In Part I of our two part series on Working With Suppliers, we discussed how to prepare for a discussion with your supplier about pricing and other contractual terms. We included the caveat that if you are a new retailer, your ability to negotiate is very limited. But, as your credibility and volume grows, so does your ability to forge better deals with your supplier.
Manage the negotiation.
Once your research and initial analysis is complete, you are ready to talk with your supplier about pricing. Approach the discussion in an open, friendly way.
The sales rep you will be speaking with has some latitude in setting terms. The more he likes you, the more motivated he will be to make you a better deal.
Be sure to explain your company. Help the sales rep see the potential that you bring. Explain how your business captures a specific market and why you think you will grow. This is especially important for small businesses. On the surface, you represent less business for essentially the same amount of work. To the extent that your business presents an opportunity, you have established an advantage to offer the sales rep.
Keep an open mind during the discussion. Remember that you would like to buy products from this wholesaler. Do not get stuck so wrapped up in the 'deal making' that you allow a small sticking point to destroy the opportunity for an otherwise profitable arrangement.
Write down everything that is discussed. This practice will help you remember and think through any agreements you made or questions that came up and need to be answered. It is also useful to be able to compare your notes to the contract that you will sign to be sure that all agreements have been captured.
Here are a few simple things to think about when negotiating a wholesale supplier contract:
- Usually the first pricing you are offered is not the best pricing you may be able to achieve. It is a mistake not to ask for a better price. If it is not possible, you will hear that. If it is, you have done yourself a service.
- Talk about your purchasing in quarterly volumes rather than monthly; it does not change the facts but it gives a better picture of your business.
- Ask about incentives, promotions and other services. Many wholesalers have a host of programs available to help retailers.
- If pricing seems too low, ask why. It is a legitimate question. Pricing is not a mystery, it should be based on a definable set of costs and strategies. Be sure that low pricing reflects a legitimate issue such as overstock, promotion to gain market share, etc and not a substandard product or a product no one can sell (unless you have the secret to selling - then it is a great deal!).
Do remember that you will have more opportunities to negotiate terms over time. Do the best you can then let it go and settle into a productive relationship with your supplier.
Many wholesaler contracts consist of a set of terms and conditions printed on the initial account setup paperwork. Be sure to read the terms, understand what they mean and that they reflect the agreements you made with the sales rep.
Here are some of the standard clauses in a wholesaler agreement:
Shipping, Risk of Loss, Transfer of Title.
The wholesaler details the terms of shipment and delivery including the payment and responsibility terms. Wholesalers frequently use FOB shipping terms. FOB stands for 'Free On Board' or 'Freight On Board'. Whatever city is listed as the FOB is the destination to which the wholesaler pays the costs of shipping.
Typically, the FOB will be the same city where the supplier is located. You will be responsible for the cost to get the shipment from the wholesaler's warehouse to your destination. The shipping section may also include the suppliers right to ship orders in part and so on.
Inspection and Rejection.
This section tells you as the buyer under what circumstances you can reject merchandise including time frame for doing so. In most cases, suppliers will require that you contact them first to discuss the shipment. They will then assign you an RA (Return Authorization) or RMA (Return Merchandise Authorization) number.
Be sure you follow this procedure. The reason for the return may affect the method of return. If you do not follow the procedure, the contract will usually stipulate that the supplier has the right to charge you for the returned merchandise.
Pricing, Payment, Security Interest: Merchant.
This section will describe payment arrangements including allowable methods of payment, number of days to pay, discounts for early payment, surcharges for late payment and so on. Be sure these terms correspond to the agreement made.
Suppliers usually warranty that a product is as described and will replace or repair products if necessary. Once again, there are procedures to follow which will be outlined in this section.
Force majeure is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term 'act of God' (e.g. flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract.
Governing Law, Attorney Fees, Miscellaneous.
The wholesaler will name its local laws as the applicable laws for the contract and will usually state that attorneys fees will be paid by the non prevailing (losing) party. This section protects both parties but it is more difficult for the retailer if the wholesaler is located at a distance.
If the wholesaler is in another country, it can be extremely difficult to pursue a legal remedy. It is sometimes possible to request that international arbitration be substituted for resolution of any disputes. There are a number of international arbitration groups that will mediate disputes between businesses in different countries using international law. It is generally less expensive to use arbitration than to pursue a remedy in the courts.
Honor the agreement.
Once you have made an agreement, honor the terms and you will find that as your business grows and your credibility grows, your wholesale supplier will look for ways to retain you as a customer.