5 Steps to Successful Contract Negotiation in Procurement
In many industries the balance of power has dramatically shifted from buyers to suppliers. The shift has come about for various reasons: in some cases suppliers have eliminated their competitors by driving down costs or developing disruptive technologies. In others, fast-growing demand for inputs has outstripped supply to such a degree that suppliers have been able to charge what they want. In still others, buyers have consolidated demand and forced suppliers’ prices down so far that many suppliers exited the market, giving the remaining few more clout.
Whatever the reason, companies that have gotten into a weak position with suppliers need to approach the situation strategically. They can no longer rely on hard negotiations through their procurement offices. To help with the strategic reappraisal, we’ve outlined five steps your company can take in order to get the most out of your supplier relationships. Companies should start by assessing whether they could help the supplier realize value in other contexts. If not, they should consider whether they could change how they buy. They should then look at either acquiring an existing supplier or creating a new one. If all else fails, they must consider playing hardball, which can have a lasting impact on the relationship and is a last resort.1
An Introduction to Contract Negotiation
Contract negotiations with suppliers is a large part of any procurement role; and it can also be the most difficult. Negotiating is the process that procurement professionals go through to create favorable terms as part of a new supplier contract. This can involve negotiating different terms with an existing supplier when a contract is renewed, or discussing terms from scratch with a brand new vendor.
Negotiations are typically used to determine the fairest price and payment terms, delivery and production time, quality standards and more. The negotiations need to consider the best option for both supplier and buyer, rather than just aiming to get the cheapest possible price, as this will help to build stronger relationships with long term suppliers.2
To ensure everything you set out to achieve is covered in negotiations with suppliers, it is important to set objectives prior to entering into negotiations.3
Setting Objectives for a Negotiation
There's a range of key considerations you need to bear in mind when setting objectives for purchase negotiations. These might include:
- Value for money
- Payment terms
- After-sales service and maintenance arrangements
- The key performance indicators (KPIs) which will be used to monitor supplier performance
- Reporting requirements - content, frequency and review meetings
- Communication channels, order & delivery practices, and any system integrations that may need to be in place
- Key contacts at both parties for dispute resolution, disaster management and continuity
- Training and skills transfer requirements
Before you start to negotiate, draw up a list of the factors that are most important to you. Decide what you are - and aren't - prepared to compromise on.
For example, if you're ordering supplies in bulk you might want to find a supplier that will offer you a discount. Or if you're investing in a complicated piece of computer software, you might want to make sure that training is provided as part of the deal.4
5 Steps to Successful Supplier Negotiations1. Research the actual costs: There's no better position to be in when negotiating a price than to know what it cost the guy on the other side of the table to make what he's selling. By figuring out the cost to make the product, you then have a much better idea of how much wiggle room you have in regards to negotiating.5
Another good idea is to reference their customers, The best data you can get from a supplier is from their customers. Before you enter into any sort of negotiation, you should always ask the supplier to provide a list of customers you can reference for the type of product you want. Customers like to talk about products they are happy with, and more often than not, they will share their prices.
1. Understand their mission and business drivers: Think like a supplier: They have the product and want to sell as much of it as possible. Present yourself as a resource with a proven track record of selling to the target industry. Understand that money talks, and a supplier that sees dollar signs will make a partnership with you. The trust and credibility you build will determine the terms of your partnership and favorable rates.
2. Discover areas of mutual gain: Spend time to discover the supplier's goals to increase the mutual gains achieved in the agreement. For example, if the supplier won't budge on price, focus instead on other areas of the agreement, such as the amount of the down payment, the length and scope of the warranty, a discount for purchasing in bulk, and other areas of interest that might provide even greater benefits for both parties.6
3. Know the lingo: The best clients are the ones who understand the industry basics or are open to learning them with my guidance, and therefore become their own best advocate. Talk to different providers and learn the jargon so you sound like you know what you're talking about, and the vendors will treat you with respect. Feel free to reference our blog post on incoterms you should know.
4. Quote multiple suppliers: Always get the service quoted by at least three other suppliers. Let the supplier know that you are getting quotes and will go with the best one available. This creates some competitive pricing.
Do your research and have a target dollar amount that you want to pay. Tell the supplier that you want to order a very high quantity and get their price. Once you get the price, ask them how much for an amount less than what you want. Then tell them you want this many pieces and you're getting it cheaper from their competitor. Give a reasonable price that makes sense, and they will beat it.
When negotiating with strategic suppliers, take a strategic approach. Select and brief your team well beforehand. This includes setting objectives for the negotiation, defining roles in the process, doing research, deciding on tactics and planning the meetings or calls. Always have a fall-back position in case negotiations fail and you’re not able to get the result you’re looking for. We recommend taking a data-driven approach to preparation by looking at your historic spend and suppliers in that category, your purchasing volumes and patterns, past prices & current market data, your forecasted volumes, and any existing terms you have with similar suppliers.
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.
About Exporta Technologies
Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States.
Exporta’s marketplace offers buyers a full service experience in the origination, sourcing and managing of products. The platform was founded on the idea that curation and service are the most important elements in the buyer’s journey. Exporta’s marketplace is building technology that addresses the pains of sourcing products internationally at attractive prices.