AUTHOR Rich Weissman
PUBLISHED July 11, 2019
In some situations, negotiation is a contest with a clear winner and loser. Think about your last automobile, mattress or real estate purchase, where price was everything and the relationship fleeting and insincere.
That model shouldn't apply to the procurement world. Negotiation is not just about price, but about managing and improving overall supplier performance. Negotiation is an underutilized, yet critical business skill that lies dormant within most organizations.
There needs to be a broader approach around supplier performance, including measurable criteria such as accurate and timely deliveries, high quality, strong customer support, reduced supply chain risk, great communication and cost management.
The actual bottom line of a supplier relationship is far deeper than the price on a purchase order.
Successful supply chain management is anchored on excellent commercial relationships with critical suppliers. The benefits of close relationships include a focus on cost rather than price, early supplier involvement on key commercial and technical aspects, improved supplier performance in the areas of quality and on-time delivery and an abundance of communication.
While strong supplier relationships have proven beneficial to the buyer and seller, these relationships are not a replacement for active and ongoing negotiation. If one looks at negotiation with the big picture in mind — ongoing give and take with trustworthy and high performing suppliers — it can be an agreeable experience where both sides meet their objectives.
It is important to keep the relationship in perspective; a relationship with a supplier is not an excuse for lack of due diligence. Buyers need to focus on negotiating and establishing the performance framework early in a supplier relationship to allow for continuous improvement. Approach negotiation with a holistic approach.
This five-step process will help to build the foundation critical negotiations with critical suppliers of all types.
1. Understand your mission and business drivers
It is essential to understand the fundamentals of your own business so you can develop a negotiation strategy that complements the overall strategy. What are the essential business objectives of your company? What markets do you serve, who are your customers, what are their requirements and what are the operational goals of your business? Without a strong understanding of the business issues that makes your organization tick, you will never be able to successfully negotiate at any level.
A company that is quickly trying to build market share may be less focused on cost and more concerned with rapid deliveries. A negotiation based purely on low cost would not offer the proper business alignment. Suppliers will do their best to understand your business and craft a negotiation strategy to exploit your areas of weakness. It is your obligation to know more about your own business than they do to offset their potential advantage.
2. Understand their mission and business drivers
Understanding what business issues drive your suppliers will allow you to develop successful situational negotiation strategies. It is easy to compile intelligence on your suppliers so you can understand their pressures. This process can also be a good way to determine pricing trends, market constraints, regulatory issues or other important issues that the supplier may not quickly share.
3. Be authentic to build credibility and trust
Negotiation can be an emotional exercise, with the pressure of the bottom line creating an environment of conflict and mistrust both inside and outside of the company. Those emotions are not limited to the usual buyer and supplier dust-ups, but internal judgments and misconceptions as well, as the importance of the supply chain gain greater company recognition. Avoid posturing, bluffing, lies or deceit. These are tactics of a bygone era. Be yourself, adhere to your personal and organizational values and proudly represent your company. Trust is an underappreciated business and personal attribute. Gain it and keep it.
4. Work towards a positive outcome for all parties
Win-win negotiations are a bit of a misnomer. It does not mean each party gets exactly what they want, or there is one giant compromise in the "let’s split the difference" model. In a win-win negotiation, both parties can compromise so each side captures some level of value. Win-win negotiations in a relationship-based environment take on a long-term approach with a balance of success for both sides over time. One-off negotiations, perhaps for a piece of capital equipment, may lend itself to less of a relationship-based win-win model, replaced with a more traditional style of negotiation. Experienced buyers can negotiate over range of business situations.
5. Create a plan for evaluation and assessment
Negotiations are not singular events, but continuous efforts that need ground rules and communication frameworks. Leave little to chance and revisit performance often. Identify issues early to avoid conflict later. Establish key performance indicators in the contract that will form a basis for discussion.
Focus on cost, delivery performance, quality levels and a kaleidoscope of customer support initiatives. The indicators provide a great framework for regular contract reviews. But note in a relationship-based environment, the buyer has key performance indicators as well, including adherence to payment to terms, consistent forecasting and a resolution format for operational issues.
Most negotiations occur over and over again. We tend to deal with the same suppliers for a long time. It is important to recognize and give proper weight to the context in which a negotiation is taking place. If it is within an on-going relationship, the significance of that relationship must be considered as you craft your negotiation strategies.
This story was first published in our weekly newsletter, Supply Chain Dive: Procurement.
Matthew Bradshaw, CPSM, CPSD, C.P.M. is the Director of Programs for ISM-Houston, Inc.