Prime Vendor Agreement: Everything You Need to Know
A prime vendor agreement (PVA) is a pricing contract that vendors offer to buyers on products that are frequently purchased. 4 min read
2. Disadvantages of Certain Prime Vendor Agreements
A prime vendor agreement (PVA) is a pricing contract that vendors offer to buyers on products that are frequently purchased.
How Prime Vendor Contracts Work
Buyers tend to receive preferred pricing because of the high volume of product being purchased. They will typically receive it through the vendor's wholesale distribution channel. Like many other contracts, a PVA is designed to benefit both parties: the buyer and the seller.
The pricing for a PVA is usually calculated using one of the following:
- Cost-plus pricing. The cost of the product plus an additional flat markup fee.
- Cost-percentage pricing. The cost of the product plus an additional percentage rate. This is used for products that are susceptible to spoilage
- Cost pricing. The cost of the product.
- Market pricing. The current market price of a product. This is used for products where the price fluctuates depending on the time of year
A vendor should be knowledgeable of the conditions in which the buyer does business. There are many expenses that increase the cost of delivering a product, such as fuel, weather, and routes. Any one of these components may drastically impact the cost and effectiveness of the delivery. To prevent delivery mishaps, it's recommended that vendors remain knowledgeable of delivery issues that may arise with their buyers.
The aspects of the services that the vendor will fulfill on behalf of the buyer should be negotiated within the PVA. The following are the most vital components of service:
- Communicating with the sales team.
- Payment terms.
- Resolving disputes.
- Product expertise.
The purchasing behavior of the buyer will determine if creating a PVA is the right decision for the organization. A PVA may be ideal if your organization is seasonal or ethnic or if it is a small business.
Once a PVA has been established, it's important to determine if any of the conditions below are occurring within your business:
- Kickbacks or financial rewards being directed to the individual buyer. These could cause the prime costs of the product being purchased to increase.
- Placing massive orders. Time may be saved on the front-end by placing massive orders, but it may also deteriorate the relationship between the sales team and the buyer. It's important that the buyers and vendors continue to interact with each other and grow their relationship.
- Ensuring best practices are being met. Continue to audit the cost of the products over the course of the agreement to ensure best practices are being met.
In order to get the best products at the lowest price it's important to do the following:
- Create solid specifications for all products.
- Be leery if the vendor attempts to switch from a name brand to an in-house brand.
- Make sure all product substitutions go through a formal authorization process.
- Continue to build relationships with all members of the supply chain in and outside of the company.
- Research the financial health of your vendors.
- Comparison shop.
- Make sure you understand what the "cost" is made up of for all contracts that are cost-plus.
- Recognize that vendors may be able to manipulate their "cost" and still make it look like you're receiving the same margin percentage.
- Ask for details surrounding how all shipping costs are calculated.
- Don't get swindled by margins and percentages. Instead, stay focused on the total cost of the product.
- Remember, the final agreement should benefit both parties and be mutually respectful.
Disadvantages of Certain Prime Vendor Agreements
Buyers should avoid restrictive PVAs with broad line distributors (BLDs) that do the following:
- Impede on the buyer's ability to purchase from their preferred vendor.
- Require buyers to purchase a certain number or percentage of product.
- Create constraints and eliminate free market competition.
The following items should be emphasized with buyers:
- It's a buyer's market.
- Nothing will lower prices more than the free market.
- It's nearly impossible to calculate the cost-plus PVAs, so avoid them.
- Price deductions and rebates are subsidized by the buyer to make it look like they're receiving a great deal.
- As long as purchase orders exceed the point of diminishing return, it does not make economic sense to agree to a binding PVA if the only reason is to receive lower prices.
Below are other disadvantages:
- Due to lack of competition, service levels may decrease.
- In instances of special orders, the BLD may insist on charging the buyer an additional fee.
- Due to the lack of competition, the sales staff may become less interested in the buyer.
- It may be easy for the vendor to bury price increases if the quantity of orders is massive.
- The vendor may request the buyer sign a long-term agreement.
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