Tuesday, August 16, 2011

Supplier Rebates

In a consumer purchase setting supplier rebates are intended to generate the sale. Most companies know that the number of rebates that are actually applied for and that meet the conditions of the rebate are small so it’s a low cost way to try to drive purchases and capture business from your competitors.

In procurement rebates are viewed in a number of ways. Some suppliers consider them hassles and don’t want to invest the time and expense to manage them. Other suppliers will view them as a mechanism to drive future sales and loyalty. If the customer purchases elsewhere, they lose that counting either meeting the conditions of the rebate or they lose rebate. Some buyers view rebates as price reductions that they should have been receiving from the beginning and an additional cost as the Supplier has the use of the Buyer’s money until they pay the rebate.

However you look at it, rebates are clearly used by suppliers with the intent of influencing your future sourcing decisions. For each purchase it can force you to weigh any difference in a competitor’s price against the impact that purchase would have on the rebate, qualifying for the rebate or the price with the rebate included. Many times buyers may drive suppliers to using the route of rebates. If a Buyer wants the one-thousand unit price for a quantity one and makes no firm commitments to purchase more, the supplier can either say no or they can tell the buyer that they will rebate them the difference once they have met that quantity. In doing that they have nothing to lose and everything to gain. If the buyer fails to purchase the quantity for the rebate, it costs them nothing. If the buyer purchases the quantity the only thing the Supplier pays the buyer is the difference and in the interim they have had free use of the buyer’s money.

With companies whose procurement groups are heavily focused on cost reduction, Suppliers use rebates as a tool to lock the buyers in. If they continue to buy from the supplier they will get the rebate that they can claim as cost savings. If they change suppliers, they may get a lesser price on that purchase and can claim that as savings, but they may lose the rebate and they lose the claim of cost savings from the rebate, which may be larger.

Most rebates are tied to volume and in negotiating a rebate you would negotiate it the same way you would negotiate any volume pricing. Look at where there are real cost differences and opportunities at the volumes. Look at their total volume to see what if any real impact your volumes will be. If they get real cost breaks from your volumes the rebate you negotiate should be higher than if your volume will have zero impact on their costs. If your volume doesn’t have an impact on their cost you know that they can sell it to you for the higher volume price without it impacting them at all. I would use that to try to drive the price down. If they won’t agree to reduce the price and only will agree to a rebate approach you need to understand that the rebate is an attempt to lock you in for the future. As the market changes over time you will have that as an additional thing to consider in your sourcing decision or how you split your awards. In the end chasing rebates could have you wind up paying more than what the competition is charging in the future just to get the volume for the rebate. That may have been what the Supplier’s strategy was in the first place by offering it.