A 5-STEP APPROACH TO BOOSTING YOUR BUYING POWER

When it comes to purchasing power, it pays to be big. Large organizations can often spend more to place high-volume orders that warrant price breaks. Small businesses typically have lower spend levels and a tendency to purchase goods in smaller quantities, making it harder to negotiate lower prices with suppliers.

But there are several tactics — from understanding current spend to keeping costs controlled — that small businesses can use to boost their buying power and sharpen their competitive edge.

PART 1

Understanding Your Current Spend

Before you can optimize your small business’s purchasing power, first understand how you’re spending your money today.

Start by mapping out your spending. Here’s how.

MAP OUT YOUR SPENDING PROFILE

Create a detailed account of your spending activity.

In addition to total spend, document spending by supplier on specific goods and services — this includes direct costs (those associated with product production) and indirect, operational costs. Compare this data with industry benchmarks.

PRO TIP

“A company’s indirect spend should be about 10 percent of their total spend. If it’s over 10 percent, you know this is an area to home in on and potentially trim down.” — Jaime Steele, senior director procurement operations & COE, Staples

IndirectSpend

TotalSpend

PART 2

Identifying Opportunities

Once you have an accurate view of how and where you’re spending, it’s time to look for consolidation opportunities. The goal? To make the most of your purchasing power with key suppliers.

Here’s how.

CLEARLY COMMUNICATE YOUR NEEDS TO SUPPLIERS

The more clearly and accurately you can communicate your business goals with suppliers, the faster you can identify where to consolidate your spend.

If you’re seeking a new supplier for a specific product or service, consider creating a detailed request for proposal (RFP).

The RFP Should Include:

• The desired quantity: Can you guarantee a volume minimum? Many larger suppliers won’t work below certain volumes.

• A timeline for fulfillment: Do you generally require a quick turnaround for shipments?

• The scope: For example, what growth objectives might impact this specific product or service?

• Intent to perform a thorough review of all RFP participants.

DETERMINE THE AMOUNT OF RISK YOU’RE WILLING TO TAKE

In some cases, small businesses can benefit from seeking out emerging suppliers hungry for business, or those that are looking to test a new product or service.

For suppliers first testing a market, small businesses can be attractive because they operate on a smaller scale. But that can bring some risk.

RISK

Identifying your risk tolerance is an important step. For example, would you consolidate more of your business with an emerging supplier that offers a lower price point but has not yet established a proven track record?

Knowing your comfort limits will help you best assess which supplier is the right fit for your company.

RISK TOLERANCE

PRO TIP

“A smaller organization may be able to provide a more controlled environment for suppliers looking to pilot or test new approaches and innovations. This is a benefit that could be used to negotiate a lower price point.” — Jaime Steele

PART 3

Negotiating a Lower Price Point

Once you have identified the suppliers that are ready for more business, smart negotiation tactics are critical to driving supply costs down. If your small business does not have a procurement team, look to larger organizations’ strategies for insight.

To negotiate a lower price point, look for an opportunity to aggregate your orders with fewer suppliers. You also might consider aiming for a long-term agreement with those suppliers to get leverage for a lower price.

Here’s how.

BUNDLE YOUR PURCHASES

Can just one supplier satisfy multiple needs? If so, consider consolidating your purchases.

By purchasing a variety of goods or services — as opposed to just one — from a single supplier, you may be able to increase your total spend with that supplier and negotiate a lower price.

AIM FOR A LONG-TERM PARTNERSHIP

Suppliers appreciate stability and the ability to forecast revenue from trusted customers.

This is why you may be able to secure a lower price in exchange for a long-term agreement.

PRO TIP

“If you’re dealing with more static markets and you don’t have a lot of dedicated resources, consider at least a three-year term. If there’s more volatility, include an escalator clause to account for changes in market conditions.”— Jaime Steele

3YEARS

PART 4

Keeping Costs Controlled

Negotiating lower price points for goods is only half the battle. For many small businesses, high shipping or freight costs can quickly add up.

If you work with a small parcel or LTL freight carrier, revisit those agreements at least once a year. Here are some tips to keep shipping costs controlled.

COMMUNICATE FREQUENTLY

While bundling can help to reduce shipping costs, make sure you’re having strategic conversations about pricing with carriers.

For example, some small parcel carriers offer volume-based discounts. As your business evolves, you may miss out on better rates if you aren’t checking in with your shipping representative on any new savings opportunities.

PRO TIP

“When negotiating, remember the areas in which you can later be nickel and dimed. For example, make sure you’re considering things like sub-tier cost drivers, freight, fluctuating raw materials and accessorial charges, to name a few.”— Jaime Steele

PART 5

Maintaining a Positive Relationship with Suppliers

Treat ongoing communication and interaction with suppliers as opportunities to forge a meaningful partnership.

Here’s how:

TIPS FOR MAXIMIZING YOUR PARTNERSHIP

• Seek mutually beneficial agreements

• Submit prompt payments

• Support supplier growth

The stronger your relationship with your supplier, the greater the likelihood you’ll be able to seek more favorable — and flexible — terms.

TAKEAWAY

From everyday office supplies to key commodities, the more strategic your purchasing is, the more you can close the gap between your small business and larger organizations. To do so:

• Start by getting a concrete understanding of your spend, your needs and the risks you’re willing to take. That way, you can prepare yourself for a productive conversation with the right suppliers.

• Once you’ve secured the most cost-effective agreement through strategic negotiations, you can shift your focus to keeping costs controlled — and supplier relationships strong.

With a smart strategy in place, you can ensure your small business is buying like the big guys.

For more ideas and inspiration around growing your small business visit the Staples Small Business Hub.