A prime vendor agreement or prime vendor contract allows buyers to purchase frequently-purchased products for “preferred” or discounted pricing. This type of agreement is most common between customers and wholesalers or broad line distributors, and is sometimes called a “bulk discount.” Restaurant owners can use prime vendor agreements to help control costs and maintain consistent quality. We’ll discuss how prime vendor agreements (vendor pricing agreements) work, the most common types of vendor pricing agreements, and what to watch out for when engaging in a vendor pricing agreement.
Types of Vendor Pricing Agreements
There are four common ways of structuring a vendor pricing agreement:
- Cost-plus pricing – as you might imagine, the vendor will sell a frequently-purchased product at the cost they incur to create or obtain the product, plus a flat markup dollar amount.
- Cost-percentage pricing – like cost-plus pricing, the vendor will sell a product at the cost they incur to create or obtain the product, plus an agreed-upon percentage of that cost. This pricing method is frequently used for products susceptible to spoilage, like fresh fruits and vegetables, and raw meats.
- Cost-pricing – at the benefit of the restaurant, the vendor sells the product at the same cost they incur to create or obtain the product. This is less common, as there is no built-in profit margin for the vendor, making it a less desirable vendor pricing agreement without some other incentive.
- Market pricing – the vendor sells the product at the going market rate. This method is typically used for products where the market price fluctuates throughout the year, due to availability. Market pricing is beneficial to the restaurant when market prices are low, but it may work out to be a higher rate than a cost-plus or cost-percentage agreement during non-peak seasons.
Regarding pricing methods based on cost or cost plus a markup – a product’s “cost” to a supplier includes the cost of delivering a product, which may be inflated by increased fuel prices, road hazards, weather delays, and shipping route and method. When negotiating vendor pricing agreements, be aware that these delivery costs may occasionally include surprise increases if there is a mishap during delivery. Be sure to discuss safeguards in case of delivery issues or delays with the vendor.
Vendor Services in a Vendor Pricing Agreement
Vendor pricing agreements should line out the services to be provided by the vendor to the buyer, as well as the pricing structure. Vendor pricing agreements should detail how the teams will communicate with each other, appropriate timelines, payment terms, how to resolve disputes, and what types of product expertise may be provided by the vendor. By defining these services in the vendor pricing agreement, you reduce the potential for confusion as the relationship evolves. Defining these services will also help you, as a buying restaurant, ensure that the agreement is fair and proper.
Once you have established your vendor pricing agreement and are placing orders, you’ll have to do your part to keep the agreement fair, as well.
- Audit the products’ costs and best practices for orders placed. This will help you catch discrepancies between orders and the vendor pricing agreement, inflated delivery costs, and issues with orders versus inventory and deliveries. If you use an invoicing/POS/accounting integration system like MarginEdge, you can set price alerts on specific products to help catch these discrepancies.
- Watch out for kickbacks or financial rewards to the individuals placing the orders, as these will inflate the costs of the products to your restaurant.
- Be sure to place reasonable orders. If you are placing very large orders in order to save time in transit or delivery costs, you may end up with wasted (spoiled) inventory, and large gaps between orders. This behavior can create inventory issues for your restaurant, and deteriorate the relationship with your vendor.
Keys to an Optimal Vendor Pricing Agreement
When setting up or working with a vendor pricing agreement, there are a few key things you can do to make sure the agreement will work as intended.
- Be cautious about “cost” and prices built on vendor’s costs. Vendors may manipulate costs to inflate their invoice to you, or have unusual profit margins built into shipping costs. Don’t allow yourself to be fooled by margins and percentages in cost-plus and cost-percentage agreements; focus on the total cost to you to make sure it’s truly reasonable.
- Set specific parameters for the products you purchase. This may mean you only purchase specific brand(s) or buy products from specific regions. Be wary of the vendor switching from name brands to in-house brands without vetting the replacement first. Make sure that all product substitutions – temporary or permanent – are formally authorized on each order.
- Build and maintain a functional relationship with every member of the supply chain, or make sure your vendor is successfully doing that for you. This covers everyone from where your vendor is getting the product, to the vendor’s sales, AR, and dispatch teams, to the company delivering your orders. If there is a breakdown in communication and relationship in any of these areas, you may end up with late or missed orders.
- Compare the reputations and financial health of your vendors when comparison shopping. While there is definitely something to be said for supporting small or struggling businesses, you don’t want to become a struggling restaurant because your food supplier went out of business and skipped out on your deliveries.
Vendor Pricing Agreements with Broad Line Distributors
When working with small vendors/distributors, you have pretty tight control over the products you’re purchasing because they only sell a few types of products. Alternatively, you may end up working with a broad line distributor. A broad line distributor sources and delivers products from multiple vendors, saving you time by working with only one vendor instead of many. However, that convenience in time saved also means you lose the detailed control with those vendors because the broad line distributor makes those arrangements for you. When working with a broad line distributor, avoid distributors who don’t allow you to choose your vendors or substitutes, require you to purchase a certain number or percentage of a particular product, or create constraints that impede or eliminate free-market competition. Also be aware that broad line distributors may provide limited service due to the lack of competition, may charge additional fees for special orders which require re-routing or re-organizing your delivery, buried price hikes in large orders, and long-term agreements that bind you to using only that distributor.
Vendor Pricing Agreements and Your Restaurant’s Financials
Having the right vendor pricing agreements in place saves time negotiating each order, and can help reduce your COGS percentages. Remember that the costs (invoices) from your vendor pricing agreements feed directly into your financial KPIs. Make sure that in whatever agreements you’re engaged, the costs are detailed on the invoices. Without that transparency, you will not have the correct data to accurately calculate key indicators like prime costs, overhead, and weed out bad business deals. If you have any questions about how your vendor pricing agreements should work, or how they feed into your accounting and inventory systems, schedule a call!
