December 1, 2012 |

Ask Big Dave: Supplier Discounts

By Dave Ostrander

December 2012Q: Do you know of any independents grouping together to get discounts with suppliers?

Darren Larson
AllStar Pizza, Clute, Texas

A: For the most part, suppliers are not keen on pricing with a loose group of independents. They are looking for groups that have been around for a while and have the authority to speak/represent their respective groups. What you are referring to is what is called a Prime Vendor Agreement. All chains purchase 85-plus percent of their food from one supplier. In effect, this allows the supplier to enter into the agreement and charge less margin. The way they look at it goes like this: “Would I rather make 18-percent margin on a third of spotty business, or would I rather make 13 percent on all of the business, week in and week out?”

If you are a good prospective customer you can en­ter into your own Prime Vendor Agreement with your current suppliers. I have written and given numerous seminars on the subject. I also have assisted many of my single-unit clients in establishing their own contracts with suppliers. Once the new prices kick in, a 5-percent or better drop in pricing typically occurs.

This is how it works. First, you compose a letter and mail it to all suppliers that could service you and with which you are comfortable doing business. This letter invites the supplier to bid on your purchases us­ing a cost-plus system. At that time you will honestly describe several important things to the supplier.

They will want to know:

  • How many deliveries will you require a week?
  • What sort of credit terms do you desire –– COD, 7-days or 14-days, electronic payment, credit card, etc.?
  • How will you place your order and how much lead time will you want? Internet, phone, in person to DSR, etc.
  • Will you allow automatic substitutions if they are out of stock on specific items?
  • What time do you want the delivery?
  • Is your business seasonal?

All of the above factors are important in determin­ing how much it costs to service your account. If you lower the cost of doing business with you, you deserve lower pricing. If you are unorganized, don’t have the order placed before cut off time, bounce checks, and give away business to their competi­tors who come in and quote lowball prices to get your business, they won’t be interested in being your supplier/partner. On the other hand, if you are loyal and easy to do business with, you are what they are looking for.

I assure you that if you meet the above criteria this system will work for you. It is a two-way street with requirements on both the buyer and seller. These agreements are cancellable by either party with two week’s notice and allow you to do spot check audits of their costs from their suppliers to guarantee they are actually pricing your ingredients on a true cost-plus percentage basis.

For the most part, this is how the majority of big chains purchase their food items. It lowers their over­all food cost percentages in the long run.

The last 15 years I owned Big Dave’s Pizza & Subs I never asked my sales rep the cost of cheese. When you think about it, the rep has the least amount of power in the entire organization. He or she has a laptop that is programmed with the least amount they can charge for items before they have to do some fancy explaining to their boss or the company buyer if they override the pricing bracket. My system takes the adversarial component out of purchasing. Every Friday, I looked up the block price of cheese and then added our pre-agreed “cost plus XYZ pennies over block”, and that figure is what showed up on my invoice.

This is a simplistic description, but you get the point.

Big Dave Ostrander owned a highly successful independent pizzeria before becoming a consultant, speaker and internationally sought-after trainer. He is a monthly contributor to Pizza Today.