Vendor Negotiation: Tactics That Tame Your Cost of Goods Sold (Part 3)

August 15, 2022 |
Article | 5 min
| Business Insights

While businesses can’t do much to avoid interest rates and inflation on a macro level, this does not mean they have to shy away from goals and growth until the problem resolves itself. Strengthening your vendor/supplier relationships is a good way to mitigate these uncertain times. Read more here.

The Federal Reserve has made some historical moves this past year, hiking rates by three-quarters of a percentage point—the most significant increase since 1994—twice, in both June and July. Interest rates are the most potent weapon the Fed wields against inflation—inflation that reached record-setting highs between 2020 and 2022. With the margins getting tighter and tighter, how can business leaders keep their cost of goods sold within profitable margins?

Businesses can’t do much to avoid interest rates and inflation on a macro level. But that doesn’t mean they must shy away from goals and growth until the problem resolves itself. Now’s a more critical time than ever to strengthen your vendor relationships. How can you leverage those relationships to sustain growth and profits while taming your cost of goods sold?

Vendor and Supplier Negotiations

Professionals sitting around a table conducting a meeting

Your cost of goods sold leans heavily on your commercial partnerships, and strong supplier/business relationships are more than purely transactional. Strengthening vendor relationships could prove the final bolt you need to tighten to secure profits during these turbulent times. As the crucial first step in your business supply chain, vendor negotiation skills determine if your company can source high-quality materials for a profitable price.

To improve your vendor negotiation skills:

  • Speak Their Language: This includes the jargon, trends, and workflows. It may be a steep learning curve, but once you decode their business operations, the negotiation process gets easier.
  • Make Reasonable Counteroffers: Vendor negotiation is like buying a house—never accept the first offer. Still, limit your counteroffers to one or two when possible.
  • Know Their Competition: Don’t enter into vendor negotiations without knowing what their competitors charge. Let them know other suppliers have reached out to you and you’d like to discuss their offers.

Check Your Supplier Relationship Approach

Regarding vendor management, it helps to ask yourself one important question: “Am I acting from a reactive or strategic standpoint?” You must take a more strategic approach as money gets tighter with high-interest rates and rising inflation. Begin by correctly categorizing your vendors. Here’s a quick refresher:

Wholesalers and Distributors

Wholesalers and distributors are the bridge between manufacturers and customers. Distributors buy and sell products to wholesalers, often in mass quantities. Then wholesalers turn around and sell those products to customers for profit. But wholesalers aren’t necessarily bound to your product—they can as quickly sell competitor products next to yours. Meanwhile, distributors are contractually bound to your business.

Manufacturers and Vendors

Manufacturers make the product; vendors sell the product. Of course, these can also be the same entity, as a vendor is whomever you buy a product from.

Manufacturers turn raw materials into products and then sell those products up the supply chain. They may only be part of a whole (such as a manufacturer making car brake pads) or the final product (i.e., the finished vehicle).

Import Sources

Maintaining solid relationships with international suppliers is crucial for keeping your cost of goods sold under control. Your imports are anything that comes across the border as part of your supply chain. You must maintain regular lines of communication with your import sources and acknowledge cultural differences as a sign of respect to take positive steps towards maintaining your supplier/business relationships.

Now that you’ve categorized your vendors, you can strategize how to strengthen those relationships to benefit your businesses.

Adopt a Strategy That Works for Your Bottom Line

Woman writing notes down in an office

Every successful business says the same thing: their business relationships saw them through the trying times. It’s not a cliche but a standard business truth. Your relationships are one of your most valuable assets as a business owner. Adopting strategies to maintain and grow those relationships must be one of your core business goals.

Consider these five tips when forming your supplier relationship strategy.

  1. Start From a Place of Respect

    Remember that your suppliers have their own business to run, profits to maintain, and shareholders to keep happy. Treat them like business partners, and you’ll benefit from the relationship.

    Remember, your cost of goods sold might be their profit margin. Finding a middle ground where you both make money is imperative to maintaining strong business relationships. Maintain open lines of communication and ensure you agree to payment terms you can honor.

    When starting a new vendor relationship, you might only have one chance to make a good impression. Make sure you set realistic goals you can meet to prove yourself as a valuable business partner for years to come.

  2. It’s All About the Value

    The “value” of your vendor relationships is more than just monetary. Can they refer you to other suppliers or even customers? Do they offer outstanding support and customer service? Are their deliveries always correct and on time? These added benefits may be worth paying the higher price point.

    One way to track these metrics is by investing in vendor management software (VMS). At its core, VMS controls vendor information, relationship management, and risk exposure through your supply chain.

    VMS keeps all your vendor information in the palm of your hand, allowing you to make well-informed business decisions at a moment’s notice. Using various data points to visualize value, you can easily track your relationship with several suppliers over time.

  3. Dot All the I’s and Cross All the T’s

    2 men reviewing and discussing notes on a tablet

    Don’t leave anything up for interpretation. Create a documented process to guide your team members through supplier management and administration. As your company grows, be sure to periodically audit and refresh these playbooks.

    Use flowcharts, SOPs, policy documents, and contractual agreements to keep everything organized. Obviously, VMS makes this process easier.

    Keeping your documents organized is crucial to maintaining strong business/supplier relationships. Disorganization can lead to confusion, ultimately hurting your and your supplier’s bottom lines.

    Create a flowchart or deck to explain the process to your team to keep everything together. Or, ensure your VMS’s workflows are set up to work best for your business, and then follow them! Once everyone understands their duties, they can easily recognize when something goes wrong. Avoid unreasonable expectations, and ensure the agreement is fair for both sides. Taming your cost of goods sold exemplifies the value of employee soft skills and having the right people for the right job.

  4. Set Better Targets and Strategies With VARS

    Value-Added Resellers (VAR) can provide several advantages for your business. Their primary purpose is to enhance the value of third-party products through custom features and add-ons before reselling them to end users.

    VARs can help increase the potential for repeat business by adding value to your existing products. They have deep insight into the product and are often better poised to understand consumer challenges. They can also act as a point of contact for customer service regarding products or solutions.

  5. It’s All About Support

    Your business/vendor relationships won’t be perfect. One of you will drop the ball eventually, perhaps sowing a sense of distrust between both parties. Instead of slamming the door, find ways to right the wrongs to get your relationship back on track.

Understand and Acknowledge the Reason for Mistrust

Something caused one party to distrust the other. Being open and honest about your mistakes is the first step to correcting them. Meet with your suppliers to discuss what happened and the steps to take to ensure it never happens again.

Spend time with the supplier team to understand how they view the partnership and what they expect. You can also expect the same from their side if your vendors were the source of mistrust. The unwritten rules are just as important as the written ones.

Establish Effective Communication

Your business relationships aren’t about convincing or persuading; they’re about connecting. To better connect with your partners—especially when mending damaged relationships—always remember to:

  • Be mindful of your partner’s culture. They may come from a different background than you, involving different customs and expectations.
  • Listen more than you talk.
  • Respect your partner’s sensitivities. If they don’t like tardiness, ensure you’re always on time. If they don’t like personal questions, keep the conversation business-centered.
  • Be strategic, not reactive. Don’t throw away a positive long-term partnership over a single, point in time issue.

Work With Your Vendors to Weather Trying Times

Given the current financial climate, the future may be full of business challenges. Rising interest rates aim to curb record-high inflation—but we probably won’t see the impact overnight. Business leaders must prepare for rough times and strengthen vendor/supplier relationships.

There’s little room for error, as every dollar spent is more valuable than ever. Thankfully, business leaders can lean on a trusted financial partner like Citywide Banks, a division of HTLF Bank to navigate these times.

Get in touch with Citywide Banks, a division of HTLF Bank today to speak with a commercial banker. Together, you can determine how your cost of goods sold affects your bottom line and how improving your vendor relationships is the key to controlling it.

View the rest of the Series: Tactics to Tame the Cost of Goods Sold