No. of Recommendations: 8
Our business model created a substantial cash flow at a reasonably high net profit. This allowed us to pay all our bills on time (my edict), which in turn allowed us to be very valuable customers to our vendors in a field where nearly everybody else was in a cashflow crunch caused by ever-depreciating inventory, slow-paying customers and poor business management.
First, an anecdote:
During the last few years I owned my businesses, we branched into design-builds of commercial/governmental auditoriums and theatres audio/video/lighting infrastructure. There was a manufacturer of automation hardware/software who was pestering me to buy their stuff. Well, they turned out to be suitable in a design and I placed an order for a couple of hundred grand worth of their product to augment one of our projects. They informed me that, despite our having a great credit reputation (they checked our bank, references and D&B), the first order by any new customer had to be paid in-advance. Well, I wasn’t particularly pleased, so I said “OK, but I’m taking a 2.5% cash discount” which they reluctantly agreed to. A couple of months later I decided to place a somewhat smaller order (around $30K, I think) and they informed me that they had given me a $10K credit line and I would have to pay the rest up-front. I laughed at them and said “you just saw me pay a quarter of a million-dollar order and pay for it up-front without blinking an eye and now you say I’m not credit-worthy enough for an order a fraction of that size? You’ll find that I pay my bills on-time, but if you don’t give me a rational credit line, I don’t want to bother selling your products”. In the end they saw things my way.
From an ethics standpoint, mentally, I separated the decision of how to self-question awkward purchase policies (assuming I paid attention at all) into three categories:
1) Situations where i had signed an authorization contract with a manufacturer limiting me to the channel sources they said I belonged with
2) Situations where I had no contract with the manufacturer, but potentially my vendor was breaking their contract
3) Situations where manufacturers (and distributers) depended on the inertia and lack of imagination of their customer base
A couple of anecdotes in category #1:
Going back to the 1980's, buying Japanese-built PCs at the highest discount "Dealer" level. These came by ship from Japan to the US west coast, then were shipped to Massachusetts and then to me in NYC. I then sold them to the company's Australian distributors for less than they paid the company to ship them to Australia. On aa number of occasions, I sold the same company's products back to Japan-based companies and shipped them back to their origin.
There was a major US network manufacturer who was dumping its equipment in China (presumably for reasons discussed in releases from Wikileaks - similar to why the US government frowns of the use of Huawei equipment by our government). While they tracked the serial numbers on their switch and router chassis for warranty purposes, they didn't bother tracking options (which, when added up, could make up a significant portion of the price). These options were available to be shipped back from China at a fraction of their US distributor cost.
Sometimes, special deals were “stripped”. Say, for example, a manufacturer was running an end-user promotion of “buy 5, get 1 free”. If we got an order for five from a customer unfamiliar with the promotion, the “free” unit frequently ended up in our inventory.
Category #2 frequently involved “OEM” purchases and some blurred into Category #3. The term Original Equipment Manufacturer refers broadly to an entity which is manufacturing a product to be sold as a “whole”. Presumably, they can buy the components (say electrical connectors) from a wide variety of non-differentiated sources where brand name is not important, but price is. The definition can be pretty convoluted.
An electrical contractor buying a “safety switch” (the big grey boxes with a pull handle which would be seen where the electricity enters a building, for example) is treated as an “end user” since he hangs it on the wall and attaches wires to it – and might be able to negotiate a 10% discount from MSLP. An HVAC contractor, buying the identical switch from an HVAC equipment distributor would get a 40% discount as an OEM based on the premise that they would attach it to the side of an air conditioning unit. As one of thee very few electrical contractors who realized that there was a significant savings in simply opening an account with an alternative distributor, we had an edge.
Similarly, if you bought lamps (fluorescent tubes, light bulbs, etc.) from an electrical distributor, you would essentially be charged end-user price, but if you bought them from a lighting fixture distributor, it would be at much OEM pricing as when you inserted them into the lighting fixture, the entire thing was considered a manufactured item (but you had to know enough to ask for the discount, else the lighting distributer would pocket the funds).
There were some “secret” scams. Building wire has various ratings depending on the maximum temperature it was rated to sustain. The wire frequently used for general purposes was called THW/THHW/THHN. The wire used for lighting fixtures was rated at 90 degrees © and was rated AWM and was theoretically more expensive. One day I ordered two (stranded) spools of each and received four identical spools of quad-rated THW/THHW/THHN/AWM (suitable for both functions), but was invoiced at two different prices. When I challenged the owner of the distributor, he laughed and said that there were a number of products he carried that were charged at different prices – depending on what was ordered.
There were a number of instances where one division of a company charged another division much higher prices than they could buy their own product from me. It gave me a sense of ironic accomplishment when I could drop-ship the product from one of their warehouses to another and make a profit :-).
Of course, one common way around the system was to buy “brand-name” products from OEM’s who received much lower prices. While they were breaking their contracts by selling the items on their own (rather than built into a product), their pricing was generally based on various quantity benchmarks and, if they were short, they would do what had to be done (by selling product “sideways”).
While my electrical contracting business traditionally bought from local distributers, the IT equipment one started as a mail-order house. One of those ads you see in trade magazines with rows of tiny type advertising stuff at low prices. The business model (today, common, but unheard of in 1980 when I started the venture) was that I would sell the product, get paid, and then purchase it, on credit, from the closest source to the purchaser. Then I would pay the bill a month later. My inventory was an ever-growing bank account fille filled with money. This funded our gravitating towards government sales. Few brick and mortar competitors could afford to offer the large amount of credit required, but that wasn’t a problem for us.
We were dealing with dozens of large distributers all around the country. The technology-oriented ones regularly sent us their pricing structure (back then, it was on floppy disk as the internet and even CD’s were still a figure of the imagination).
As we moved towards becoming “legit”, one of our “secret sauces” was the database of dozens of distributors’ products and prices. Even after closing the mail-order function down, we maintained the same model of only ordering material after it had been sold – and each line-item was ordered from wherever it was cheapest. By this time, a number of super-large distributers developed (such as Techdata and Ingram-Micro), each of which had hundreds of thousands of items available for sale. Getting the same level of pricing from traditional electrical product distributers was more challenging as they treated their pricing as trade secrets and were hampered by not being particularly computer-savvy. Eventually, by threatening not to do business with them, most of them finally joined the modern era.
In any case (circling back), it was a constant battle between the manufacturers trying to maximize their profits and me trying to minimize our costs – even if it meant riding roughshod over the (to me, at least) arbitrary pricing structure divisions that they were hell-bent on maintaining.
After I sold my business, my understanding is that the new owners made a deal with a single distributer because they felt it was too difficult to use the tools I had written to create a bespoke purchasing environment. My guess, from what I heard, is that their overall profit margin on the material side of the business (as opposed to the labor component) dropped substantially. Simplicity is less stressful, I guess.
Jeff
