If you’re in the foodservice industry and rely on a more traditional bidding process to obtain competitive pricing with food vendors and distributors, there is a better method to secure best pricing. Many customers think that making vendors compete for every order makes the process more competitive, but it is actually the opposite.
Developing what’s known as a Prime Vendor relationship, in which the majority of your food purchases are made through one vendor, can better incentivize a vendor to give you best pricing. Here’s why forming a Prime Vendor relationship can be beneficial.
The typical bid process doesn’t always lead to best pricing
The prices suppliers provide to customers that shop around are often fixed and not the best pricing available. Since suppliers don’t know how much of your order they will get, they make sure they will make the most they can on what you do purchase from them.
In addition, the distributor must cover their overhead costs on every delivery just to break even.
If it costs a vendor a fixed amount ($300 – $500) to make a delivery, that fixed amount must be built into every order or they lose money. Once the order is big enough to meet the fixed costs, then they can start to lower prices. When an order is bid out to three vendors, the fixed cost must be paid three times. Rather $300 of fixed costs for one delivery, there are $900 in fixed costs for three deliveries.
Why the Prime Vendor model can lower purchasing costs
When you establish a Prime Vendor relationship with your foodservice distributor, prices are lower when compared with ongoing competitive bidding through either software based bidding systems or shopping every order out to multiple vendors. For example, a bidding program (or calling multiple vendors) could show that the same case of product can be purchased from Supplier A, B or C or $25, $24.50 or $24.90. However, that same case could be $22.00 with a Prime Vendor program.
From the distributor’s perspective they will be more receptive to lowering pricing within a Prime Vendor agreement as compared to the pricing they give to bidding systems or customers that shop around. It all revolves around what they need to make a profit. Every item they sell has a range of prices based on their cost, the cost to bring it into their warehouse and overhead. The key is to give the distributor incentive to give you the price at the lower end of that range.
If they know you are buying 80% if your order from them they will give much better pricing than if they can only expect 20% of your order. They can make more money from the higher volume even though they give you their lowest price.
Refocusing on other initiatives
An additional benefit of a well negotiated Prime Vendor relationship is there is no need to spend hours comparing prices. Instead time is freed up to spend on high return activities like marketing to build the top-line, managing, training staff, and developing best practices for customer satisfaction. If you’re looking to streamline your foodservice-related costs, a Prime Vendor relationship is a viable option to explore for your business.