Logistics/Supply Chain/Raw materials
QUESTION: Mr. Madhavan
I am located in Montreal and i have a small business who makes just one product, the main raw material is a Malanga Lila.
Because it is a small business i do not buy big quantities (5 boxes of 40 pounds every week) , my main supplier is: Sami fruits
That wholesaler has a supplier in Toronto called : Arc en Ciel Produce Inc.
Sami fruits buys 2 or 3 palets (1 palet: 60 boxes of 40 pounds)on a regular basis
I am giving you these infos just to give you an idea of what i am talking about.
I would like to have a better control of my raw material and reduce considerably the price of the raw material. I am able to buy 1 palet ( 60 boxes of 40 pounds) on a much longer period than Sami fruits to reduce the price of acquisition .
Questions: How can i deal with arc-en-ciel produce to have a good price ? Will they sell to me even if they already have their distributors in Montreal who buy many different products while i only buy just 1 product on a longer period of time?
Or if you have a suggestion to reduce the price of my raw material?
ANSWER: Hi and Good day
I understand that you are a one product company with the main raw material, Malanga Lila sourced from the local whole saler on a weekly demand basis. In turn the local whole saler sources these raw materials from a larger player. The challenge is reducing the raw material price using large lot sizes
Like you mentioned there are multiple options here.
Firstly you have a limited demand forecast every week, something which requires only 5 boxes at 200 pounds every week. This works out to only like 20 boxes every month. Even if you manage to source a pallet with 60 boxes this works out to something like three months raw material stock. I don't know the demand fluctuations out there, pricing changes in raw materials, seasonal impact, alternatives etc. Holding three months raw material and maintaining proper storage and handling is definitely going to be a challenge and you need to look into it.
For five boxes per week, it may not be ideal for the Toronto wholesale company to service you as the freight and handling costs will be high per unit to produce.
If you need to reduce the sourcing costs, the options available are
1. Identify and calculate your weekly demand for the next 16 to 24 weeks and get a tentative schedule in place for this raw material
2. Directly approach the main whole sale company and check if they may be able to service your needs on a regular basis at the price you want
3. Quick check for alternate suppliers in and around who may be able to give you this product.
4. If you have significant cash flows and think this raw material can be stocked in large quantities to save on price, please do so - but check the cost of holding stock to handling it versus buying in smaller quantities and see the price benefit.
In parallel start speaking to the existing supplier in Montreal, to reduce the price and commit larger quantities per week and see if this works.
If you create a simple plan based on the above and other thoughts and acting on it, think you should see results coming in quickly
All the very best
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QUESTION: Thank you for your detailed answer but i forgot to mention that this raw material will ne dried and turned to powder, that makes it easier to stock!
Does that change your perspective?
ANSWER: Converting the R/M to a powder based production input is good enough, but again the questions need to be asked are the shelf life, quality of the powder and so on when storing large quantities. Price discounts on large volumes is definitely a good concept, but today the market dynamics are such that even a reduced payment cycle also enables a good discount with the suppliers.
Nothing more and all the very best
---------- FOLLOW-UP ----------
QUESTION: In order to be able to negociate the price (it fluates because it depends on the value of the canadian dollar vs US dollar and also upon the availability of the product in latin america)
1-for the value of the dollar i can do the follow up
2-for the availability of the product, how will i know?
How do i manage to know when to buy and what would be my leverage?
Hi and Good day
My understanding is like this... I understand that you are purchasing the raw material from a distributor in Canada and there is a dependency on availability and on the depreciating Canadian dollar.. So there is a volatility on the pricing every time.
In your case, you may look at buying larger quantities based on shelf life and store the same. The pricing can be estimated based on last 12 months purchase price and correlating with the US dollar wherever relevant.
To leverage, you need to look at a buyer directly in Latin America and start discussing with them on the volumes based pricing to understand the discounts, logistics cost and so on. Over the next few months the Canadian Dollar is going to be hit badly, looks like US Dollar is going to stay put for sometime.. Also discuss with your bankers and tell them your predicament and try to get some kind of hedging risk on foreign currency transactions. They may be able to help you out.
All the very best