by When it comes to running a business, the cost of raw materials can make or break your profit margins.
As a business owner, you understand that the price of raw materials is directly proportional to the final price of the product. Therefore, it becomes necessary to keep the cost of raw materials as low as possible.
One way to achieve this is by negotiating with your suppliers.
However, negotiating can be more challenging for small volume customers.
In this article, we will discuss how small volume customers can negotiate for lower prices and what to do if negotiations fail.
But before we discuss further, make sure you have also joined the scmguide telegram channel so you don’t miss the latest post notifications from this blog and get more insights about other supply chain management topics.
Table of Contents
Why price of raw materials matters
The cost of raw materials is a significant expense that businesses incur.
The price of raw materials can fluctuate depending on several factors such as supply and demand, economic conditions, and geopolitical issues.
When the price of raw materials increases, the final cost of the product also increases, resulting in a lower profit margin.
For example, if you manufacture T-shirts, your company sources raw materials such as cotton, thread, and dye from suppliers.
If the cost of these materials increases, you will have to pay more to the suppliers, which in turn will increase the cost of manufacturing the T-shirts.
If you want to maintain the same profit margin, you will have to increase the selling price of the T-shirts, which may make it less competitive in the market.
You might also like:
- Make or Buy? A Guide to Making the Right Decisions
- The Importance of Business Process Mapping and How to Do It Effectively
Negotiating for lower prices as a small volume customer
As a small volume customer, it is essential to negotiate for lower prices to keep the cost of raw materials low.
Negotiating can be more challenging for small volume customers who may not have the bargaining power of large volume customers.
However, it is possible for small volume customers to negotiate for lower prices if they approach the negotiation process strategically.
Research the market for raw materials
The first step in negotiating for lower prices is to research and understand the market for the raw materials.
This involves identifying the key suppliers and their pricing strategies, as well as any factors that may be affecting the price of the raw materials.
You can use the internet to find information about the market and the suppliers.
You can also talk to other business owners who use similar raw materials and get their insights.
Armed with this information, you can approach the negotiation process with confidence.
Clearly communicate your needs and requirements to the supplier
Small volume customers should clearly communicate their needs and requirements to the supplier.
This includes providing information about the volume of raw materials required, the quality standards that need to be met, and the timeline for delivery.
By being clear and specific about your needs, you can show suppliers that you are serious about doing business and that you are not simply price-shopping.
Offer something of value in exchange for a lower price
Small volume customers should be prepared to offer something of value in exchange for a lower price.
This could be in the form of a long-term commitment to the supplier, the willingness to pay upfront for a portion of the raw materials, or the ability to provide referrals to other potential customers.
By offering something of value, you can demonstrate that you are serious about building a long-term relationship with the supplier.
Be willing to walk away
Small volume customers should be willing to walk away from the negotiation if they are not able to get the price they want.
It is important to remember that negotiating is a two-way street, and the supplier may not always be willing or able to offer a lower price.
If this is the case, you should be prepared to explore other options, such as finding alternative suppliers or adjusting your business model to account for the higher cost of raw materials.
You might also like:
- Why the Right Mindset is Needed in Supply Chain Management
- How to Treat KPIs the Right Way to Improve Your Supply Chain Performance
What to do if negotiations fail
If negotiations fail and the cost of raw materials remains high, there are several steps that small volume customers can take to mitigate the impact on their business.
Increase the price of final product
If negotiations fail, small volume customers may have to increase the price of the final product to maintain their profit margin. However, this can make the product less competitive in the market, which can result in lower sales.
Look for alternative suppliers
Small volume customers can look for alternative suppliers who may offer better prices. This involves researching and identifying other suppliers who can provide the same quality of raw materials at a lower cost.
However, it is important to ensure that the new supplier meets the quality standards and delivery timelines required.
Explore other business models
Small volume customers can explore other business models that may reduce their reliance on raw materials.
For example, they can focus on providing services rather than physical products, or they can explore alternative materials that may be cheaper.
Reduce overhead costs
Small volume customers can reduce overhead costs to offset the higher cost of raw materials.
This involves looking for ways to cut costs in other areas of the business, such as marketing, rent, and salaries.
Conclusion
In conclusion, the price of raw materials is a significant expense that businesses incur.
Small volume customers can negotiate for lower prices by researching the market, clearly communicating their needs, offering something of value in exchange for a lower price, and being willing to walk away if negotiations fail.
If negotiations fail, small volume customers can increase the price of the final product, look for alternative suppliers, explore other business models, or reduce overhead costs to mitigate the impact on their business.
By adopting these strategies, small volume customers can keep the cost of raw materials low and maintain their profit margins.
Hope it useful!
Also share this article with your colleagues so that they can benefit from it too. Join the scmguide telegram channel so you don’t miss the latest updates from this blog. All articles on this blog are free to use for any purpose, including commercial use, without the need for attribution.
