Chris Maker is a buyer for Dishes Corp., a Dutch-based distributor selling dinnerware. It’s November and he is in a meeting with Peter, sales representative for Plates ‘R Us, to negotiate their contract for the following year. Dishes Corp. have been purchasing from Plates ‘R Us for 5 years and each year the price has increased by 4% on average. Chris has been pressured by his boss not to accept any increase this time around. Let’s see how he manages.
Peter: Chris, thanks for taking the time to meet with me this morning. I see that you’ve had some healthy purchases from us over the last 6 months. Seems your customers are enjoying our new designer line.
Chris: Sure, we’ve had a lot of success with your plates. We’d like to continue in this direction for next year. I guess it’s time again to discuss the terms of our contract renewal.
Peter: Of course, that’s precisely why I’m here. In principal, we can keep all of the terms as they are now. However, I will need to modify your prices a little bit. This new designer line has been quite a hefty investment for us and we just can’t continue with the rates we’ve been charging.
Chris: What sort of increase are you talking about?
Peter: It would be 5%.
Chris: 5%! You’ve got to be kidding me. There is no way that I can accept that. You have considered that our volumes have grown by 300% since we started buying from you, right?
Peter: Indeed Chris. We really appreciate the great work you’re doing with our products, but we’re still under heavy pressure to get our prices up to acceptable levels.
Chris: Peter, I’ve accepted price hike after price hike from you since we’ve started doing business together. There must be some alternatives.
Peter: Tell me about the outlook for next year. Perhaps if we can expect a sufficient volume increase then we can play around a little with the numbers.
Chris: I have orders lined up until June. If we look at the figures, this year, we bought 26,000 plates. Next year, I’m expecting to purchase at least 32,000. That’s a 23% bump.
Peter: That’s a promising forecast. If you can guarantee that number somehow, I can drop the price change to 2.5%.
Chris: I have no issues to put this volume in our contract. As I’ve said, the orders are there already. But, I’m still not willing to accept an increase. What if I anticipate some of my orders for this year. Is there anything you can do?
Peter: Well, if you can commit to receiving next year’s full expected volume by June and also pay in advance for the shipments by the end of the year, then I think I can figure out how to convince our management to forget the price increase for this year.
Chris: Peter, if I understood you correctly you want me to pay now in full for 100% of next year’s volume? I think that’s a little excessive and would put us in a really difficult situation. What I can propose is to place an order for 10% of next year’s volume by the end of December. From January on, I’ll order 3 months worth of plates at once, so 8000 at a time.
Peter: That could be acceptable. But, could you consider also reducing your payment terms?
Chris: What did you have in mind?
Peter: If we can get down to 30 days net, then we can forget the price increase.
Chris: I can agree to that. But, I can’t have you coming back to me with another price increase proposal next year. I need to have this price in place for at least the next 3 years.
Peter: I’m afraid 3 years isn’t feasible, but 2 I could do.
Chris: Great, I think we’ve reached a good compromise here. Now, why don’t we get that down in writing?