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The economy is forcing many restaurateurs to review their purchasing strategies and supplier relationships. While ongoing bidding has become commonplace because operators tend to believe it yields better prices, provides flexibility on products, and keeps vendors on their toes, Bill Marvin, Restaurant Doctor, says the opposite is true: “Engaging in ongoing competitive bidding practices to get the lowest prices actually leads to higher food costs, not lower.” Lee Plotkin, president, L.P. Enterprises, Inc., agrees, “You may get a lower price on some items because the rep wants to get your business, but in the long run you’ll pay more for other items to compensate. And, because you’re buying a small amount from a lot of vendors, you won’t have any leverage when it comes to getting products or service.” Bottom line, they maintain, working with a single vendor from whom you make more than the majority of your purchases (usually 80%+) – a “prime vendor” relationship – creates incentives and efficiencies for vendors that get passed along to restaurants. And becoming more important to a vendor creates a mutually beneficial partnership. Suppliers become more responsive, which can mean better delivery windows and quick turnarounds. If shortages occur, a prime vendor will usually search the market for an alternative.
The savings are substantial and quick. “Every time I’ve moved a client to a prime vendor, his food costs have dropped by 10% overnight, and no one has ever looked back,” explains Bill. “The basic truth is, the less it costs the supplier to service your account, i.e., the more he can fill his truck, the lower your cost.” He says using a prime vendor streamlines the otherwise inordinate amount of time spent compiling and evaluating bids, dealing with salespeople, managing multiple vendors, and receiving lots of small deliveries – which is a distraction from high-return activities, such as training and developing people and caring for customers. Lee adds that there are other tangible savings operators don’t always think of, including cutting checks. “One client says that with everything factored in, it costs him $15 to cut a check, and he was writing 1,500 checks to vendors a year. That’s $22,500 in check-writing costs that has been reduced dramatically,” says Lee. “The same client also estimated that he saved $14,000 annually in staff time ordering and receiving deliveries.” It’s also possible to further reduce costs if you can place orders online.
Getting started with a prime vendor. Lee recommends putting together a list of the 10-15 items you buy the most of and the 10-15 ones you buy the least. Send them out to several prime vendors for bids and compare their prices to what you’re currently paying. He says it’s important that audit privileges are part of the agreement – it’s where checks and balances come into play for this type of relationship. Your prime vendor should be required to produce manufacturer invoices and freight documents on items you periodically select that can be traced to your actual invoice cost. Also, make sure you understand if there are additional charges – for splitting cases or stocking proprietary items that only your restaurant uses.
Working with a prime vendor for cost-plus pricing. Lee suggests negotiating a cost-plus pricing agreement (a specific markup over the supplier’s cost) if you purchase enough with one vendor. “If you’re spending over $4,500/week with your prime vendor, be proactive and request a meeting with your rep’s manager – someone in authority – and ask for a cost-plus pricing agreement, locking in a specific markup.” (The rep, he says, may be hesitant to recommend cost-plus pricing, as it might negatively impact his/her commission.) It’s important to remember, Lee says, that for the duration of the contract a primary cost-plus supplier cannot deviate from the cost-plus markups that are agreed upon. Market prices will fluctuate, but the cost-plus markup remains the same and can’t be changed without mutual agreement. “In my experience, a cost-plus agreement will yield lower overall costs on an annual basis and assure the operator that they have a good relationship in place,” says Lee. “If you’ve had a cost-plus agreement in place for awhile, I think now is a great time to revisit the relationship. Ask your vendor for a volume report, comparing when you began with them and where you are now. If your business has grown and the markup has remained the same since day one, it’s time to discuss reducing it.”
“Work with your suppliers – ask what you need to do for them so they can do a better job for you. It should be a mutually beneficial relationship.” – Lee Plotkin, president, L.P. Enterprises, Inc.
