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All organizations, particularly nonprofits, need to maximize their cash flow to fund their activities. When your organization purchases goods and services from suppliers, it needs a keen eye to keep your costs low without sacrificing service or quality. Focusing on managing your supplier relationships can help free up cash flow that is being left on the table.
Here are some ideas that will help you reduce your costs.
Not every customer gets the same pricing – It pays to price compare with other businesses and other suppliers. We often see similar types and sizes of organizations paying very different prices for the same thing. In fact, we have seen different divisions of the same organization paying different prices to different suppliers for the exact same item.
Strong arming suppliers can backfire – Being strategic in your dealings with suppliers will yield the highest quality and best long-term results. Work with your suppliers; ask them what you can do to reduce your costs. You should strive for a reasonably competitive price, not necessarily the lowest price. Remember, your suppliers do need to make a profit if they are going to be around to be a good partner with you.
Contracts can be good – Multiyear contracts can provide improved pricing and service in exchange for customer loyalty provided that they include specifics about future price increases and how they will be handled.
Contracts can be an issue – Read your contracts carefully and consider worst-case scenarios to be safe. Are there termination penalties, and if so, what are they? Look for “evergreen” or autorenewal clauses and monitor them carefully.
You’ll be happy with any discount – Suppliers know that you will be happy with a 5 percent to 10 percent discount or some new service -- even if you could be getting much more. Do your homework so you know where the market is and that the basis for the discount makes sense.
Suppliers often have ideas on how to reduce your costs – Ask them for advice and they will share ideas with you. Treat your suppliers as partners and not vendors and they will work with you to reduce your costs, for example, by identifying alternative products of similar quality with lower prices.
A long-term supplier relationship can be expensive – You tend to trust them and that can lead to price creep over time. You need to test the market periodically, not only for price but new services and technologies that could reduce your costs. You may also need to change the person who usually works with the supplier in order to increase competitive tension.
Are you hiding behind voicemail? – Listen to what alternative suppliers have to say, but be careful to compare carefully before switching. Prices alone can be deceptive.
Do your homework – The most effective buyers have a process in place to conduct periodic performance audits of their contractual terms with suppliers. Meet with your suppliers on a regularly scheduled basis to review the status of your relationship and opportunities for cost savings and have a policy on going back to the market on a regular basis, say every three to five years, depending on the cost category, with an RFP.
Consider association or group discounts carefully – Group buying discounts can be a great deal, especially for smaller organizations. But, if you are of any size, be sure to compare the pricing and services you could get by going direct to the suppliers versus through the group deal.
Paying attention to your procurement practices and treating your suppliers as partners, vs. vendors, can often lead to 20 percent plus savings thereby generating increased cash flow for your organization. It is time well spent.
Gross is managing director of Expense Reduction Analysts. Contact him at firstname.lastname@example.org.