Including a growth bonus in the net price. What pitfalls will you face? This is an example of what we often encounter, as advisers and business controllers.
Case
Recentes case

How to include a growth bonus in the net price?

A large supermarket chain
Recentes is completely at home in the controlling of purchasing. We are business controllers, specialised in supplier conditions and sets of conditions. Our know-how supports the primary purchasing targets; with excellent analyses and process monitoring, contributing to the best possible financial results. We have many large and medium-sized clients in retail, and always work to achieve the best possible results for our clients.

 

This client is a large supermarket chain. Because we’ve been an actual part of the company for a long period of time, this case has been written from the point of view of our client. Our financial know-how has been deployed to contribute to the best possible results.

 

The case

Supplier X has been our preferred supplier for an important turnover group for many years. In recent years, we had more or less fixed bonus agreements with our supplier. These agreements concerned a guaranteed percentage condition of 4% on the full purchasing value and a growth bonus of 2% on top of that upon achieving the €10 million purchasing value threshold.

 

Retrospective bonus

This situation remained unchanged until last year, when our organisation decided to include agreements in the net price retrospectively wherever possible. Quick calculations soon led to the conclusion that our purchase price of €100 would be reduced by the guaranteed 4% bonus agreement to a new purchase price of €96. This was, unfortunately, not possible for the growth bonus, as the supplier demanded that this condition was maintained dependent on the purchase value.

 

If we would not adjust the €10 million threshold, it would be much more difficult to achieve this threshold. Check the following calculation example to illustrate this.

 

jaar x jaar x-1
number of articles purchased 102.500 102.500
purchase price 96 100
purchase value 9.840.000 10.250.000

 

Safeguarding

As you can see, the number of articles purchased remains unchanged, but we no longer achieve the €10 million purchase value threshold required for the growth bonus. In order to avoid this loss of approximately €200k, we have also reduced our threshold for the growth bonus by 4% to €9.6 million. We will therefore achieve the growth bonus in the new year and can safeguard an amount of approximately €200k.

 

Satisfied?

But are we satisfied? Surely we’ve achieved our objective? All possible retrospective conditions have been included in the price and the threshold for the growth bonus has been reduced. In order to answer this question, let’s have another look at the results of the 2% growth bonus:

jaar x jaar x-1 verschil
purchase value 9.840.000 10.250.000
growth bonus 2% 196.800 205.000 8.200

 

Missed opportunity

As you can see, we are still missing more than €8k in the new year, as the result of lower purchase prices. In order to repair this bonus, we need to increase the percentage of the growth bonus to 2.08%. If we do not do so, we will lose approximately 0.1% margin (based on purchase value). This is a missed opportunity in a market where margins are increasingly under pressure and where even the smallest margins are often long sought for.

 

This is but one example of what we often encounter, as advisers and business controllers. Our financial know-how is deployed to contribute to the best possible results.

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Contact
Martin van Wijngaarden
studio@nenontwerp.nl
M 06 1665 0665