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![]() Chapter 3: Buying PracticesVendor NegotiationsThere are numerous negotiating points to be resolved during purchase discussions with suppliers. The following are some of the areas that a typical retailer may consider: 1) Trade DiscountsSometimes referred to as volume discounts or booking discounts, these are reductions, or a series of reductions, from the total value of the purchase order. Certain requirements are sometimes tied to these discounts. These may include such things as minimum purchase volumes, or deadlines for order placement or delivery. More often, these trade discounts are tied to a specific payment schedule. For example, a certain level of discount may be applied only if the invoice is paid within usual terms, such as 30 or 60 days from invoice date. 2) Cash DiscountsSuppliers like to get their money as soon as possible, and often allow discounts for prompt payment. A common payment term of 2/10 net 30 means a 2% discount can be deducted if payment is made within 10 days of the invoice date. If no discount is taken, the full invoice balance is due within 30 days. Not taking advantage of this discount is equivalent to paying the supplier an interest rate of 2% over 20 days, which equals a 36% effective annual interest rate. 2% X 360 days per year
Remember, "cash is king" when it comes to getting the best price. Cash up front or cash on delivery (C.O.D.) are extra-powerful incentives for vendors to sharpen their pencils and offer even further discounts. 3) DatingThis is where the date for final payment of the invoice is determined. Having an extended period of time before payment is due will not affect the gross margin, but it does have cash flow and interest-saving consequences for the company. In return for this benefit, suppliers impose penalties for not making payments when due. A common byline on purchase contracts and invoices states that a 1.5% rate of interest per month will be charged on all overdue accounts. 4) Markdown AllowancesIf the retailer does not attain what he feels is an appropriate sell-through percentage on a particular item by a certain date, the supplier may agree to a cash rebate. This is considered compensation for lost margin, because markdowns are needed to clear remaining stock. Other variations of allowances are the guaranteed sale and the consignment agreement. In the guaranteed sale, the vendor agrees to take back any unsold merchandise. Under a consignment arrangement, the vendor retains ownership of goods and the retailer pays only for product sold. These allowances are difficult to negotiate, but not impossible. New suppliers trying to break into a market can sometimes be pushed into such arrangements. As well, mid-season purchases are sometimes treated in a more favourable light. 5) Co-op AdvertisingThis refers to a vendor's rebate program often available to retailers to help promote their product. Most suppliers have written guidelines as to the type of advertisements and the percentage of yearly purchases that are eligible for the co-op program. At the beginning of each season, suppliers usually develop a budget for their co-op program. Many times, this budget is not completely spent, so retailers with a strong promotional idea can negotiate additional funds above and beyond the standard rebate. Another common negotiating objective is to have the co-op rebate dropped or rolled into a larger volume discount, which is deducted off the face of each invoice. 6) Private Label ProgramsOccasionally, part of a retailer's total strategy is to develop an in-house private label program. This is where the retailer puts his own name on a product to identify it as being manufactured by, or exclusively for, his store. Sometimes, this option can be negotiated at no extra cost (assuming the supplier has the capability to label goods in such a manner). 7) Freight TermsAnother opportunity for the buyer to save money is in negotiating responsibility for freight costs and the point at which ownership transfers from supplier to retailer. F.O.B., or "free on board", indicates where the retailer takes ownership of the goods and becomes responsible for their shipment. If the F.O.B. destination is somewhere other than the retailer's address, it means that ownership is transferred at that location and the retailer is responsible for paying freight costs from that point forward. If there are problems with the shipment after that point, the onus is on the retailer to file a claim against the shipper."FOB destination", on the other hand, means that the vendor owns the goods until they reach the retailer's door and pays for all shipping costs. |
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Created: 2004-05-21 Updated: 2004-08-12 ![]() |
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