Negotiating with suppliers
Negotiating with suppliers In some cases, the negotiation is a clear winner-and-loser contest. Think of the last purchase of a car or real estate, where price was everything and the relationship was fleeting and dishonest.
This model should not apply to the world of procurement. Negotiating is not just about price, but about managing and improving the overall performance of suppliers. Negotiation is an underutilized, but very important, business skill that lies dormant in most organizations.
There needs to be a broader approach to supplier performance, including measurable standards such as accurate and timely delivery, high quality, strong customer support, reduced supply chain risk, great communication and cost management.
The actual bottom line of the supplier relationship is much deeper than the price on the purchase order.
Negotiating with suppliers
Successful supply chain management rests on excellent business relationships with important suppliers. The benefits of close relationships include a focus on cost rather than price, early supplier involvement in key business and technical aspects, improved supplier performance in quality and on-time delivery, and abundant communication.
While strong relationships with suppliers have proven beneficial to both the buyer and seller, these relationships are not a substitute for active and ongoing negotiations.
If one looks at negotiating with the big picture in mind - continuous give-and-take with trustworthy, high-performing suppliers - it can be an acceptable experience where both sides achieve their goals.
It is important to keep the relationship in order; A relationship with a supplier is not an excuse for a lack of due diligence. Buyers need to focus on negotiation and establish a performance framework early in the supplier relationship to allow for continuous improvement, a negotiation approach with a holistic approach.
This five-step process will help build critical negotiations with critical suppliers of all kinds.
Understand your mission and business drivers
It is essential to understand the basics of your own business so that you can develop a negotiation strategy that complements the overall strategy.
What are your company's primary business objectives? What markets do you serve, who are your customers, what are their requirements and what are the operational goals of your business? Without a solid understanding of the business issues that make your organization tick, you will never be able to negotiate successfully at any level.
A company that is quickly trying to build market share may be less focused on cost and more interested in fast deliveries, and a negotiation based solely on low cost will not provide the right match for the business.
Suppliers will do their best to understand your business and formulate a negotiation strategy to exploit your weaknesses. It is your duty to know more about your own business than you do to make up for the potential advantage.
Understand their mission and business drivers
Understanding the business issues that drive your suppliers will allow you to develop successful situational negotiation strategies.
It's easy to gather intelligence on your suppliers so you can understand their pressure. This process can also be a good way to quickly identify price trends, market constraints, regulatory issues, or other important issues that a supplier may not share.
Be honest to build credibility and trust
Negotiation can be an emotional exercise as the pressure of the bottom line creates an environment of conflict and mistrust inside and outside the company.
These feelings are not limited to the usual buyer and supplier dust, but internal judgments and misconceptions as well, where the importance of the supply chain is more recognized by the company.
Avoid situations, deceive, lie or deceive. These are bygone era tactics, be yourself, stick to your personal and organizational values, and represent your company with pride. Trust is an underappreciated business and personal trait, earn it and keep it.
Work to achieve a positive outcome for all parties
Win-win negotiations are somewhat of a misnomer. This does not mean that each side gets exactly what they want, or that there is one giant compromise in the "let's split the difference" model. In a win-win negotiation, both sides can make concessions so that each side gets a certain level of value. Win-win negotiations in a relationship-based environment take a long-term approach with the balance of success for both sides over time.
One-time negotiations with suppliers, perhaps for a piece of capital equipment, may give way less to the relationship-based win-win model, which is being replaced by a more traditional style of negotiation. Experienced buyers can negotiate a range of business positions.
Make a plan for evaluation and assessment
Negotiations are not individual events, but ongoing efforts that require ground rules and communication frameworks. Leave a little to chance and review performance often.
Identify issues early to avoid conflict later. Put the KPIs into the contract that will form the basis for the discussion.
Focus on cost, delivery performance, quality levels, and problematic customer support initiatives. Indicators provide a great framework for regular contract reviews, but note that in a relationship-based environment, the buyer has KPIs as well, including commitment to pay terms, consistent forecasting, and orchestrated resolution of operational issues.
Most negotiations happen over and over, we tend to deal with the same suppliers for a long time. It is important to recognize and give appropriate weight to the context in which the negotiations are taking place.
If it is in an ongoing relationship, consider the importance of that relationship while formulating your negotiation strategies.
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