory that is carried of supply items. This is important because your company’s cash is used to purchase and hold any excess inventories and it reduces cash available for other activities such as advertising, payroll, etc.

To save on inventory, you can leverage suppliers or distributors systems capabilities, use A, B, C, inventory classifications and supply variability, calculate your inventory carrying cost and set targets, and assign the same person that does the purchasing to manage inventory and hold them accountable.

•Strategic sourcing Use a robust and holistic purchasing process to ensure the lowest cost of ownership is achieved to ensure the best price/value combination is achieved and maintained. You can accomplish this by establishing a defined process and monitor compliance to the process, resourcing this process in accordance with its business value, investing in training and supply market intelligence, assigning supply categories responsibilities and setting reduction targets, and providing finance support

•Focus on the vital few costs. Limited resources should be applied based on the 80/20 rule to get the maximum value. To achieve this, look at the dollars you spend by category and pareto, apply your employees to conduct the strategic sourcing process according to the pareto, and develop an approach to harvest savings from the 20% of the none addressed spend.

•Hire a purchasing partner. A purchasing partner provides external experience, supply category sourcing best practices, and detailed supplier and pricing understanding to optimize your value, but don’t assume your partner’s interest is aligned with your companies. Be sure to conduct a background review and leverage partner to create value.

Immediate short-term actions

1. Take advantage of association discounts. Many professional associations have already negotiated discounts on things such as office supplies and etc.

2. When you negotiate pricing, provide as much information about your usage to determine the best price based on real numbers.

3. Don’t allow auto-renewal clauses in contracts.

4. Partner with your suppliers to see what you can do to help them lower their costs (e.g., change delivery schedule, order process, product specifications).

5. Don’t be afraid to renegotiate an agreement in the middle. If costs for the suppliers have dropped, they often will negotiate.

6. Take your top 10 expenses from last year, put them in a spreadsheet, and graph the monthly and unit cost. You will quickly see pricing issues.

7. Look at shipping habits. Does that package have to be there using the fastest delivery method?

Tony Lego can be contacted at 904-401-1235,, or through

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