There are many different approaches you can take to reduce your cost of goods, and it's important to know which is most appropriate for your circumstances. In general, there are two key factors to consider: the alternatives available, and the value of the relationship with the supplier. Below is a simple chart to help you choose your approach based on these factors.
Relationship Value
The best way to understand the relationship value is to look at the suppliers strategic fit with your business. If you differentiate through quality or innovation, suppliers who can demonstrate a real capability in those areas are potentially the ones with whom you should build a deeper relationship. If you differentiate on price or convenience, the same would be true for suppliers who excel in those areas. This should guide the approach you take with that supplier.
Taking a competitive approach, e.g. a blind-bid or reverse auction process, will damage most supplier relationships. Whilst a more considered, traditional negotiation can introduce a competitive edge in a much more controlled and understated way. It's more time consuming, and requires more preparation, and it may still result in a simple transfer of value from supplier to retailer, but there is room to manage the relationship.
Using Alternatives
For unbranded and own-brand products, it's often easy to identify alternative sources of supply, however you should also consider the specification of what you're looking for. The broader the specification, the more alternatives you create, but the more difficult it is to directly compare. The solution is to understand exactly what adds value from a customer perspective and then to build a detailed brief for suppliers around those elements, taking out as much cost from the product as possible, prior to going to market.
For branded products, understanding alternatives means observing customer behaviour, particularly "switching". Promotional analysis can help - looking at which products take a hit when a competitor is on promotion can identify which products your customers see as acceptable alternatives. Loyalty card and account data can give a more detailed view. These are powerful insights that not only help identify the real alternatives to brands, increasing your negotiating power, but crucially it gives the confidence to follow through with changes, knowing both the financial and customer impact of the decision.
No Alternatives?
Where the number of alternatives are low, but the supplier itself is not a good strategic fit, exploiting leverage - essentially holding back the things they most want or need in order to force through new terms can be effective in the short term, but longer term, you should look at ways to build alternatives to improve your options in the future.
The final benefit of understanding both the alternatives and the relationship value though, is that it will uncover the real gems: those suppliers that give you high-loyalty, highly differentiated products, and which fit with your strategy. For these suppliers, you can cement your relationship and their dependency by collaborating, reducing their costs, and yours, and sharing the benefits - growing the pie, rather than simply trying to take a larger slice.
There is no right way to reduce cost of goods, but some ways are more sustainable than others. A cost of goods programme that uses the right approach for each group of suppliers will be more productive and sustainable than a one-size-fits-all. If you want more detail on any of these areas, just drop me a line.