6 Steps to More Effective Supplier Negotiations

You don’t want to be known as the buyer who beats up all of his or her suppliers on price, but in some cases those requests for lower costs are warranted. After all, in order for your organization to meet its financial and growth goals it has to produce a profit margin. Achieving that goal incorporates a number of steps and one of them involves negotiating the best possible pricing on all purchased items.

“Reviewing pricing, market conditions and other factors should be part of a procurement agent’s DNA,” says Sergio Juarez, senior vice president, Europe and Latin America, for supply chain operating network Elemica in Exton, Pa. “The agents should be doing this on a daily basis.”

Here are six ways to make sure your next supplier negotiation session produces favorable results:

1. Renegotiate all contracts annually. In Five Ways to Control Costs, Steve Odland of the Committee for Economic Development points out that for whatever reason, American businesses presume that all multiple-year contracts will result in lower costs. “A smart company policy is not to have the life of a contract exceed one year,” Odland says. “This forces annual bidding or at least renewal discussions with the current suppliers.” Almost always these discussions will result in lower cost of goods, he adds, while a multi-year contract will usually favor the vendor.
2. Conduct regular spend assessments. Writing out purchase orders and hoping that suppliers are fulfilling their commitments at an affordable price is not the way to do business in today’s budget-conscious environment. Take control of the situation by conducting regular spend assessments on specific vendors. Look at exactly how much you’re spending, what you’re getting in return, what other suppliers in the marketplace are charging for similar goods, and so forth. “This will give you a good understanding of how much you’re spending over time,” Juarez says, “and where the potential negotiating points are.”
3. Aggregate volume buys across the organization. By conducting regular spend assessments, companies can better gauge where they are spending money. With this information in hand, procurement agents can more effectively aggregate volume purchases across fragmented organizations, divisions and entities. If a company division in Texas spends $250,000 a year on a specific part—and if another division in California is executing similar buys from a different vendor—then it’s time to get some volume discounts by aggregating that $500,000 in annual spend with a single vendor. “By bundling those purchases under the same supplier,” says Juarez, “you can gain some economies of scale and better negotiating power.”
4. Help suppliers work more efficiently. Let’s say 80% of a specific electronic component’s cost is rooted in a single commodity item whose price fluctuates wildly. By working with the vendor of that product—and perhaps suggesting another material option—buyers can help “even out” those fluctuations and reduce their own costs in the process. “Help suppliers find more efficient ways to make their products,” says Juarez, “as a way to gain a better negotiating position for your own purchases.”
5. Explore the alternatives. Even if you’ve been procuring the same part from the same vendor successfully for the last 10 years, that doesn’t mean there isn’t some room for explorative thinking. “Maybe there are other products or materials that are being made today for half the price,” say Juarez. “When you explore alternative sourcing options you can often tap into price reduction opportunities that you didn’t even know were there.”
6. Come at it from the win-win perspective. Regardless of the corporate mandates that you may be dealing with, simply demanding 10% price decreases across the board isn’t going to help solidify positive supplier relationships. In fact, Juarez says approaching the cost reduction exercise from that position could be downright damaging for electronics buyers and their organizations. “Think about how you can make this into a win-win situation,” he suggests, “by suggesting more affordable manufacturing processes, transportation options, or material choices.” The bottom line: consider what you can do to help your suppliers give you a better deal. “This approach is always going to be much more effective that just asking someone to cut costs,” says Juarez.