Growth in many businesses can essentially be boiled down to smart purchasing and profitable selling. The building materials sector is a prime example of this.
Of course, superficially, purchasing smart and selling profitably should be relatively easy. However, the way deals are agreed between suppliers and merchants in the building materials sector make this more exponentially more difficult!
The status quo
What we’ve seen in the building materials industry
Manufacturers of building materials supplies regularly use rebates as a mechanism of maintaining their stated price, but incentivizing trading partners to purchase in higher volumes in order to get a retrospective discount.
It’s common practice to see a trading agreement agreed with a standard price accompanied with rebates and other retrospective discounts which effectively lower the price of the products. When rebates are structured in tiers of incremental benefit, they can be used by suppliers to incentivize higher purchase volumes.
If your head office negotiates a rebate deal with a supplier for bathroom suites, it could look similar to the following:
- The first 1,000 bathroom suits are to be sold at the standard price with no incentive;
- Once you have purchased over 1,000 bathroom suites, you will earn a retrospective discount of 5%;
- Once you have purchased over 2,000 bathroom suites, you will earn a retrospective discount of a further 5% on all suites purchased (giving you a total discount of 10% on all products purchased).
Why is this relevant?
If you have currently purchased 1,981 bathroom suites to date and a contractor purchases a further 20 from you, it would be beneficial to have visibility of how close you are to your incentive targets so that you know whether you can offer a lower sell price (while maintaining your overall margin) in order to win this sale. Obviously knowing that this transaction will double your discount from 5% to 10% will mean you are more likely to enter into negotiations with this contractor than leave him heading to a competitor — this in turn means the contractor is more likely to return to you.
Sadly however, most businesses in the building materials sector do not have visibility of how many products they will have purchased across all included branches at the point of sale. Calculating this can use resources that some businesses cannot spare and could be an arduous process meaning you miss the sale and the contractor heads to your competitors looking for a better price!
Should you risk your profitability to win the sale and offer the lower price anyway, or do you stick to your price to guarantee your margin and risk losing the sale to a competitor? People in your business battle with this decision daily and it can leave branch managers pulling their hair out! But it doesn’t have to be this way.
Systemise your rebate management
Right now, you may think you have a firm grasp on this process and are confident in your team making the correct decision nine times out of ten. However, if you aim to grow, managing purchase volumes, sales volumes and rebates this way in simply not sustainable. Why trust you will be correct nine times out of ten when the very real possibility of being correct ten times out of ten is within arm’s reach? We’ve seen many distributors with revenues in excess of $100m who cannot manage to stay on top of everything, but didn’t know that a better way existed!
When tiered rebates are offer, the branch manager or sales person must need to have accurate real time information on where they are in terms of overall volume order so that an accurate purchase cost can be determined. How else can they determine if they are buying smart or selling profitably?
Most businesses simply do not have access to this information, and even if they do it is often managed in spreadsheets and is rarely up to date at the point of sale. Legacy systems and manual calculations simply are not quick enough to allow you access to this information in real time. Even when businesses attempt to do this, they often neglect granularity and provide this information at the group level. This means branch managers are forced to make guesses risking sales and profit margin which directly impedes your company’s growth!
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The major issues impacting profitability in the building materials industry
1. Lack of visibility of the actual profit margin at the point of sale
This means your employees can never have the confidence to know whether they are selling profitably or selling at a loss. This means they are less likely to make decisions that precede growth. This directly opposes the need to sell profitably.
2. Inaccurate calculations leading to incorrect claims reducing your expected profit margins
There is no point giving your employees information about expected profit margins if your claim success is poor and you will never achieve those profit margins because you will never receive the full retrospective discount that resources have been spent negotiating. This directly opposes the effect of smart purchasing.
So how do you rectify this situation and use rebates to grow your building materials business?
7 ways to solve these issues
1. Implement a contract management system
Systemise all of your agreements so that they are stored in one accessible secure place. This means they are always on hand and none are missed allowing you to accurately calculate rebate earnings and ensure your pricing reflects all agreements in place.
2. Increase margin visibility
Allow your branch managers and sales people access to up-to-date pricing information in order to put them in a better position to decide on the sell price for competing SKUs and maximize profit at a moment’s notice when negotiating with end customers or designing promotional activities.
3. Implement a watchlist
Put in place a watchlist to ensure your team are alerted when they are close to hitting or missing a threshold that will earn them a discount and increase their profit margin. This gives them early visibility so that they can implement marketing initiatives to increase sales and increase profitability by reaching a greater level of retrospective discount than they would have without changing their activity.
4. Improve your forecasting ability
Analyse your actual purchasing activity over a set time period and use it to model your current deal scenarios in order to get accurate forecasts of your expectations. This allows you to enter negotiations with more information, targeting specific SKUs that have the best opportunity to gain a high margin.
5. Automate deal approval
Systemise your deals so that both parties are signing off the same document that is then stored in your deal library. This will reduce the disagreements about what was agreed at the start of the year and will help improve relations with your trading partner.
6. Integrate data sources
Integrate all of your purchase and sales data into one system so that they can be tracked against the contract agreed and claims can be automatically calculated in real time giving you accurate data about your profitability in an intuitive display.
7. Involve your supplier
By providing your supplier with an online portal you can allow your suppliers to review your performance regularly and see whether your expectations and their expectations are in line throughout the year. This avoids any shocks at year end and allows you to have a strong relationship facilitating renegotiations of agreements and ad-hoc special deals. They can also notify you of price changes via this portal allowing you to adjust your expectations in line with this.
If you can create the perfect world where it is easy for suppliers to do business with you then disputes are minimal, agreements can be accessed and signed at the click of a button and you can work together rather than against each other. Rebate shouldn’t be seen as scrapping for every penny you can get, but rather as a tool that can be utilised to increase margins and growth in your market.
If you can do all of the above, you will be reducing the burden on team members to manually calculate rebate earnings, forecasts and accruals, while reducing disputes with suppliers, but more importantly, you will be removing the guess work on business decisions!
When educated with data, team members can spend more time purchasing smart and selling profitably which will help your business to grow. This in turn will allow you to have stronger relations and more negotiating power thus helping you to purchase even smarter by being involved in more beneficial rebate deals. It’s a cycle of positive feedback, you just have to get started!
All of the above can be handled by implementing a rebate management system.