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When negotiating payment terms with suppliers, manufacturers must pay special attention to avoiding risk. A balanced supply contract ensures a mutually beneficial agreement between both parties, but if the language concerning payment isn’t exact, it could result in one side losing out, possibly even irreparable damage to the working relationship.
How can manufacturers properly mitigate risk when discussing payment terms with their suppliers?
1. Put mechanisms in place for delinquent or unmet deliveries
Obviously, when mapping out payment terms, suppliers will have a few conditions in place to handle late payments. In the same respect, manufacturers should make sure their interests are equally represented by chiseling out their own conditions for deliverables.
Think of it like a typical supplier escalation clause. Should the cost of materials increase, a supplier may invoke an escalation clause to raise the price of services rendered. Fair enough, but what if the supplier, for whatever reason, cannot meet the needs of the manufacturer?
Insufficient procurement may end up costing manufacturers significantly as they scramble to complete deficient work orders and pay top dollar for last-minute service. Manufacturers should actively address “worst case scenarios” with their partners, like who they’ll turn to if suppliers can’t fulfill their supply requirements, and how much the original supplier can expect to supplement that emergency investment.
“Flexible payment terms may even be preferable to lower prices.”
2. Don’t accept boilerplate payment windows
Suppliers may offer standard payment terms, or at least terms “standard” for their other contracted partners. Adjusting and extending the length of payment terms presents manufacturers with perhaps one of the greatest “parachutes” against risk: immediate cash flow increases.
According to Entrepreneur, flexible payment terms may even be preferable to lower prices, depending on the manufacturer’s situation.
Manufacturers might get less pushback from suppliers when they bring detailed reasons as to why certain payment windows adversely impact their operations. In fact, manufacturers could calculate cash flow estimates according to different payment windows as the groundwork for their arguments regarding extensions.
3. Discuss supplier pain points as well as your own
When two organizations partner, they effectively assume each other’s risks by way of mutual dependence. A degree of transparency between suppliers and manufacturers, therefore, could mitigate or eliminate problem areas for both parties. After all, with an extra set of eyes and hands – so to speak – both partners could find ways to restructure payment terms that attack these risks head on.
Beyond timing, there are two important factors worth highlighting concerning alternative frameworks for payment terms that partners could take advantage of. Pre-payment, for one, could be a show of good faith for suppliers unwilling to budge on lengthening invoice durations. Additionally, how manufacturers remunerate suppliers could be a bargaining chip as well. If suppliers have switched to an e-payment system but the manufacturer sticks with paying in check, manufacturers could agree to modernize if suppliers are willing to expand payment windows.
The Freight Debate: How should businesses approach freight spend management to achieve the greatest results?
When businesses suffer from high operational costs, they don’t start by making indiscriminate cuts to balance their budgets. Instead, they look for intelligent ways to reduce wasteful expenses without compromising productivity.
In an effort to rein in spending, business leaders may turn toward freight optimization. After all, trends like low diesel costs push many companies to invest more in ground transportation over air travel. With ground freight worth more to operations, it would be wise to ensure nothing about logistics is left to chance. How should businesses approach freight spend management to achieve the greatest results?
Know your organization’s ‘lanes’ inside and out
Manufacturers, in particular, always have a complex, multifaceted network of materials and finished goods coming and going. That said, these businesses open themselves up to potential failure if they do not complement this “big picture” view with a more nuanced understanding of each dynamic logistics component.
Gathering information on all supply lanes is a great place to start, but this data collection isn’t enough. What businesses find therein must feed into models for change. For example, if a company has experienced significant growth in its time contracted to a legacy freight handler, perhaps it’s time to negotiate for better rates or services, seeing as though the company has provided the logistics provider with more business.
Not all pieces of the logistics puzzle are the same
Picking and choosing where to hone logistics spend may not be an exact science, but it certainly isn’t something that can be done without a little research into the largest cost areas. According to the Federal Highway Administration, average overall logistics costs break down into three major expenses: transportation (63%), inventory-carrying costs (33%), and logistics administration (4%).
“Nearly 80% of transportation logistics spend goes toward trucking freight.”
Right from the start, it’s plain to see where the weightiest expenses lie. Within transportation costs exclusively, nearly 80% of transportation logistics spend goes toward trucking freight. Discovering methods to optimize shipping for grand transportation rates – as well as the rate at which materials and products get shipped – therefore deliver the highest potential for return on investment.
Similarly, when looking exclusively at inventory-carrying costs, two-thirds of costs stem from issues like taxes, insurance and general materials depreciation. Programs aimed at reducing shrinkage may help mitigate spending, but ultimately manufacturers may want to move away from traditional inventory models to truly rid themselves of seemingly unavoidable costs associated with a full warehouse.
Sticker price isn’t the only thing worth bargaining for
The Council of Supply Chain Management Professionals reported nearly half of all logistics providers plan to see “strong revenue growth” in 2016. However, the survey also showed freight handlers expect to invest in equipment and services that will simultaneously optimize costs for their customers. In fact, more than 40% anticipate rate negotiation with their clients, as well as increased attention to things like freight consolidation in trucks (40%) and process automation (34%).
What does this mean for the businesses working with these providers? Simply put: Ask and ye shall – most likely – receive. If business leaders bring a well-conceived plan to the negotiation table that benefits their operations and helps freight handlers advance their service portfolios, the chances of both sides walking away with an agreement are considerably good.
What best practices should businesses adhere to when involved in supplier negotiations?
Direct negotiation ought to take all the guesswork out of supplier agreements. However, when done without careful consideration, supplier negotiations can do more harm than good, injecting ambiguity into agreements rather than clearing it out – or worse, forcing both parties to walk away empty-handed. What best practices should businesses adhere to when negotiating contracts with suppliers?
1. Consider a commercial “mediator”
Two heads may be better than one, but bringing in a third party during supplier negotiations can help both sides of the table see each other’s arguments with greater clarity and appreciation.
Instead of quibbling over bill of materials and other static costs, effective mediators encourage an open discussion between both the supplier and the client about their respective needs and operational limitations, so either party doesn’t waste time or patience holding their cards close to the chest, so to speak.
Trained in the art of conflict resolution, arbitration could help supplier negotiations move away from price wars and get straight to the heart of the matter: setting the groundwork for a fruitful, long-lasting relationship that benefits everyone involved.
2. Know your supplier
It is unwise for businesses to head to the negotiating table without a full image of the supplier they seek to partner with. Not only could skipping out on this valuable “homework” mean signing a contract with suppliers that can’t offer everything a client expects, but it gives clients little to bargain with during supplier negotiations.
“Businesses with the best supplier relationships often receive perks”
After all, according to information released in the 2015 Working Relations Index, businesses with the highest supplier relations ratings see noticeable increases to market competitiveness and operating profit. That’s because clients with the best supplier relationships often receive perks like early peeks at new supplier offerings, more responsive service, and lower prices.
3. Define all terms as completely as possible
For both parties to land on a client-supplier agreement that satisfies everybody’s demands, contract must clearly and wholly specify all terms so as to foster a mutual understanding.
When suppliers and clients enter into a contract, they’ve essentially made their companies vulnerable to each other’s risks for the possibility of success. If a supplier receives no business, it cannot keep its doors open. If a client doesn’t receive raw materials or parts from a supplier, it too could severely damage operations. That said, spelling out terms plainly and precisely protects everyone’s interests, especially if both parties use active metrics to make agreements less susceptible to interpretation, according to the Acquisition Institute.
For example, should a client’s demand for materials grow beyond a supplier’s capabilities, the transitory period spent finding a supplementary supplier could cost the client significantly. However, if the client makes the supplier liable at the offset for any deficiencies in service, businesses effectively avoid cost-intensive issues that may occur. Moreover, this also gives suppliers glimpses into where their partners are headed and how suppliers’ own operations will need to adjust to keep them on as clients.