If a supplier eliminates its competitors by driving down costs or developing disruptive technology, it can seem a business has no choice but to accept the supplier's price. And when fast-growing demand outstrips supply and suppliers begin to charge what they want, it can seem that you have no clout. But regardless of your company's market power in relation to that of your suppliers, you need to approach your negotiations strategically. Using 10 steps, you should approach supplier negotiations as you would any other negotiations...namely, negotiating vigorously to get the best deal.
1. Learn about the supplier's products, processes, costs and market. You'll be your own best advocate only if you understand a supplier's processes and its operating environment. By talking to a number of vendors, you'll learn the industry jargon, the products available, as well as the expertise of individual suppliers. This information will be valuable during negotiations with a supplier, particularly in evaluating concessions that your supplier might consider.
2. Become a value-added customer. Before you enter negotiations with a supplier, consider how you can help the supplier realise the value in other aspects of his business. Doing so can turn a business transaction into a strategic partnership. For instance, let the supplier know you are a source of repeat business and make the company aware of how much business they can expect based on your purchase history.
Also, you might offer a business opportunity, such as your commitment to use the supplier's products in a new market in exchange for a price concession. As an alternative, you might negotiate a lower price in exchange for a multiyear contract that will reduce your supplier's price risk.
3. Change your demand pattern. You can revise your purchasing policy by consolidating your purchase orders. For example, rather than authorising individual departments to issue purchase orders to one supplier, require that the requirements be combined in one consolidated purchase order, the size of which must be large enough to earn a price discount.
Also, you might also create a purchasing consortium with other companies and place orders with one or a few suppliers, rather than many. Your company might also switch from one material requirement to a lower-cost product.
4. Agree to larger deposits on orders. "Accounts receivable days" affect the cash flow of all companies, so you might agree to a large cash deposit on orders to secure you a significant product discount. For instance, a 50 percent upfront payment might earn a 10 percent discount, or improved delivery terms or product customisation.
5. Agree to high-dollar purchase. If you transfer all of your business to one or a few suppliers, rather than many, you'll receive deeper discounts and, perhaps, other perks. But before you give your business to a few suppliers, consider the increased risks of doing so.
6. Be a customer that solves issues, not presents issues. A supplier's profit margin can be eroded by customer production, delivery or quality issues. So to get a better deal, be reasonable when making demands.
7. Implement a bidding process. To ensure competitive pricing, use a bidding process to solicit business proposals from multiple suppliers. Doing so makes it clear your company will buy materials from the supplier that submits the most competitive bid
8. Consider all aspects of your purchases. Supplier prices may not be nonnegotiable, but other aspects of a purchase, including the down payment, bulk discounts and shipping rates might be. For instance, you might negotiate an enhanced product warranty or extended payment terms, each of which can improve your cash flow.
9. Cease doing business with supplier. As a last resort, you can cancel existing orders and exclude the supplier from future competitive bidding rounds. Before you institute this process, meet with the supplier and ask for a price concession. Also, confirm that another source of supply is available.
When negotiating with suppliers, it's sometimes hard to see a way to redefine relationships. Finding a desirable option is a matter of thinking strategically, clearly defining the issues, a willingness to work across functions, and analytical thinking. Follow the nine tips above and you'll accomplish all that and more.
Written by Paul Podbury @ Locomote