THE THIRD INSTALMENT OF “HARNESSING THE POWER”
Once a group is poised to deliver its prized purchasing volume to those vendors who are privileged to be selected, it should develop a format to solicit proposals from the vendors. The group should have its own vendor proposal form that it requires each vendor to complete and submit. In addition to the legal terms designed to benefit the group (such as a good indemnity provision), it could also contain spaces throughout the form for the vendor to enter many, it not all, of the concessions that vendors typically make in exchange for receiving approved status. Some of those concessions are detailed as follows:
Typical Vendor Incentives
(a) The most common incentive is a volume rebate program. Typically the vendor offers an ascending array of discounts contingent upon reaching certain volume levels of purchasing. For instance, a rebate program might be structured like this:
Purchase Volume Percentage Rebate
$1,000,000 1%
$2,000,000 2%
$3,000,000 3%
$4,000,000 4%
The vendors would typically prefer to pay these rebates annually, but the group should ask to be paid quarterly. The highest level rebates achieved should go back to dollar one so that if the group made $4,100,000 in purchases, the entire amount of purchases would receive the 4% rebate, as opposed to just the $100,000 of purchases over the $4,000,000 mark. I have seen some groups successfully persuade a vendor to guarantee the highest level of rebates during the first year or two as the members undertake the difficult process of changing over to the vendor’s line from the old vendors. Therefore, if the group only makes $1,500,000 of purchases during the first year, they would nevertheless receive the full 4% rebate on that amount in that example.
(b) Another common incentive is to give the group a special discount off of the normal selling price. Such discounts typically range anywhere from 1 to 10%. When used in combination with the volume rebate program, it obviously makes it more difficult for the group to hit its target goals, because they are paying less for the goods. It is not a bad problem to have, however.
(c) Vendors almost universally offer prompt payment discounts. With the group purchasing power behind the program, the vendor will be more inclined to extend out the length of time within which the payment to be made to qualify for the discount. Instead of having to make the payment by the 10th of the following month, it could be as late as 60 days following the date of the invoice. The amount of the discount might be increased, as well.
(d) Some vendors will pay a group headquarters allowance. This is paid to the group to help support its administrative cost in operating the group, thereby making the increased purchasing power available to the further benefit of the vendor. Such group discounts are usually based upon a percentage of volume, but are not contingent upon achieving any particular level of volume. Again, the vendor should be encouraged to pay this as frequently as possible, rather than waiting until the end of the year.
(e) Another incentive a vendor can offer is to extend the terms of payment, so that instead of requiring that the payment be made within 30 days, they could set the terms of equal payments of 30, 60 and 90. If a vendor is not willing to offer this on an ongoing basis, they might be willing to consider it for an opening order.
(f) One of the key impediments to the member getting onboard with a new vendor’s program is the problem of the existing inventory it has from the old vendor. Typically the new vendor will offer to purchase the old vendor’s inventory at cost (in the form of a credit) as part of its “change-over program.” Of course, this is not necessarily unique to group purchases, but it should definitely be a component of a group’s purchasing program.
(g) The group should secure a shipping performance guarantee from the vendor. Significantly reduced prices are of little value if the group is unable to purchase and receive the products when they are needed. To make the shipment guarantee effective, there should be some type of penalty associated with the failure to fulfill a certain percentage of orders placed by the members. Typically the shipping performance guarantee percentage is 95% or higher.
(h) The warranty program of the vendors should be spelled out. The group could consider negotiating a special penalty arrangement if members experience more than a small threshold percentage of returns of the vendor’s product.
(i) The group may also be able to negotiate a commitment from the vendor to buy back obsolescent products as the vendor comes out with newer ones.
(j) Vendors recognize that it is in the vendor’s best interest for the group to develop a marketing program to help the members to sell the products. Accordingly, vendors are often willing to help underwrite the costs of developing an effective marketing program for the group. Contributions could either be a flat amount or a percentage of the purchasing volume.
(k) Vendors typically offer a cooperative advertising arrangement whereby they will reimburse the members up to a certain percentage of any advertising costs mentioning the vendors’ goods. As part of the group deal, the vendor may offer to forgo proof of advertising and simply contribute a percentage of all advertising costs involving their goods.
(l) Vendors recognize the value of being able to attend the group’s meetings and are willing to pay for that privilege. Some groups require that they pay a flat amount or a small volume percentage each year for this privilege. Other groups invite them to sponsor a dinner or reception by paying for the costs associated with that event.
