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Not very obvious how this is even helpful. You're getting an approximation at best, meanwhile most suppliers will have a net margin of something like 5% to begi

Not very obvious how this is even helpful. You're getting an approximation at best, meanwhile most suppliers will have a net margin of something like 5% to begin with. If you're trying to figure out if it's currently 2% and you can't squeeze them anymore or they'll balk, or it's currently 7% and you can get some more, that kind of approximation doesn't tell you. Also, how's it better than the strategy of just putting it out for bids? If their margin is 7% at a bid that causes them to lose the contract then they'll lower it rather than lose to the other guy, and so will the other guy.

delfinom 2y ago
Because companies like Walmart already do this. The squeeze manufacturers hard on price, to the point manufacturers are forced to make lower cost versions of a good under the same brand label. Companies want the branded good because they think it will sell well, but they also don't care if the brand destroys the product. They just want the brand.
- lupire 2y ago
  But they don't need to know the actual COGS, they just need to threaten to drop the vendor.
- AnthonyMouse 2y ago
  But then they want the brand, so the seller gets to extract a premium for the brand even if you knew their COGS to the penny because it's actually worth that much in additional sales and they both know it. The thing where they make a worse version of the product isn't Walmart screwing the seller, it's the seller taking the short-term profit option by screwing the [Walmart] customer until the customer notices. And then the question is whether the customer notices whether the product is worse, or the customer notices that the product is worse from Walmart. Also, a lot of the store-specific SKUs aren't actually different whatsoever, they just put a different number on the box because it gets them out of MFN clauses with other retailers and the retailer likes it too because it gets them out of price match guarantees since nobody else has that SKU to match against.
- jrs235 2y ago
  It's why Walmart (and all big box retailers) have different model numbers for the same brands even though the big picture specs are basically the same. Cheaper components and now they can't be priced matched, they're different models after all...
m_ke 2y ago
When you have over half a trillion of revenue a year the fractions of a percent add up. Doing this allows them to negotiate a lower price from the manufacturer or get the manufacturer to adjust the ingredients to lower the COGS. So either it increases their own margins or allows them to have lower prices than the competition.
- AnthonyMouse 2y ago
  > When you have over half a trillion of revenue a year the fractions of a percent add up. The issue is that the estimate doesn't get you the fraction of a percent because it isn't accurate to within a fraction of a percent, so you don't know if it implies you can squeeze them for much more or not.
edmundsauto 2y ago
It’s not obvious that all suppliers have these low margins. It’s also possible that some very clever people could do better than just approximations. This feels like a comment dropped from an outside view, id bet someone who has tackled this problem could identify opportunities where it works really well.
- AnthonyMouse 2y ago
  For the few that have higher margins there's a reason for it, generally that they have limited competition, because otherwise the retailers would just go to the competition. But then knowing their costs doesn't help because you still don't have an alternative to them.
  - edmundsauto 2y ago
    What evidence do you have that this is the situation? It sounds like a broad generalization. It feels wrong to say “this approach won’t work anywhere”, maybe you are saying this approach won’t work everywhere. That’s fine, it doesn’t need to. And I’d defer to the person who did this work, it sounds like successfully, versus someone whose opinion is very broad and I’m not sure what evidence or experience they are basing their commentary on.
    - AnthonyMouse 2y ago
      You're calling it a generalization, but it's logical reasoning. Suppose there are 100 suppliers. Or even just two that aren't colluding with one another. The retailer goes to each of them and plays them against each other. They all want the contract as long as they can eek out at least a small margin and the winner is the one willing to offer the lowest price. What are the possible ways that this doesn't result in the winner having a razor-thin margin whether you know their costs or not? Possibility one, there is only one supplier or there are a small number who are colluding. Knowing their costs doesn't help because you have no other means to get the product than paying the asking price, since there are no non-colluding suppliers. Possibility two, one of the suppliers has lower costs than the others. Their costs are $5 when the next lowest is $20, so they can bid $20, have a 75% margin and nobody can beat it because at $20 the competition's margins are already zero. But this is the same as the first one. Even if you know their costs are $5, there is no one else who will give you the product for less than $20 and then they don't have to do it either. > And I’d defer to the person who did this work, it sounds like successfully, versus someone whose opinion is very broad and I’m not sure what evidence or experience they are basing their commentary on. Management at different companies has all kinds of opinions on how to do something. Just because somebody did something somewhere doesn't mean it's a useful strategy, only that a manager somewhere thought it would be.

delfinom 2y ago

Because companies like Walmart already do this. The squeeze manufacturers hard on price, to the point manufacturers are forced to make lower cost versions of a good under the same brand label. Companies want the branded good because they think it will sell well, but they also don't care if the brand destroys the product. They just want the brand.

lupire 2y ago
But they don't need to know the actual COGS, they just need to threaten to drop the vendor.
AnthonyMouse 2y ago
But then they want the brand, so the seller gets to extract a premium for the brand even if you knew their COGS to the penny because it's actually worth that much in additional sales and they both know it. The thing where they make a worse version of the product isn't Walmart screwing the seller, it's the seller taking the short-term profit option by screwing the [Walmart] customer until the customer notices. And then the question is whether the customer notices whether the product is worse, or the customer notices that the product is worse from Walmart. Also, a lot of the store-specific SKUs aren't actually different whatsoever, they just put a different number on the box because it gets them out of MFN clauses with other retailers and the retailer likes it too because it gets them out of price match guarantees since nobody else has that SKU to match against.
jrs235 2y ago
It's why Walmart (and all big box retailers) have different model numbers for the same brands even though the big picture specs are basically the same. Cheaper components and now they can't be priced matched, they're different models after all...

m_ke 2y ago

When you have over half a trillion of revenue a year the fractions of a percent add up. Doing this allows them to negotiate a lower price from the manufacturer or get the manufacturer to adjust the ingredients to lower the COGS. So either it increases their own margins or allows them to have lower prices than the competition.

AnthonyMouse 2y ago
> When you have over half a trillion of revenue a year the fractions of a percent add up. The issue is that the estimate doesn't get you the fraction of a percent because it isn't accurate to within a fraction of a percent, so you don't know if it implies you can squeeze them for much more or not.

edmundsauto 2y ago

It’s not obvious that all suppliers have these low margins. It’s also possible that some very clever people could do better than just approximations. This feels like a comment dropped from an outside view, id bet someone who has tackled this problem could identify opportunities where it works really well.

AnthonyMouse 2y ago
For the few that have higher margins there's a reason for it, generally that they have limited competition, because otherwise the retailers would just go to the competition. But then knowing their costs doesn't help because you still don't have an alternative to them.
- edmundsauto 2y ago
  What evidence do you have that this is the situation? It sounds like a broad generalization. It feels wrong to say “this approach won’t work anywhere”, maybe you are saying this approach won’t work everywhere. That’s fine, it doesn’t need to. And I’d defer to the person who did this work, it sounds like successfully, versus someone whose opinion is very broad and I’m not sure what evidence or experience they are basing their commentary on.
  - AnthonyMouse 2y ago
    You're calling it a generalization, but it's logical reasoning. Suppose there are 100 suppliers. Or even just two that aren't colluding with one another. The retailer goes to each of them and plays them against each other. They all want the contract as long as they can eek out at least a small margin and the winner is the one willing to offer the lowest price. What are the possible ways that this doesn't result in the winner having a razor-thin margin whether you know their costs or not? Possibility one, there is only one supplier or there are a small number who are colluding. Knowing their costs doesn't help because you have no other means to get the product than paying the asking price, since there are no non-colluding suppliers. Possibility two, one of the suppliers has lower costs than the others. Their costs are $5 when the next lowest is $20, so they can bid $20, have a 75% margin and nobody can beat it because at $20 the competition's margins are already zero. But this is the same as the first one. Even if you know their costs are $5, there is no one else who will give you the product for less than $20 and then they don't have to do it either. > And I’d defer to the person who did this work, it sounds like successfully, versus someone whose opinion is very broad and I’m not sure what evidence or experience they are basing their commentary on. Management at different companies has all kinds of opinions on how to do something. Just because somebody did something somewhere doesn't mean it's a useful strategy, only that a manager somewhere thought it would be.