“Knowledge is power,” says Joseph Carter, the Avnet Professor of Supply Chain Management at the W. P. Carey School of Business, and leader of the Strategic Procurement section of the 2012 Small Business Leadership Academy.

For a small company looking to bring on a large company as a client, or keep a large company as a client, cost can be the main component of the relationship. “Price is only one part of the total cost,” Carter remarks. “The four general types of supply costs include purchase price, transaction costs, administrative costs and production costs. “

The large company will first define its category, putting information together, including the strategy for that category. Strategy can include searching out the lowest cost, the quickest response time or the least amount of risk, which relates to the external market complexity. This information should be available at the drop of a hat for the company.

One place the large company will try to squeeze their suppliers is by negotiating a lower purchase price. The purchase price is always important, but it isn’t as simple as just one number. The purchase price includes four distinct factors: profit, semi-variable costs, variable costs and fixed costs.

The large company knows that a very small percentage of its suppliers garner the majority of the purchase dollars. Purchases should be grouped into imperative categories with the understanding that 80 percent of dollars spent will be on 20 percent of the categories.

What does this all mean to the small business owner? Once they understand where they stand as a supplier, they can better understand the bidding processes that they must go through, as well as the pressures they will face. For the small business owner, knowledge is power.

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The Small Business Leadership Academy (SBLA) is an intensive executive education program designed to strengthen the business acumen of small business leaders in Arizona. The program was jointly developed by the W. P. Carey School of Business and the Salt River Project (SRP), the program’s founding sponsor. Other seat sponsors this year include: Arizona Lottery, Blue Cross Blue Shield of Arizona, Hahnco and U.S. Bank. Each week we will bring you a few salient points from each class as well as comments from the professors themselves and the impact the information has had on the students.

For more information about strategic procurement and/or the Small Business Leadership Academy, please visit SBLA’s website.