“To know thyself is the beginning of wisdom.”
Socrates, ~400BC

“To know only thyself is negotiation suicide.”
Steve Gettleman, 2023

Improving Gross Margin boils down to three basic elements. 

  1. Selling your products for more money (Pricing Management)
  2. Selling more of your most profitable products (Sales Mix Management)
  3. Paying less for the products you buy and sell (Cost Management)

All are critical to increasing gross margin and each should be the subject of ongoing focus for organizations intent on staying profitable.

Pricing is the quickest and most straight forward of the three options since sell prices are theoretically under an organization’s complete control. But it’s also the riskiest. While a business can choose to sell an item at a certain price, customers can – and often do – choose to buy their products elsewhere for less.

Changing an organization’s sales mix to improve gross margin reduces the risk associated with increasing sell prices, but it takes time to develop programs aimed at alternative products, and considerable energy to train sales team and customer behavior. And despite appearances it’s not without risk. Distributors build their success by providing the products that customers want. Trying instead to sell the products that the distributor wants to sell can violate one of category management’s central tenets by taking the customer out of the center of its orbit and inserting itself into it. 

So, when it comes to improving gross margin in a timely, responsible and effective manner, doing so by reducing an organization’s product cost with its existing suppliers is usually the best and most logical place to start. When done right it’s a thing of beauty. No customer impact, no operational changes required, no need to transform the way your organization operates. Just direct, seamless improvement to the bottom line.

But it’s not easy. Unlike sell pricing, we can’t simply choose the prices we want to pay for items. Doing so requires negotiating with existing suppliers. And doing that well means understanding them at least as well as we understand ourselves. Neglecting to understand our suppliers is a common occurrence which can lead to highly undesirable outcomes ranging from disappointing negotiation results all the way to the devasting loss of a good supplier partner. 

So, what is the key to understanding our suppliers? How can we begin to get our arms around such an opaque, non-specific relationship dynamic? While it’s certainly nice to remember the name of our supplier’s spouse, how many children they have, and their favorite hobby, that’s certainly not the understanding we seek here. The key here is knowing – with great confidence – how your supplier views your business strategically. And there are typically one of four ways that suppliers will view their customers:*

  1. Core – this is the one that we – as negotiators – love. The supplier views your organization as an essential part of its business. Your dollar purchases are large and create considerable profit for them. Your position in the channel is a strong fit with that of your supplier, and they see your organization as a valuable key to their success. As a result, they will go to great lengths to protect your business, including reducing your cost so long as it a viable path for them. 
  2. Developmental – In this case your existing volume may not be critical to your supplier’s current success, but they see you as having “all the right stuff” to become an essential business partner in the future. And for any number of reasons, they want to support that growth. You might be in the bullseye of what they are trying to achieve strategically. They might recognize something unique in your value proposition that they believe will resonate across the market. Such supplier relationships can be valuable sources of cost and profit improvement now, and spectacular profit drivers in the future as purchase volume grows. 
  3. Nuisance – sometimes it’s painful to learn that we are simply not wanted. We all like to believe that – as the paying customer – we are always right and should be treated with respect, not to mention industry-best pricing. The reality is often very different. Because while you are pounding on the desk insisting that the customer is always right, the supplier thinks about the fact that your volume is relatively small, your organization is a pain to manage, you order small quantities of many different items and undertake any number of other practices that drives them crazy and costs them money. Not only is this NOT the place to seek cost savings, but there’s real risk here that needs to be addressed to ensure the viability of your supply chain going forward.
  4. Exploit – This is one that can be a bit confounding but is perhaps the most critical to understand from a risk management standpoint. In this case we are talking about a supplier who supports considerable volume and who would therefore appear to be a potential source of significant cost savings. Yet for any number of reasons the supplier may not hold your business as particularly important or attractive to them. For example, your organization may represent a channel that is out of sync with their future direction. Or they may feel that your business only makes sense at a certain (high) level of profitability for them. They might simply view you as an opportunity to exploit whatever they can for as long as they can. Efforts to reduce cost in these situations are not only likely to fail, but they also bring high levels of risk that need to be recognized and managed appropriately.

So when it comes to improving gross margin in a timely and responsible fashion, negotiating better programs with your existing suppliers is typically the best place to start. But first, make sure you know which bucket your organization falls into from the perspective of your suppliers. Then, when the circumstances are right, develop your plans and take your best shot. But when they are not right for cost savings, be sure to tread wisely.

To help you better identify your relationship with your supplier, we’ve developed a short, 7-question analysis tool. Click below to evaluate your suppliers.

*The foundational concepts referenced in this article are based on the Supplier Preferencing Model originated by Paul Steele and Brian Court (1996)

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