Rupert Jackson of Brookvale, New South Wales asks:
I wrote a business plan a
couple of weeks ago ready for the new financial year. For safety, I
factored in a 5% buffer for possible supplier price increases. No sooner
has the financial year started than three key suppliers have jacked
their prices by as much as 17.5%. My margins are already evaporating and
we’re in week 1 of 2011-12. What should I do?
Kenelm Tonkin, Chairman, Tonkin Corporation
Firstly, congratulations! You are writing a business plan and
this places you in an elite group amidst Australia’s 1.2 million
However, there is nothing worse than having suppliers eat away at
your profits. Thankfully, you can counter this by exploiting
commoditisation, competition and tendering. If you operate in a
competitive market, and who doesn’t, your suppliers probably do too.
So, use market forces to your advantage. Then, and this might seem
contrarian, think like a government department announcing a tender. With
immediate effect, tell these three suppliers that you are putting your
account to the market and invite them to make a bid.
Let them know you are mustering at least four of their rivals
simultaneously. Dangle a 3 year exclusive contract in exchange for
capped prices and reliable fulfilment. Prepare a one-page letter and
single-sided tender form and send them to each bidder, insisting the
tender form is completed according to your format. Tell them failure to
follow your format will result in a failed bid. You don’t have time to
cut-through verbose pitches or decipher parochial pricing. Set a clear
deadline for submissions. Never reveal the identity of the competing
bidders or their bids. Avoid indulging prospective suppliers with
insider tips. Play a straight bat by telling them to put in their
absolute best offer. Never allow yourself to be compromised in such a
process by being friends with a supplier. You must be free to terminate
if their rates and guarantees are substandard.
Once the bids are in, make a clear-headed decision and communicate
it. The result will be cost control for 3 years in a range closer to a
17.5% reduction rather than 17.5% increase.