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By strategically aligning with vendors and manufacturers, retail businesses may be able to cut costs and resist price increases. The catch: It may involve tricky technological updates.
Customers aren’t willing to shoulder businesses’ rising costs anymore – and that means it’s time to find new ways to save money.
Although inflation has started to ease, consumer spending fell in both November and December, according to the U.S. Department of Commerce – a sign that increased prices have finally put a damper on demand. Even industry giants have felt the increasing pressure from customers. Whole Foods, the Austin-headquartered grocer owned by Amazon, urged suppliers to cut costs on packaged groceries during a virtual summit in December, The Wall Street Journal reported. During the summit, the company reported that inflationary pressures had impacted customer buying habits, and that it intends to lower prices as inflation eases.
While price increases, which began as early as the summer of 2021, have been inevitable for many businesses across industries, some brands have managed to maintain their price points despite pandemic-era supply chain challenges and inflation. Pair Eyewear, a New York City-headquartered custom eyewear brand founded in 2017, has kept its $60 base price since launch.
The key, says co-founder and co-CEO Nathan Kondamuri, has been strategic alignment with suppliers. “We’ve been able to decrease our cost structures internally, so at a time like now, we don’t need to raise prices aggressively,” he says. “Material prices across all industries have gone up, but we constantly work with vendors to reduce costs in other ways.”
It’s a strategy that other retail businesses may turn to as they look for new ways to cut costs and ease prices – and it’s one that can ultimately benefit both buyer and supplier. Here’s how.
Treat suppliers like partners
“We really view all of our vendors as partners and are very collaborative in the way we work with them,” says Kondamuri. “We have an internal R&D team and engineering team that go to our vendors and get videos to understand, step-by-step, the process of making our products.”” From there, the business can pinpoint specific opportunities for those vendors to operate more cost-efficiently, thereby reducing their own costs. The investment in helping a vendor improve its own internal processes tends to have a considerable return, Kondamuri says.
Treating suppliers like partners also means actively nurturing a relationship with them, adds Carolyn Rodz, co-founder and CEO of the Houston-headquartered small-business education platform Hello Alice. ““If a supplier is inviting you to go to dinner or to have a drink, take advantage of that opportunity,” she says. “It’s very valuable to you. It’s similar to your relationship with your banker or your lawyer – you probably don’t need it every day. But when you need it, you need it.”
When you have strong relationships with your vendors, it’s easier to have open conversations about your business’s needs. Even having standing meetings with suppliers once a quarter can be beneficial, adds Frank Ciotoli, an operations executive and managing director at the global management consulting firm TriVista.
Sweeten your deals
It likely goes without saying that, when negotiating, you’ll have to offer something in return for your own ideal terms. But that doesn’t mean money is the only thing that can sway your suppliers. “Really brainstorm all of your tradable terms,” says Martin Rand, co-founder and CEO of Pactum, a Mountain View, California-based autonomous negotiating tool used primarily by Fortune 500 companies. “Go through all of the value you could offer to your supplier.” That may include extending contract terms or introducing the supplier to a wider network of potential buyers.
Industry information can be a compelling bargaining chip, adds Ciotoli. “If you’re seeing a trend in your business where one product is rapidly gaining in popularity, being the first person to relay that to your supplier is very valuable,”” he says. “That makes you a trusted business partner, rather than just another account.”
Efficiency incentives can also drive suppliers to improve their own internal processes, which can ultimately improve your own costs, says Jag Lamba, founder and CEO of Saratoga, California-headquartered third-party life cycle management platform Certa. In typical “cost-plus” negotiations, a business pays suppliers for the cost of their expenses, plus an additional fee (either a flat fee or a percentage of profit). But Lamba recommends contracts that reward suppliers for reducing their costs over time, through automation or other technical updates: “We might say, we expect you to stay within this cost, but you can keep any efficiency improvements.”
Shop around
Through the pandemic era’s supply chain disruptions, many businesses learned the importance of diversifying their supply chains. But even if they’ve landed on what they believe to be a good deal, business leaders should look for better options on an ongoing basis. “Because we’re so time-constrained as entrepreneurs, it’s really easy to take the first offer and run without really shopping,” says Rodz. “I always tell people, at least every six months, revisit your ongoing contracts and see what you can negotiate.”
When reaching out to potential new suppliers or manufacturers, Ciotoli recommends looking close to home for “niche suppliers in your state or region that can provide you better service, better insight, and can get you what you need quickly.” International suppliers may offer lower prices, but can ultimately be more costly when transportation costs or supply chain issues are considered.
By transitioning to U.S.-based manufacturers starting in 2020, Pair Eyewear has gradually decreased its manufacturing costs. It is thus better equipped to handle unavoidable material cost increases from vendors, which has enabled the business to avoid increasing its own prices, especially as the business has grown, says Kondamuri. Although labor costs in the U.S. are higher than those overseas, “there’s a lot more you can do in the U.S. to automate processes and make things more efficient,” he says. “But it does take a little bit of timing and math to make sure you’re at the scale where the investment does make sense and it is cost-effective for you.”
Optimize inventory levels
While straightforward negotiations and investments in automation to improve manufacturing processes may help businesses reduce their overall costs, inefficient supply chains can still cut into their margins, says Bob Rogers, founder and CEO of the San Francisco-based supply chain planning tool Oii.ai. Using artificial intelligence, Oii.ai enables businesses to identify potential supply chain disruptions so that business leaders can optimize inventory levels.
This kind of tool can uncover surprising cost-savings, Rogers says: “We generally see companies that are not regularly updating their supply chains to be between 25 and 35 percent high on their inventory.” That can lead to increased warehousing costs as well as extra inventory that may ultimately go unsold.
Business leaders may feel resistant to that type of technological update, because they think their existing supply chain data isn’t accurate enough. “The most common supply chain software, even across large companies, is Excel,” Rogers says. “At the end of the day, it’s not a flexible, transparent, enterprise-ready tool for this kind of thing.”” A solution that uses A.I., like Oii.ai, can process a business’s existing supply chain data and flag any potential concerns. That way, businesses can gradually digitize their data and see a high return on their investment in the process: One of Oii.ai’s clients, a pharmacy brand, increased revenue by 65 percent by responding to demand more efficiently.
This article was written by Rebecca Deczynski from Inc. and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected].
