Reactive Vs. Proactive: 3 Tips For Negotiating Your Way To Higher Profit Margins
By Stefan Hilger, CEO, gicom
While predicting the future is impossible, preparing for it is not. Throughout the last 18 months, the supply and demand of certain product categories have fluctuated in ways no one could have predicted. Starting with panic-buying of toilet paper and disinfectant wipes, retailers found their aisles empty, despite their best efforts to get more in stock.
On March 12th, 2020, toilet paper sales were 734% higher than the same day the year, according to NCSolutions. While this was a rare result of panic-buying, there were a variety of other products and product categories that experienced severe fluctuations of supply and demand including canned goods, home renovation supplies, consumer electronics, athletic and leisurewear, and even yeast. While the worst days of the pandemic-driven panic buying may be behind us with vaccination rates rising, supply and demand have yet to level out, with new issues coming up steadily. As an example, pool supply retailers are struggling with a chlorine shortage.
Despite the unpredictable nature of some of these trends, there are steps retailers could have taken before the pandemic to prepare for these moments. One of the most important preventative steps is to negotiate stronger, more transparent relationships with suppliers, vendors, and other partners to maximize flexibility.
The Importance Of Being Proactive With Negotiations
The unfortunate reality is that most retailers are reactive when it comes to negotiations, consistently responding to fire drills and last-minute requests. As retailers seek to improve profits in the post-COVID era, they often overlook the most fundamental place to start – agreements with their suppliers.
For example, in the canned goods industry, retailers with real-time or near-time margins could have reacted quickly to impending shortages by renegotiating the importance of the product category. By redefining canned goods as a “fast-moving item,” the performance of individual commodity groups or suppliers may have reacted faster to changes in behavior. This simple switch could have enhanced monitoring to ensure margins were protected and the deal remained profitable for both parties.
In situations like this, it is important to have simulation options to evaluate partnerships with vendors and suppliers. Cloud-based simulations offer in-depth transparency across the supply chain that helps you determine the extent to which renegotiation makes sense and is enforceable. Especially in the case of a spontaneous change in buying behavior, automatic can suggest a strategic derivation in the shortest possible time and can be adjusted at any time, in real-time, to see how one shift could alter another.
Tips For Negotiating Higher Profit Margins
Retailers today need instant access to agreements and their calculation results to react to negotiations in dynamic markets. To do this, automated documents and condition agreements can accurately calculate settlement agreements. These systems enable retailers to quickly uncover deficits and proactively initiate negotiations to achieve both short-term and long-term margin targets.
- Simulate Agreement Scenarios
One way to prepare for the future is to learn from the past. By analyzing previous negotiations, retailers can conduct “what if” scenarios and better prepare for future supplier conversations. Simulations can incorporate a variety of scenarios to compare costs and margins. Testing simulations allow retailers to see exactly how an agreement would play out if the cost dropped for an item or if demand rose for a particular product category. This visibility helps retailers make data-driven decisions to ensure profitability even during renegotiations amid an unprecedented event.
In these scenarios, all stakeholders and business units can be involved in the strategy. Category managers can adjust values to calculate margins on individual items, product categories, or entire assortments. Next, representatives from the partner companies can evaluate the deal and ensure the negotiation strategy works with their business goals. Then, CFOs can test any renegotiated numbers given by the partner to make sure the earnings will match internal goals as well. This seamless experience ensures both parties are happy with the settlement and leaves room for smooth renegotiation as any market complications arise.
- Centralize Agreements For Customers
When moving quickly to adapt to market changes, having one source of truth across suppliers, internal teams, and contractors is critical. With a central, digital hub for all agreements, retailers can make relevant information readily accessible for everyone and call attention to changes that need to be made.
Throughout the agreement management process, errors and miscommunication are common when teams are working across a variety of documents and servers. By centralizing agreements, conditions and documents, everyone has up-to-date information and can make quick, strategic, decisions every time. Not only does this help when making new connections and adapting plans, but it also makes it easier to strike up a new deal at the end of a contract.
- Strategize Agreements Proactively
Retailers don’t have time to focus on each agreement individually. By proactively developing a strategy, they can compare contracts throughout the year to identify overall profitability goals and how to best meet them through future agreements. This approach will strengthen partner relationships by eliminating stressful last-minute responses to issues or contract deadlines.
Today’s condition structures are complex and require real-time data preparation to avoid delays and data overloading. In addition, when it comes to reporting contract resolution, there should be standard reports based on empirical values that can be extended within a framework easily, without great effort, and in conformity with standards. All of these proactive steps can lead to transparent, long-term relationships that will increase profitability and protect margins during market uncertainty.
Responses To The Unpredictable
Retailers are eager to leave 2020 behind and “return to normal,” but unfortunately, industry disruption is not so easy to leave behind. The best way to avoid chaos is to prepare for everything. The importance of strong partner relationships cannot be understated, and the success of these deals starts with the first negotiation. By creating transparent, flexible agreements based on data-driven scenarios, retailers will be as prepared as possible for what surprise lies around the corner.