Alongside supply security, pricing is inevitably the most critical task for procurement team — especially now as businesses look to cut costs in the current economic environment. But the success of bringing down supplier costs ultimately comes down to negotiation skills.
Procurement teams need to be prepared with good reasons as to why their supplier should lower prices. Beyond just price, however, successful negotiations require businesses and suppliers to align on agreeable terms around pricing, lead time and volume commitments.
Below are the three key steps of a successful negotiation:
1. Gathering initial information
Procurement teams need a 360 degree perspective on internal and external environments so they can spot potential opportunities and negotiate lower prices. But gathering data doesn’t just mean looking at a spreadsheet — actually visiting a supplier site, for example, can sometimes be even more useful than a list of numbers.
Here are some places to get started:
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Track material prices within your supplier’s industry. There are a couple of ways to go about this. For instance, packaging will usually have the material manufacturer’s name printed. That can allow you to get a better sense of your supplier’s costs from their suppliers. The alternate approach is to use the external consulting firms who have the market reports on all the industry segments for access.
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Know your supplier’s financials and business plans. A disruption at a critical supplier can have a huge impact on production and revenue. Whirlpool saw production volume decline 5% in Q4 due to a “one-off” disruption, for example, with net sales falling 15.3%. Procurement teams should have a strong sense of their supplier’s business situation to spot and prevent disruption before it happens.
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Understand your supplier’s process. Visiting a supplier site can give procurement teams a better sense of how production works and why certain business decisions are made. One of my supplier visits really helped me to better understand a vendor at the capacity utilization level, which I then used as a point during negotiation.
2. Preparing to negotiate
After gathering all the relevant details, the next phase is to prepare your strategy before going in for negotiations.
Consider the following:
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Compare your internal demand forecast to supplier capacity. This is an important part of negotiation as it sets the contract’s timeline and opens the door for businesses to find savings through potentially larger volume commitments. For instance, based on our volume outlook, I had an agreement for five years with one of our critical suppliers to secure the capacity and get the best possible rate. It really helped the organization sail smoothly irrespective of market turmoil.
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Decide on your price range. After doing your market research, decide what will be your anchor quote (or starting offer) and your extreme offer. If the supplier’s price range overlaps, it will set up the Zone of Possible Agreement.
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Prioritize your asks. Organize your negotiating terms based on “must-have” and “nice to have” items. Similarly, try to make a list of what you think your suppliers’ business priorities are to game out potential gives and takes during negotiation.
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Know your BATNA. Before entering negotiations, make sure you have a grasp of your Best Alternative to Negotiated Agreement in case talks reach an impasse. Could you get a better rate or a change in component specificaiton with another supplier? If so, use that to your advantage in negotiations.
3. Executing
The final phase is to dive into the actual negotiation by using all the information you’ve gathered to try and secure the best possible agreement.
Some final tips:
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Understand where you’re aligned and where you’re not. Organize the conversation so you can focus on the main points where you agree and where you disagree. This helps to avoid discussions on peripheral items which are insignificant. It also helps to build positive connection as both sides feel like they’re making progress on agreed points.
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Ask about price discrepancies. When I was in the process of negotiating with my board vendor, they made a claim for an input material cost increase of 15%. However, the global indices went up by 6% only for the same period. After much discussion, I learned more about the other cost pressures the vendor was facing and it helped us reach a consensus.
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Look for alternative solutions. A supplier once asked me to revise payment terms as she was going through a capital crunch. However, our company has standard terms and it wasn’t possible for me to make an exception. Instead, I found a solution by extending the invoicing discount facility to help her out for the interim period. In another case, I increased the advance order time so that supplier could better plan production and minimize excess inventory.
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Avoid renegotiating. Make sure you didn’t overlook any final requests or discussion points before closing out negotiations. Reopening talks in the future could leave you at a disadvantage and put already negotiated clauses in jeopardy.
No matter what, the most important thing for a successful negotiation is to have a win-win mindset. A winner-takes-all approach only offers short-term rewards and may erode important supplier relationships.
Praveen Kumar Soni is a procurement manager at Colgate-Palmolive.
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