Finance & Accounting

Ensure Your Vendors Are Giving You Fair Deals

Ensure Your Vendors Are Giving You Fair Deals

The way you deal with vendors has a big impact on the kinds of pricing they offer you. Find out how to obtain and then maintain the best possible deals from your vendors.

By Tara Remiasz

When a linen company continued to overcharge Chicago-based P.J. Clarke’s Restaurant, former Director of Operations Mark O’Sullivan wasted no time taking the issue to the vendor’s president. “I probably put 10 voicemails in his voice mailbox,” O’Sullivan says. He left a message every few hours until he had the president on the line. O’Sullivan’s tactic might seem aggressive, but the results of his persistence speak for themselves: The linen company gave P.J. Clarke’s a nearly $10,000 credit.

For O’ Sullivan, constant monitoring of vendor pricing is a must. “You know they have a pricing for people who don’t have questions and then they have a certain pricing for people who do. If you don’t ask questions or you don’t look into things, you’ll be getting that higher price,” he says.

Smaller businesses tend to get stuck with higher pricing unless or until they negotiate better deals. Ensure that your company falls into the competitive pricing category with the following strategies.

Negotiate Like a Pro
When seeking a vendor, send out a request for pricing quotes to as many businesses as possible. Once you’ve narrowed your selection down to a few contenders, pit vendors’ price quotes against each other. “I’ll tell them right off the bat ‘Give me your best pricing,’” O’Sullivan says. “After that you still realize that they’re not going to give you the best pricing that they can…[So] you say ‘This guy is a couple of dollars below you on this item and a couple of dollars below you on this item,’” O’Sullivan says. “If you leave it vague, they’ll come down across the board.”

But, be wary not to negotiate so hard that your vendors aren’t going to make a reasonable profit, says Marc Freeman, president of Marc Freeman & Associates in Fairfield, Iowa. Always keep in mind how your business operations and employee motivation would be impacted if you were not making a fair profit from your clients.

Select the Right Vendor
Once you’ve determined which company you’d like to use, it’s important to request references and actually call those references. Speaking with references gives you the opportunity to gauge the kind of service you can expect potential vendors to provide. “You know, pricing is one thing, but quality and reliability are important things as well,” O’Sullivan says.

Understand the Interworkings of Vendors’ Operations
“Many times the reasons why stores don’t get the best deal is because they don’t really understand their vendors,” Freeman says. Sometimes businesses assume their vendors are being stubborn or taking advantage of a situation without having a deeper understanding of how his vendors’ operations work. But, once a business owner becomes knowledgeable about his vendors’ operations, it becomes easier to work out some kind of compromise that will satisfy both parties.

Although it’s good to ask questions as they arise, Freeman suggests asking the following questions from the outset: What is your shipping timeline? What is your return policy? How do you handle defectives? If you pay early/on time, is there a discount?

Put It on Paper
When you decide to go with a particular vendor, be sure to put the agreement in writing. “If you want to make a good deal, don’t verbally make a deal, don’t do any handshakes,” O’Sullivan says. Establishing a paper trail is one of the best forms of insurance that you can provide for your business. “There’s so many times where I’ve either faxed or e-mailed a copy of something saying ‘Hey, this is the price we agreed to, so make it right.’ But without that [signed agreement] you don’t have a leg to stand on,” he says.

Monitor Pricing
All the work that it requires to negotiate a good deal will mean little if you don’t monitor your vendors’ prices. P.J. Clarke’s has processes in place to compare the agreed-upon prices with the actual prices. The person who initially accepts a delivery will check the price against the purchase order. P.J. Clarke’s also has a second person who checks all invoices to make sure they reflect the correct pricing.

Dealing with Incorrect Pricing
If the person who accepts a delivery notices the pricing is off, there are two ways to handle the situation. If the vendor has proven itself as reliable and trustworthy, P.J. Clarke’s will accept the delivery and deal with the pricing issue later. But, if the vendor’s integrity is questionable, the restaurant will refuse the order until the pricing issue is corrected.

When incorrect pricing is discovered, O’Sullivan says he prefers to give vendors the benefit of the doubt. He broaches the topic by saying “I’m sure you weren’t aware of it, but …,” instead of using an accusatory tone. However, if the same pricing mistake happens a few times, O’Sullivan will take action by calling the president of the company.

Pricing Long Term
O’Sullivan encourages business owners to compare vendor pricing every chance they get. At the very least, do a yearly analysis, or even better, conduct a quarterly analysis. “In the long run it can really help your bottom line,” O’Sullivan says.