Morgan Li of Everett, Washington, asks:
I wrote a business plan a couple of weeks ago ready for the new financial year. For safety, I factored in a 5% buffer for possible supplier price increases. No sooner has the financial year started than three key suppliers have jacked their prices by as much as 17.5%. My margins are already evaporating and we’re in week 1 of 2017. What should I do?
Kenelm Tonkin, Chairman, Tonkin Corporation answers:
Firstly, congratulations! You are writing a business plan and this places you in an elite group amidst America's 22 million employers.
However, there is nothing worse than having suppliers eat away at your profits. Thankfully, you can counter this by exploiting commoditisation, competition and tendering. If you operate in a competitive market, and who doesn’t, your suppliers probably do too.
So, use market forces to your advantage. Then, and this might seem contrarian, think like a government department announcing a tender. With immediate effect, tell these three suppliers that you are putting your account to the market and invite them to make a bid.
Let them know you are mustering at least four of their rivals simultaneously. Dangle a 3 year exclusive contract in exchange for capped prices and reliable fulfillment. Prepare a one-page letter and single-sided tender form and send them to each bidder, insisting the tender form is completed according to your format. Tell them failure to follow your format will result in a failed bid. You don’t have time to cut-through verbose pitches or decipher parochial pricing. Set a clear deadline for submissions. Never reveal the identity of the competing bidders or their bids. Avoid indulging prospective suppliers with insider tips. Be defensive by telling them to put in their absolute best offer. Never allow yourself to be compromised in such a process by being friends with a supplier. You must be free to terminate if their rates and guarantees are substandard.
Once the bids are in, make a clear-headed decision and communicate it. The result will be cost control for 3 years in a range closer to a 17.5% reduction rather than 17.5% increase.