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Negotiating with Vendors

D

DDH

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I have 3 stores and the vendors I use and percentage of purchases: Reinhart (60%), US Foods (30%) and IFH (10%). I have each vendor email me a weekly price list for my store managers to use for price comparisons. I don’t think they use them as effectively as is possible. I do receive a 2% rebate from Reinhart and a 1.5% from US Foods.

I’m looking at ways to reduce my food cost which runs around 34%. I’d like input from anyone who deals with vendors on a cost plus percentage agreement. What is a fair markup across the board for the vendor? Would I have to increase my purchases from my primary vendor to enter such an agreement with them? How often do you ask to see what their cost are from their suppliers? I’m just looking for some feedback before I approach them.

Is this a possible avenue I might want to pursue? I like the idea of not having to “cherry pick” purchases based on weekly price fluctuations. We’re a fairly high volume purchaser who has been in business for 10 years, so I do have purchasing power. Thanks in advance.
 
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There is no way to do this. There are several moving parts in the price game and your vendor only controls one of them. In other words, fixed percentage on top of what?

To get better prices you need to go to the broker and sometimes the original supplier and get them to pass through a price break to your vendor. It is worth doing on things like meats or tomato products. For example. I can often go to the food shows and get $2-$3 per case on meats.

Mostly you have to watch your vendors like a hawk.

One clue: if you are getting rebates, it means they are charging too much.

Beyond that, portion control, waste and theft are things you need to get control of.
 
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Good point by Bodegahwy…“rebates” are the same as income tax “refunds”…it’s your darn money in the first place and you simply over-paid.

We also use 3 distributors and will never cut that past at least 2 in order to keep each of them honest. I sit down and have near zero qualms of sharing my invoices with either of them as long as I’m sure I’m getting a good price already what’s it hurt to try to push one of them lower?
 
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We use two suppliers for most of our food and maintain a spreadsheet updated every week with prices. We buy the lower price. An onion is an onion. If yours are less expensive, I buy from you.

I like our reps but I do not trust the companies they work for at all. The reality is that the reps have little control over your pricing. I likewise have no qualms about price shopping… but save your ammo for important items. i.e., do not worry about what you pay for sun-dried tomatoes (just shop it and buy the lower price) while you hammer on the price of cheese, flour, pepperoni going to brokers, vendors, managers etc.
 
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Obviously the more you buy from 1 person the best price you get…

We have 1 supplier for food and 1 for Paper… We have backup suppliers as well that we use for will call when needed.

Roma is my main supplier, Twice a week delivery…15 case Minimum, I can break cases and pay the same price as if I was buying a full case…

The twice a week delivery allows me to be tight on my inventory. What I order on monday I get tuesday and what I order on thursday I get friday… I know friday im getting another order tuesday. So I can run it tighter then once a week ordering.

In the long run does it save me money? I think so… Im not forcing stuff into my walkin thats gonna sit there past my next delivery day.

But, as the cost of everything goes up, you see food go up… try not to go on the cheap on some items… continue to get the good stuff… You will notice the difference in your food.
 
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Thanks for everyone’s feedback. The reason I suggested entering an agreement based on cost-plus was from an article I saw in Pizza Today by Big Dave. He talked about cost-plus pricing and your ability to occasionally audit what your purveyors are paying to confirm that your agreement is being honored. My understanding is that while their cost are made up of several components, when all is said and done, they still tack on a certain percentage markup as their profit. Cut a point or two off this markup and you’ve saved yourself a bunch of money. A lot easier then haggling between several vendors item by item. I assumed this was doable since it came from Big Dave.
 
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Cost plus pricing is out there, but it is not a panacea since there are other moving parts.

“ability to occasionally audit what your purveyors are paying to confirm that your agreement is being honored”

Yes… but what they are paying is negotiable. i.e. there is significant money to be saved by reaching the brokers and suppliers. With a fixed percentage markup your purveyor is motivated to pay more!

In the end, there is no magic bullet that substitutes keeping a very close eye on costs and having more than one purveyor and shopping prices.
 
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I was directly involved in the negotiation of one of these contracts and let me tell you the waters are muddy. That said If you do have the volume and are able to enter into a prime vendor agreement you MUST know the following.

Markup IS NOT THE SAME as Margin. Although this seems pretty cut and dry, check out this as an example.

Option 1: Vendor proposes a cost plus % markup.
Eg. Case of cheese costs $50, they charge a 15% markup (50x.15 = 7.5) you pay = $57.50

Option 2: Vendor proposes selling you product based on margin
Eg. Case of cheese costs $50, they sell it to you on a 15% margin (50/.85), you pay = 58.82

Not understanding the above could cost you 2-3 ish

Also if you do decide to negotiate on a markup % or margin, don’t get caught up in only looking at the markup % or margin %, what is most important is what is the cost on your invoice. It is quite likely that you pay a lower markup or margin on a product but that it actually costs you more than a higher markup from a second distributor that has more volumes which allows them to purchase that product at a lower cost, etc.

Josh Davis
Mail Shark
http://www.themailshark.com
 
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The concept of buying from the cheapest source after openly make them fight for your low profit business is alien to me. I actually find it offensive. Would you want to enter into a business deal with somebody on that basis?
Cheapest is never best in the long run. Think that guy in the stupid pizza outfit jumping up and down on side of road advertising the $5 medium pizza. Cheap. Far from best.
Seriously doubt that your rep would run to the warehouse and deliver that case of mushrooms in his car you unexpectedly needed? Mine will. On a Sunday. Why? Because I pay too much?
No. Because I pay a fair price, buy 95% of what I buy from him, negotiated with the territory manager and agreed to give them the vast majority of my business. I have a business relationship with him/them based on a combination of price and service.
Did I “shop” before committing? Yes. Did I tell the competitors what the other guy quoted? Absolutely not. Could I save a couple dollars on some items? Yes. Would it take hours of checking costs? Yes. Not interested. Way prefer to have my management spend that time in a more productive fashion overseeing production, customer call backs, etc etc…
We knowingly use high cost/quality ingredients yet maintain a total food cost ( including paper ) of 32%.
I suppose it comes down to different ways of doing business. I will continue to do business as I want to be treated myself. Allow me a fair profit. Don’t sell me out for a couple of dollars. Expect service in return.Have some integrity.

Rant over…
 
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The pizza from shop A and from shop B are not the same a say Specific Brand Soda from vendor X as opposed to vendor Y. It is the same exact brand soda that you are purchasing. So if it is an off the shelf part, specific brand item, or specific brand ingredient the vendor must provide a service to justify higher pricing. If you get the same service from either vendor then why not go with the lower price for brand XY or Z?
 
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boatnut,

There is no parallel to the “jumping up and down on side of road”. The food vendors are, in fact, in most cases selling the same item. Onions are onions. When the item is identical, cheaper IS better. There are many ways to do business. I assure you that the food vendors do things in exactly this way themselves with the suppliers they buy from and are not offended by it. Buying food is a commodity business and this is how it is done. There is nothing wrong or offensive about it. Does it take some time? Sure. It takes about a half hour per week if you check prices every week. If one vendor is five cents a pound cheaper on cheese that alone is worth $50-$100 per week to us depending on the season.

The reps, area managers and dept heads are under the gun to increase margins. How do they do that? By charging you more. Different suppliers have different advantages in sourcing too. Why is US Food nearly always better on some items and Sysco on others? Because they used leverage to get a better cost. When one does that and passes that savings to me I buy it from them. Brokers add a layer of cost between the source and the vendor you buy from. They can be approached for discounts as well (mostly at food shows).

Service is great, but I do not need my food rep to drive across town to get me a case of mushrooms and would not trade the thousands of dollars I save by price shopping to get them to do so. (BTW, the warehouse is 170 miles away in any case, so no rep is driving to Denver no matter how much I overpay) Before I would ask my rep to take time out of his day off to get me a case of mushrooms, I send a driver to Safeway and get them. That would cost me about $10 extra food cost, solve the problem in 15 minutes… and it was my problem to begin with.

I am sure your food reps are great guys. Mine are too. We see them each once a week. Heck I can send you pictures of our US Food Rep on our employee raft trips. Both he and the area manger for Sysco shop in our men’s store. Most restaurants in town have more than one supplier and we are no different. They know the deal.
 
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I appreciate what you are saying. Just not the way I do business. Understood it is the norm. Just don’t agree with it myself. I agree we could probably save some money following that route. Choose to have my managers spend that time on customer follow up, quality control and other areas that produce a like savings.
We use Sysco. Use to use GFS and a local independent. Sysco’s bus development mngr approached me about a year ago. I initially told him not interested. He pushed and pushed to the point I agreed to let him quote me under one condition… If I switched and subsequently found an item had increased in price (apart from the produce ) without being notified prior to, game over.
We are not a huge account by any means. Not small, but not huge. We will spend approx $250,000 this year with Sysco.
I’m still with them. Wings have increased. Flour went up and then back down. I have been notified of a number of price drops. They have suggested switching some products to reduce costs. ( Pre-sliced mushrooms for one. $15 a case vs $19 and slice ourselves.) They have honoured the deal.
I am approached about every second month by my previous, and some new, suppliers. I tell them I am happy. They insist on quoting anyhow. I sometimes check the quotes… Sure some low volume items are cheaper. Nobody can come close to what I pay for cheese or meat. Sometimes they match flour. Maybe, maybe I would save $50-$100 a month buying the cheaper items from them vs Sysco. I would also remove my management from the production line and I’m convinced a mistake on build or something would occur. More importantly, I would violate the agreement I have.
Guess I’m just not the norm… We also pay our staff far above minimum wage. We never coupon. Refuse to do lunch pizzas for schools. etc etc…
 
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