Wednesday, 22 May 2013

When the Buyer says your supplier margin is too big....

With retailers struggling on 4% Net Margin, whilst many suppliers are in trouble on anything less than 9%, the buyer may claim that you are taking advantage.

S:   Glad to see you have looked up our latest published accounts. I obviously keep up to speed on your profitability, so now we can jointly explore ways of optimising your net margin, without driving me out of business

B:   Well, you are always banging on about lack of money, so I thought I’d call your bluff: Here you are making 9% and we only have 4%

S:   On the surface, it looks bad, and it had me worried first time around. However, deep down we are each trying to balance reward and risk, it’s just that we work in two  different business models..if you take more risk, you need more reward

B:   How come? …and I haven’t got time for a lecture on finance

S:   No way. For me to understand it, it has to be simple: As a manufacturer, we have to research and invest in product ideas up front, a big risk we are prepared to take, provided we can convince our shareholders that the rewards will be adequate. We also have lots of money tied up in state-of-art plant and equipment, whilst you can operate from leased premises, if necessary…

B:   We all take risks in business

S:   Agreed, but your risk is limited to taking in two weeks stock of our new product, and if our advertising and trade funding is not enough to move it, you can sell it at cost and de-list it. No harm done, except to our bottom line…

B:   Yes, but I could have given that space to something more successful

S:   ….and sacrificed an opportunity to experiment with a bit of innovation that might have given you a competitive edge. But let me explain more about why we need our margin to optimise your profitability…

B:   Ok, I buy the need for innovation, but I need to improve my bottom line

S    Fine, we need to manufacture big runs and hold at least 6 weeks buffer-stock of finished goods to cope with fluctuating demand. This allows you to operate on two weeks average stock. In fact, with our daily delivery of main SKUs, your average stock on our lines comes down to 2.5 days, reducing your risk even further.

B:   More like 3 days, but I take your point..

S:   Great, so when it comes to optimising your profit, the closer we work together, the more we can each make…you make more sales, we waste less money..

B:   How come?

S:   Think about it. Our biggest investment is in advertising (5%) and trade promotion (20%). See, you already get the lion’s share! So if we can coordinate our above-the-line campaigns with bespoke instore activity geared to your traffic flow, we get more for our buck, and the more you optimise shopper demand. Provided you manage potential wastage, the increments go straight to your bottom line.

Buyer:   So what do you need from me?

SuperNAM:   Now you are talking! If you give me guaranteed forecasts, we can optimise factory output. If you can pay a bit faster, we don’t have to fund so much free credit, but the real payoff can be via improved compliance instore…

Adventures of SuperNAM (19)

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