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Use Sourcing to Improve Margins
There are two basic ways to improve margins, raise your prices or lower your costs. We will focus on lowering costs in this newsletter. For most distributors, purchased material accounts for the majority of the cost of goods sold. Here are some suggested actions that you can take to lower your costs in 2013:
- Review your sourcing strategy - Your industry and your suppliers' industry have gone through a very difficult period of time. As you look ahead to 2013, for each commodity or product group that you purchase, what changes in the number and mix of suppliers need to be planned to ensure lowest total cost and adequate supplier capacity?
- Lock in low prices - You may be buying a product line which has many potential suppliers. If pricing has dropped during 2012, now may be a great time to lock in that price for 1, 2, or more years. When you negotiate new agreements, review the contract language carefully. This may be a good time to adjust the terms to be more favorable to your company.
- Review your blanket order and contract terms - Many distributors don't time their negotiations based on the market, instead they focus on the calendar. For example, if some of your products are seasonal, buying those during the peak will likely cost you more money. If some product line costs are tied to a published market price, do you have the right type of escalation/de-escalation wording in your purchase orders?
- Re-build key supplier relationships - Many distributors have just a few key suppliers. It has been a tough couple of years. Acknowledge the efforts of the suppliers who helped you survive the worst of the downturn. Set up meetings with the management of your key suppliers to discuss plans for growth, reducing total cost, lead times, etc.
- Risk Management - Some suppliers may still be at risk due to the recession. Purchasing and Finance should be working together to monitor suppliers where there have been disruptions in production or delivery. The cause may be cash constraints, or worse. Be proactive in managing your supplier base.
- Outsourcing/Insourcing - The total cost equation has probably changed for many products that have been outsourced during the years leading up to the recession. Now is the time to evaluate suppliers here in the U.S. or possibly Latin America that may be competitive with and offer shorter lead times than suppliers in Asia.
- Examine your energy costs - Focus on your warehouse and transportation energy related costs. Energy costs will continue to fluctuate. Oil is a global commodity. While you cannot control your fuel or heating costs that may be impacted by oil prices, you can question the rationale for announced price increases. Transportation rates are negotiable and you should be resisting any surcharges. Do your costs reflect the fact that natural gas rates are very low compared to recent years?
We have worked with many distributors on these sourcing concepts resulting in improved margins. Can we help you reduce your costs in 2013? Contact Herb Shields, your Sourcing Advisor.