Growth in many businesses is about smart purchasing and profitable selling and that is so true in the building materials sector.
Of course, on the face of it, this should be relatively easy — were it not for the way that deals are struck with suppliers in this sector. Manufacturers of building materials supplies often use rebates as a mechanism for maintaining their stated price. It is very common to see a trading deal struck with a standard price and negotiated rebates and retrospective discounts which effectively lower the price in return for higher sales volumes.
Suppose your head office has negotiated a deal with a supplier for their bathroom suites:
- The first 1000 bathroom suites are at the standard price.
- Once you have purchased over 1000, a retrospective discount of 5% is earned.
- And when you have purchased over 1500 a further 2% discount is earned on all bathroom suites in the future.
If you’ve purchased 981 bathroom suites to date and a builder arrives asking for a further 20, you know that, if you need to, you can offer a slightly better price in order to win the sale as you are close to being able to claim that retrospective discount.
But what if you don’t actually know how many bathroom suites have been purchased across the group already?
What if calculating that takes too long?
Do you take a chance and make a lower offer to win the business, thereby risking your profitability? Or do you stick to the price and risk losing the sale?
These are the questions branch managers and sales people in building materials businesses face every day.
Distributors with revenues in excess of 100 million often find it difficult to keep a track on the sheer volume of products, types of deals and suppliers.
As a result, we typically see two major issues that impact profitability for companies in the building materials industry:
- Inaccuracies in calculating and claiming rebate income
- Lack of visibility of actual margin at the point of sale
It is easy to see that one stems from the other.
Let me explain:
Where tiered discounts are on offer, the sales person or branch manager needs to know exactly where they are in terms of overall volume in order to calculate an accurate current cost. We have seen many situations where this information simply isn’t available at the branch level, because consolidation of purchases against contract happens only at group level. Worse still, where that consolidation is performed in a spreadsheet, there is the high probability that it is not updated with every sale made — which means it can never be an accurate snapshot of actual purchases made.
So how do you rectify this situation?
Here are three things that will help to improve profitability at the point of sale:
- Create agreements that can be systemised — in other words deal structures that you can translate into a format against which you can record purchase history. This will set the scene for accurate records and up-to-date pricing information.
- Put controls in place so that sales / branch managers can see the cost and discount information that they need to see in order to put them in a position where they can judge the competing SKUs that drive the most profit.
- Create alerts to show when thresholds are about to be missed to give sales / branch managers the opportunity to sell more and make even more profit.
And four further things you can do to promote mutual growth for you and your suppliers:
- Introduce the ability to model deal scenarios based on actual / forecasted purchasing activity. This will enable you to negotiate deals with suppliers that fuel achievable growth for you both.
- Use online contract approvals to ensure there are no disagreements about the nature of the deal being struck.
- Integrate data sources (purchases made) against the contract, and automate claims processing to remove errors and disputes.
- Provide a supplier portal to review your performance against targets.
In other words, make it easy for suppliers to do business with you. Do that AND sell more means you’ll be putting yourself in the best possible negotiating position with your suppliers.
A rebate management system will enable you to do all of this and more. Find out how a rebate management system could work in your business by downloading our eBook: "Putting the merchant in the driving seat".