Not Receiving Your Ideal Price From Suppliers? Check Your Business Terms and Conditions

The relationships between businesses and their suppliers (also referred to as vendors) is a complicated one, and one which we’ve discussed before. While in the past, we’ve explored how factors such as market changes, environmental issues, and economic waves can affect how much you’re paying your suppliers (and how willing your suppliers are to trust you as a repeat, worthy investment), there’s one we’ve yet to dive into.

Business terms and conditions.

Contract details might seem dull, but they often have a big impact on the prices you get from vendors. Understanding these terms is key to improving your negotiations and finding better deals. Here’s an overview of the essential elements of your contract and why they matter.

Payment Terms

We’ve all been in a position where we’re waiting on a payment, staring at our management costs and hoping it will come through. Suppliers are no different, and—oftentimes, your contract’s payment terms will affect how much you’re paying overall.

Let’s say that your business contract emphasizes payment terms of Net 30 (i.e., you’ve agreed to pay your supplier within 30 days of receipt of the product). You might get a better price than an organization that’s negotiated terms of Net 45, Net 60 or Net 90 because your promise to pay quickly and promptly puts less strain on your supplier’s own supply chain. This is often called and measured in the “Cash to Cash cycle”. Not only that, but it can also project a reputation for reliability of on-time payment. If your supplier feels like they’ll have to eat some of the cost on a new shipment because you’ve taken longer to pay, your price will probably rise by a few percent.

In contrast, some suppliers will offer options in which your overall payment will decrease if you opt to pay more efficiently. You can also see this trade off between terms and pricing when a supplier offers terms of 2% net 15 or similar, a 2% discount if you pay within 15 days.

INCO Terms

INCO terms (standing for “International Commercial”) refer—at their most basic level—to the transit of goods from a supplier to their customer. If your contract puts the burden of shipping on the supplier, your prices will likely be higher than if you transported them yourself. 

Imagine it this way: if your friend asks you to help them move, and offers to pay you in pizza and beer, that might seem like a pretty good deal. If your friend asks you to help them move and then lets you know that you are responsible for renting the UHaul, driving it, and returning it once the move is made, you might consider asking for at least some extra garlic bread.

In the majority of cases, the supplier will take on the burden of transit, but understanding what that transit entails will help you understand your ultimate price. In some cases, a business might opt to find a more local supplier if the transit fees from an international one—which might encompass a plane or a barge—seem too steep.

Being able to spot these potentially negotiable factors in your terms and conditions will help you make the best choice for you. Remember – freight and logistics are not free. Someone is paying for the service and cost. Understanding all the components of INCOTERM costs is key to understanding what is making up your cost.

Vendor-Managed Inventory (VMI)

Vendor-Managed Inventory (VMI) can significantly influence your suppliers’ pricing model—though this is often more applicable to larger businesses that can keep greater inventory on site, and allow suppliers to monitor that inventory more closely. In doing so, your business builds a more collaborative relationship with your vendor, allowing them to gain direct insights into your inventory levels and sales patterns. This allows your supplier, in turn, to optimize their own production and distribution strategies, which saves them money, and will likely lower the prices they charge you.

In the same way that a business paying a supplier in the shortest possible intervals alleviates spending and uncertainty on said supplier’s end, VMI-based demand forecasting and inventory management does the same. Suppliers can adjust their pricing models based on real-time data rather than speculative forecasts, leading to more accurate and potentially lower prices.

Make the Most of Your Supplier Relationships with Advanced Analytics

Contract terms and conditions are just one part of managing successful supplier relationships. To gain a complete understanding and refine your pricing strategies, advanced analytics play a crucial role.

Lytica offers pricing and risk solutions that deliver valuable insights, helping you negotiate better deals and optimize your supplier relationships. Our advanced analytics tools uncover hidden opportunities for cost savings and efficiency improvements.
Reach out to learn how Lytica can help enhance your business’s profitability and strengthen your supplier relationships today!