Most merchants would agree that knowing their vendors is key for assortment planning and negotiations.  You know basic performance metrics for your vendors—sales, margins, turns—but is that enough? 

The answer: maybe not. Some additional insight can go a long way toward helping you get more out of vendor relationships. The right information gives you a deeper understanding of the vendor’s market performance and overall health, allowing you to:

• Enter negotiations with more knowledge and power
• Increase your buying leverage
• Reduce risk related to future decisions
• Identify ways for the vendor to help you become more competitive
• Improve your ability to collaborate with the vendor to solve problems or take advantage of opportunities

What do you need to know and how do you use it?

The typical merchant already has a full plate—you need a simple approach to hone in on the insight that will make an impact. Your goal as you plan your assortment and prepare for negotiations is to develop strategies that will drive value for you and also for the vendor. To do that, you will need to consider your vendor through two different lenses: an internal one and an external one.

Look Through the Internal Lens – Use internally-available data to conduct a comparative analysis for each vendor to understand just how important they are to your business and how important they should be.

• What is the vendor’s total profitability in a given category?  How does it compare to “best in class” profitability for that category? This tells you more than gross margin can and also highlights vendors to partner with to increase profitability.
• How does their share of sales (within your category) compare to their overall market share?  A mismatch indicates a vendor who is underrepresented in your sales.  Working with vendors whose sales are disproportionately low can help to improve their penetration, benefitting both of you.
• Compare notes with others in your company who deal with the same vendors.  Are you getting the same terms and allowances?  If not, this may represent an opportunity.
• How does the vendor perform across the supply chain?  How does the vendor’s performance compare to their competitor’s performance?  This insight can help you work with under-performing vendors to improve their supply chain performance.

Look Through the External Lens – Use publicaly available data and industry reports to evaluate the vendor’s business situation to understand not only how important your business is to them, but also where they are going and what they might do.

• How stable are their financials?This tells you if they will be healthy enough to continue their current level of financial support (e.g., terms and concessions ) to your business.  It can also identify unprofitable vendors who may be forced to cut costs, potentially impacting their service levels.  These financial considerations are particularly important for small and mid-tier vendors.
• What’s your share of their revenue (at a category level)?  This tells you how dependent they are on your business.
• How has their category market share and positioning changed over time and why?  This helps you anticipate how sensitive the vendor is to changes in market dynamics and how their behavior may change.  For example, if their market share is shrinking, then the vendor may be more willing to make short-term concessions.

Leverage the Insight – Now that you have the analysis, what do you do with it?  The value of knowing your vendor is being able to use those insights to forge a productive partnership with the vendor.

• Develop vendor-appropriate strategies to drive growth or manage performance with the vendor.
• Translate the strategies into specific objectives and desired outcomes for your next meeting with the vendor.
• Share these insights with the vendor to build trust, then work together to develop a growth plan and improvement targets.

As a retailer you have many choices in vendors and limited shelf-space—decisions about vendors should be as strategic and fact-based as your other business decisions.  This approach does require more effort, however, merchants will find support, plus a wealth of information, by reaching out to other functions such as Finance.  Getting to know your vendor as well as they know you can improve costs and service, while driving future bottom-line growth for both of you.

If you would like to hear more about improving your margins by buying better, contact PRGX at .(JavaScript must be enabled to view this email address).