Until recent years, nearly all suppliers would identify their best customers using one simple methodology – those with the highest purchasing volumes are always the best customers.  This would typically mean the supplier’s largest customers usually received the best pricing, additional services, and the most attention from salespeople.  While organizations that spend the most money will always gain favor in the marketplace, modern data analytics systems are now allowing suppliers to look at customers differently. 

More and more suppliers now have the ability to quickly access data that help them better understand a customer’s overall transactional behaviors using Cost to Serve (CTS) analysis tools. According to Wikipedia’s definition, “Cost to Serve is a process-driven accountancy tool to calculate the profitability of a customer account, based on the actual business activities and overhead costs incurred to service that customer.”  Since there are certain operational costs associated with each and every business transaction, this type of analysis can be help suppliers see their customers in a different light.  What they find is that some customers have a much higher CTS than others.  In many cases, suppliers often discover that their largest customers are not always as profitable to the bottom line as they may have thought. 

This is great news for many small or midsize organizations that do not yield a large buying power like their bigger competitors.  They now have more of a level playing field if their supplier realizes their value in terms of overall CTS in addition to purchase volume.  With all things considered, it is important for a customer to understand the factors that impact their CTS and make efforts to improve in these areas if at all possible. 

Here are a few ways to improve or reduce your organization’s Cost to Serve: 

1. Increase items per order.

There is nothing better for a supplier to see than purchase orders coming in each day from their customers. With that being said, there are operational costs associated with processing each and every order that goes through the sales cycle.  Customers who purchase more items less frequently ultimately have a lower CTS than customers who purchase fewer items more frequently. 

For example: Customer A and Customer B both spend a total of $100,000 in sales each year and buy the same products.

  • Customer A purchases 1,000 orders at $100 per order.
  • Customer B purchases 100 orders at $1,000 per order.

While both customers have the same amount of sales at the end of the year, Customer A creates 10 times the amount of transactions for the supplier to process to reach the same sales amount.

Looking into ways to reduce the number of transactions produced between you and your supplier while still maintaining or increasing normal purchasing volumes will certainly strengthen your value as a customer from your supplier’s perspective. Additionally, your organization will also benefit because you will need to process fewer transactions.

2. Reduce the number of product returns.

It would probably be very difficult to find a supplier these days that would adhere to a strict “All Sales Are Final” policy. If one does exist, they probably will not be in business long. Even though most suppliers are happy to accept product returns in most situations, they know that there are always several costs and risks associated with accepting returned goods after the initial sale. First and foremost, the additional processing and handling of returns takes time and resources away from the supplier. Second, many returned products are not always in the same condition that they were in at the time of purchase. This can make it tough for the supplier to resell them to other customers.  It is not uncommon for suppliers to ultimately throw away returned merchandise or sell it for a significant loss because they perceive that it is no longer in new factory condition from a buyer’s perspective.  If you can find ways to reduce or eliminate the number of returns you process each year, your supplier will be grateful. 

3. Convert more quotes into orders.

In many business situations, the sales process will include some initial quoting or bidding. Customers who bid out large jobs often have long lists of materials they need to complete a project. It is very common for suppliers to spend large amounts of time during the workweek to generate these quotes. In the eyes of your suppliers, quotes that are converted into orders are viewed as time well spent. On the other hand, it can become costly when a supplier is constantly quoting products that never turn into sales. Frequent quote requests that do not result in orders can also give the appearance that a customer has stronger loyalty to another supplier.  All in all, if your requested quotes routinely turn into purchase orders, your supplier will trust that you are a committed customer. If they rarely turn into sales, a chat might be in order to find out why.            

4. Make timely bill payments.

Trade credit is arguably one of the biggest factors keeping business-to-business commerce thriving in our economy. While most suppliers offer trade credit to the majority of their customers, not all customers are equal when it comes to paying their bills on time.  When enough customers are past due on their bill payments, it can be challenging for suppliers to purchase additional inventory or even pay their own bills. Let’s face it, nobody enjoys being a bill collector. The supplier’s salespeople and accounts receivable department would rather not have to make awkward phone calls asking for payment if they can avoid it.  Developing a track record of paying your bills on time is one of the best ways to ensure your suppliers identify you as a valued partner. 

The Bottom Line

Now that suppliers are beginning to look at buying habits differently, contractors have a new opportunity to show their value in multiple ways – not just purchasing power. In fact, they now have the potential ability to negotiate better pricing discounts or services with some of their suppliers if they can reduce their overall CTS.  At the end of the day, every supplier loves contractors who make the entire business process easy.  When customers can focus on improving one or more of these operational transaction areas, they will be well on their way to becoming a preferred customer that suppliers never want to lose.  

Publication date: 4/24/2017

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