Finding Supply Chain Success

chipsBuilding a strong relationship with your vendors can ease the negotiation process and take unnecessary costs out of the distribution system.

By Erin Rigik, Associate Editor.

Cutting costs along the supply chain remains a challenge for convenience stores, but strong negotiation and communication skills can go a long way toward scoring the best possible deal with wholesalers, DSD vendors and local foodservice suppliers. Further, reducing out of stocks and following a seamless exist strategy for products that aren’t selling is essential to driving incremental sales growth.

Open communication is key to getting the best deals for your business, said John Matthews, founder and CEO of Wake Forest, N.C.-based Gray Cat Enterprises Inc., a strategic planning and retail consulting company that specializes in helping businesses grow in the franchise-based retailers, restaurants and c-stores industries.

“By communicating your cost control targets with suppliers, you may trigger a productive conversation that neither party previously entertained. You may find that your suppliers can alter their existing manufacturing processes or delivery procedures that enable the retailers to capture the savings they seek,” Matthews said.
In some cases, it may be a win-win scenario for both parties in that, through open communication, all options were put on the table.

Negotiate a Good Deal
“I love to negotiate,” said Jim Callahan, a c-store industry consultant and director of marketing for Geo. H. Green Oil Co. in Fairburn, Ga. However, everyone has a different negotiation style and while larger chains might get away with a more aggressive style, mid-sized and smaller chains can benefit greatly from getting to know their vendors, he advised.

“To me, it’s a process where you get to know your vendors, you treat them well and you look for commonalties,” Callahan said. Years ago, discovering he went to high school with a prospective client’s son-in-law helped Callahan solidify an account he’d been after for some time. But something as simple as a shared interest in baseball or a new movie could be a building block toward a closer working relationship.

When the original negotiation hits a dead end, Callahan recommended looking for other “pockets” or alternate areas of negotiation. “There are always other pockets. Maybe I’ll ask if there is an advertising allowance and if I run this special at that low retail price will they help me with advertising? Or maybe it’s ‘Do you have rebates?’ And they’ll say, ‘Oh, yeah, I can give you a 2% rebate.’”

A genuine bond with your supplier can aid that negotiation. “I try to find out about family, and I try to give them helpful hints. If I see something about a competitor, I’ll email it to them. I’ll also give them leads for new accounts. If I see a new store going up, I call my vendors and say, ‘Hey there’s construction going on here. Go take a look,’” Callahan said. “Then, at the end of the year, I pick suppliers from every category, no matter how small the category is, and I send out vendor-of-the-year letters. It’s smart business to praise good performance and the vendors really appreciate it.”

It’s also vital to do your homework. Especially as retailers prepare to renew their contracts for the start of 2014, a knowledge of what the competitors are doing can give you a solid idea of what you can ask for from your supplier. “For example, there are so many people with ATMs who don’t know about non-monetary transactions. We get five cents for these transactions—such as when customers want an inquiry about how much money they have, but they’re not taking money out,” Callahan said. “I guarantee 90% of small stores don’t know what it is and aren’t getting anything for these transactions.”

Eliminate Out of Stocks
After negotiating the best possible price, avoiding out of stocks is the next crucial challenge, and sometimes it only takes a simple solution to solve major issues that can arise in this area.

“The easy things are not always the things we do,” said David Bishop, managing partner for Balvor Corp. One effective practice to reducing out of stocks is to encourage the store manager to walk through the aisles of the stores and physically verify what’s on the shelf rather than placing the order from the office.

“What most retailers find is the cause of out of stocks is really just poor ordering practices from their store teams, who may be just ordering from past history without verifying what’s on the shelf,” Bishop said.

Item level inventory, or tagging and tracking items, is another solution many retailers use.

“Relative to item-level inventory, the most critical area is the tobacco category, given the real brand loyalty that occurs in that segment. The retailer just can’t afford to have the out of stocks because not only will customers not switch brands, they will probably switch stores to find what they are looking for,” Bishop said. “Many other categories don’t have that same high level of loyalty for a particular brand so they will just substitute with another product.”

Technology Assistance
Kocolene Marketing, which operates Fast Max convenience stores and Smokers Host tobacco stores, has begun a pilot test on item level industries in one of its stores this month in the other tobacco products (OTP) category. “From there we plan to roll out to more sites, and then to other categories,” said Lance Gentry, the company’s director of information technology. “After the item level rollout we will investigate a computer assisted ordering program. We hope with item level inventory, if we’re missing inventory, we’ll be able to pinpoint exactly what’s missing and how much it is worth. Then we can evaluate our check-in processes and determine if we need a procedural change, be it an accounting issue or pricebook. Technology helps us point to where there might be a problem.”

Out of stocks, in this day and age, are never a good thing, but being out-of-stock of a top seller is simply unacceptable, Matthews said.

One solution, Matthews noted, to ensuring the basics are always in stock is to create a “Never Out of Basics” (NOB) Products clause with suppliers that warrants 100% fill on top selling items in product categories as measured by the retailer’s velocity reports. “Retailers should dictate a list of products that fall into this NOB category, and if the supplier fails to meet the expectations of delivery, escalating remedies begin to kick in,” he said.

Exit strategy
Experts agree that the key to an effective exit strategy is negotiating and clarifying it up front with suppliers. “There must be a clear understanding of your expectations in the event a product fails,” Bishop said. Some suppliers might offer additional product discounts if a product doesn’t sell. In other cases, you might be on your own. It can be cost prohibitive for manufacturers to reclaim items that aren’t selling, but in many cases you can negotiate a rebate and then put the product on a promotional rack. This is another area where negotiating skills can go a long way.

“Getting full credit and shipping it back is not something most manufacturers want to do because it’s costly. So you have to get creative about and negotiate this scenario up front because if something is not selling, you need to get that product off the shelf right away so you can put something there that is going to start selling,” Bishop said.
What’s more, failing to create a timeline with specific mark-downs will cause the non-moving products to accumulate.

“My strategy is get rid of a non-seller as soon as possible,”said Callahan. “Take the hit because eventually it’s going to go bad. We put it in a discount bin and people love it because they feel they are getting a good deal. If it’s not moving, it’s taking up space and perhaps preventing a better option from filling that spot on the shelf.”

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