Top 10 Items to Negotiate in a Distributor Contract

Top 10 Items to Negotiate in a Distributor Contract

Let’s face it.  You don’t negotiate lab supply contracts very often, at best once every 3 – 5 years?  The people you are negotiating with do this every day, and they are much more skilled at this than you are.  Your advantage is that you have what they want – money.  You want as much for that money as you can get, and they want to make as much profit as possible.

In many negotiations or RFP’s I've seen, customers who ask often get what they ask for, even if what they ask for is far more than a lab of their size typically receives.  How do they do this?

  1. They know WHAT to ask for.
  2. They make the competition appear real.  (Everyone has a favorite vendor of course, and even if they play their cards very close to the vest, distributors know that an incumbent has a leg up in any negotiation.)
  3. They aren't too eager to sign the agreement.

So what should you ask for?  Here is my list of the top ten things you should ask for when negotiating contracts with a major distributor:

  1. Few or no restrictions on the number of items on the hot list.
    A ‘hot list’ is a list of your top spend items and these are priced on a NET basis which takes away the distributor's ability to play discount games.  They will attempt to restrict the number of items that can be put on a hot list and you should insist that there either be no restrictions or that the number gives you plenty of room to add items later.  You should also ensure that items can be added at any time during the contract AT YOUR REQUEST.
  2. Detailed Spend Data / Quarterly Reports
    If you know what you buy, how much you buy and have the ability to cross reference items using manufacturer part numbers, you put yourselves in a different league from the distributor perspective.   Insist on monthly reports detailing all of the items you purchase in Excel format.  Insist on quarterly in-person reviews that detail savings, performance and compliance.  NOTE:  Never accept percent discount from list price as a savings metric!
  3. Annual Price Changes Only
    These are sometimes referred to as fixed price book dates, but the idea is that the prices you pay on January 1st remain in effect until December 31st (or other 12-month period.)  The distributor will exempt extreme cases in which product is in very short supply, which is acceptable (Force Majeure).
  4. Price Increase Caps on Hot List Items
    This is a favorite place for the distributor to put something on the table you may be too eager to agree to.  A typical clause is:  “Hot list item prices year-over-year capped at 3.5%.”  Sounds pretty good, right?  You should NEVER accept this offer at face value!  The distributor will make absolutely certain that you are paying 3.5% more on your hotlist items if you accept this even if they have had no increase in price from their suppliers!  There are many better ways to negotiate this.  Tie it to the rate of inflation.  Insist on proof that their costs have increased (you may agree to restrict this to your top spend items.)  But the main point here is that the cap is on an ITEM-BY-ITEM basis and NOT on the combined spends of the entire list as a whole.
  5. Guaranteed Savings With NO Downstream Penalties
    This is an offer some large clients can’t refuse:  “Sign a contract with our company and we will guarantee you 10% hard cost savings in year one of the contract.”  If you see this offer, a big red flag should go up.  Were you doing such a poor job before the contract that there was 10% extra margin being made that some other vendor could easily give up?  Or is this a Trojan horse?  It’s a Trojan horse and on day one of the second year of the contract, you will see the troops pour out of the horse and take over your castle.  This "perk" is predicated on the idea that if the distributor takes on a potential loss in year one, they will make up for the loss in year 2 and subsequent years until the end of the contract.  The catch is that they get to make product substitutions and you have little or no say in the matter at that point.  Are you O.K. with that?  If someone is going to guarantee HARD cost savings (actual costs saved, not potential costs offered but never realized) then YOU need to be in control throughout the contract and YOU need to insist on documented proof that savings are actually realized.
  6.  The Ability to Purchase from Other Vendors without Penalty
    No vendor can supply 100% of what you will require.  However, buried within the fine print of some distributor contracts are clauses that will prohibit you from buying from another vendor if you sign the contract.  And make no mistake, once the vendor finds out you have purchased from someone other than them, you will be getting a letter from their attorneys.   Make sure there a clauses in the contract that give you the rights to buy up to at least 20% of your total lab spend from any vendor you choose.
  7. Freight Terms without the Land Mines
    Free freight is one of the first things vendors will agree to.  Why?  Because they ship so much they get very favorable rates from their contract carriers.  But any final agreement you sign will be chock full of things you should negotiate on.  These include:
    -No or significantly reduced Hazmat fees.
    -Actual freight costs incurred by distributor when charged (e.g., 3rd party, bulk shipments, overnight) rather than marked up with a profit margin which is typical.
    -No blue ice / refrigeration / special handling fees.
    -No automatic air freight shipments on items that would deliver next day from the stocking warehouse if next day delivery would happen if shipped by the ‘free’ method (ground.)
    -No freight charges on equipment (e.g., refrigerators, furniture, other heavy items.)
  8. Replacement Cost-plus Pricing
    It is very common for distributors to offer very enticing pricing on expensive equipment (such as Mettler balances.)  Their motive for doing this is to keep these from going out for bid.  The offer typically will appear as:  “Cost plus 10% on equipment and instrumentation >$500.”  Sound pretty good, doesn’t it?  What they don’t tell you is how they define “cost.”  You are thinking, well, that’s what they pay for it from their vendor, right?  WRONG!  The cost they are referring to is a number they cook up which is the replacement cost, plus inbound freight (which is never incurred on drop ship items) plus marketing / sourcing cost, plus… well you get the idea.  So make sure that ANY cost plus offer is based on REPLACEMENT COST only.
  9. Signing Bonus / Loyalty Bonus / Growth Rebates
    A really effective carrot on the distributor side of the table is the promise of cash.  Don’t get me wrong, cash is great!  As long as it doesn't come with lots of strings attached.  A signing bonus is an easy starting point.  However, when does it get paid out?  Insist on it being paid within 30 days after the contract is executed.  And insist that if you exercise any cancellation clauses later that you do not have to pay it back!  The same applies to loyalty bonuses, which are typically paid annually after the second year of the contract.  You can also negotiate a contract extension bonus which would be paid if you decide to extend the contract beyond its end date.  Growth rebates require a lot of careful attention, especially as to what dollars are included in the calculation.  Do service fees or 3rd party purchases count?  Are they attached to multi-site compliance clauses?  Beware of growth rebates!  Distributors pay these out about as willingly as life insurance companies pay up after an accidental death of the insured.
  10. Discounts from List / Guaranteed Gross Margin (GGM) Rules
    A discount schedule is supposed to cover everything not on your hot list.  And this is where the distributor will make their profits.  They do this in two ways.  First, they will hope you will buy products from vendors who aren’t on the discount schedule, such as new vendors added after your contract is signed.  Or, they will give you a huge discount (50% off) but every item you purchase ends up hitting a little known clause in the contract called a “GGM rule.”  This is a “stop loss” clause put in contracts so that discounts, when applied, don’t end up yielding profit margins less than a certain percentage.  GGM rules are a complete mystery to most customers and when they see a number like 25% inserted there, they have no idea what it means. It means a lot and it’s a source of most contract disputes.  So there are two things you should do:
    [1] Insist on a GGM rule amount that is as low as possible, not to exceed 12%.
    [2] Ensure that any new vendors added after the contract start date that you wish to purchase from will be discussed at each quarterly review, and added either upon request at any time, or after the quarterly review is conducted.

We have many more negotiation techniques and tactics that we provide for our clients.  If you are going into contract negotiations, contact us.  We can and WILL help you win at the bargaining table!