My first topic of this blog! I choose to write on negotiation since I consider negotiation as very critical aspect for any procurement professional. An important tool any human use through out his/her life to achieve their goals. Many won, many lost, Many relationships flourished, many broken, some were very successful, some were completely destroyed. Every case makes this whole game so exciting.
Negotiation brings lots of surprises to the table. You can deal with them and emerge as successful only if you have a better preparedness. Here are the 7 point tips on how you can better prepare for a negotiation and avoid many pitfalls.
1) Identify the top supplier for the negotiation and have a next best option in case you cannot reach an agreement with your best supplier
You arrive here after analyzing RFx responses, Technical reviewing and assessing supplier on various parameters designed for the package. It is recommended that you communicate and present the case with your higher authorities (depending on the cost of the package or approval limits involved) and User department who are directly impacted by the decision. This exercise will ensure that every one internally are aligned to the decision (both commercially and technically). There are cases where buyers are forced to retain the incumbent supplier or a specific supplier due to internal resistance. This will help identify the right supplier for negotiation.
2) Be very clear about the objectives of the negotiation, your expectations and results you would want to see after the deal. Do a market benchmarking, costing and analyze total cost of ownership involved
List down the points you would negotiate ex: Pricing, Quantities, Timelines, Payment terms, Delivery terms, Freight costs, Warranty and maintenance, Service levels etc. and what are the expectations you have for each point. Know your business objective, do a market study to understand about the state and trends in the market. Research the true market value. Back-up your case with evidence and uncover defects in their argument.
3) Ensure that you are negotiating with the decision making authority at the suppliers end. Create an agenda for negotiation, practice and start confidently
After all the preparations, practice and hard negotiations if the supplier representative says he cannot take decision himself and need approval from his management then it’s a waste of time for you and you may have to start all over again while supplier is well prepared to counter your tactics this time. So communicate well in advance and say upfront if necessary that you appreciate to negotiate with the decision maker. Many buyers mess up things by not being able to have high level representative of supplier organization in the negotiation.
4) Identify the negotiation strategy (ex: tough, collaborative, leveraging etc). Identify the points you are negotiating and set least acceptable tolerance for each point
There are instances where supplier provides concession on pricing and ask for concessions on other areas. You may come to agreement at that point of time but realize the mistake committed once they are penned down later. Ex; a) A logistics buyer while negotiating with a freight forwarder for performing transportation of goods from a certain location to across the region proposes $7/ CBF against quoted amount of $10/CBF for shipping goods from A to B. The supplier agrees to that but asks for waybill charge of $20 for each shipment or relaxation in terms of TAT.
b) A OEM supplier proposes to provide concession on the cost of machinery you are buying while proposing an increase on the spare parts pricing, or same supplier proposes increase in the equipment cost while providing the discount on spares, warranty and maintainance etc.
There could be small shipments of less than 5 kgs at a higher frequency. Annual spend for spare parts, maintenance, service could contribute to a large amount. There is a potential pitfall if buyer comes to an agreement with out properly analyzing the scenarios, Product characterstics, their spend, usage details/ volumes, cost of machine breakdown and its implications on business etc
5) Don’t get emotionally involved threaten or demand to work things at your way. It may back fire, often breaks down. Don’t be aggressive be cool. Highlight the benifits of doing business with you, Justify that the budget you are specifying is valid with proper data or say you are forced to award the contract to another supplier if you cannot conclude in the specified budget limits or TOC etc. Get something in return every time you give up something ensure that you are conceding in small increments.
Though negotiation happens between 2 organisations in reality its 2 negotiating inividuals accountable for their relationships. Assume you are a sales guy for a moment. The buyer on the other side threatens you for taking other business from you or make things works his way by dictating terms with you. Though you agree to his terms and conditions, you may not like him at the personal level and that makes you give him next or less priority later on. Now switch back to your buying role and see, you are not in a pleasant situation now. There are companies who beat the suppliers for YOY reduction. A supplier who has extended 3% reduction on your pressure during the market down turn, with no volumes at all hesitates to came back to you with the saving when they have done some process improvements at his end that improves the production cycle time and cost of production or reduction is cost of the product with some alternate material and technology. Encouraging for cost reduction and collaborating for that is a good thing dictating is not.
History suggests that collaborative and leveraging approach has given better results to that of tough game approach.
Leverage your BATNA (Best Alternative to the negotiated agreement). Trade off concession encourages the supplier to concede first for you. Your supplier will have more appreciation for final outcome and respect for you
6) Do an assessment after each negotiation session with the supplier and change your strategies and tactics if necessary. Prepare notes for each point you are going to negotiate, review the notes from previous negotiations for tips. Anticipate and analyze supplier’s reaction to each tactic
Supplier can easily anticipate your strategy in the next negotiations when you stick to the same dialogue every time. Use various tactics unconventional ways of negotiations to work things at your way. Know their strengths, their weeknesses, their competitors, your strengths, internal & external atmosphere every thing that factors. Negotiate like a king. Dont use all your weapons for defending one point or proposing one point. They will have more power and other tactics to defend for other points. Ask more questions like why they want the price increase. Ex: If the increase is for labor rate hike dont jump in to decrease in the raw material costs, fuel, increase in your volumes or other reasons that justifies the price reduction immediately. Try to defend with a reason like job market situation, consumer index and any market forces affecting the labor which are more relevant to his reason. You can use the other weapons for next points or even stress for reduction with them.
7) Document whatever has been concluded in the negotiation. After the negotiation make supplier feel good about the contract awarded if he is unhappy for loosing the negotiation
There are many instances where suppliers agree to certain things but in practice they will not be followed accordingly. After reaching any agreement with the supplier document them and email to all the concerned parties to ensure that you both are in same page. This avoids any misunderstanding or disagreement after invested so much of time. Use that as a base during any conflicts and non compliance.
Supplier leaves the room with a dissatisfaction of losing the margin, or not being able to get what they wanted etc after a hard fought successful negotiation you had. You need to make supplier feel happy for what they have achieved, long-term benefits they gain by associating with you. Explain them how it could affect them if they had lost the deal. And how this deal is directly linked with their personal performance etc
Negotiation brings lots of surprises to the table. You can deal with them and emerge as successful only if you have a better preparedness. Here are the 7 point tips on how you can better prepare for a negotiation and avoid many pitfalls.
1) Identify the top supplier for the negotiation and have a next best option in case you cannot reach an agreement with your best supplier
You arrive here after analyzing RFx responses, Technical reviewing and assessing supplier on various parameters designed for the package. It is recommended that you communicate and present the case with your higher authorities (depending on the cost of the package or approval limits involved) and User department who are directly impacted by the decision. This exercise will ensure that every one internally are aligned to the decision (both commercially and technically). There are cases where buyers are forced to retain the incumbent supplier or a specific supplier due to internal resistance. This will help identify the right supplier for negotiation.
2) Be very clear about the objectives of the negotiation, your expectations and results you would want to see after the deal. Do a market benchmarking, costing and analyze total cost of ownership involved
List down the points you would negotiate ex: Pricing, Quantities, Timelines, Payment terms, Delivery terms, Freight costs, Warranty and maintenance, Service levels etc. and what are the expectations you have for each point. Know your business objective, do a market study to understand about the state and trends in the market. Research the true market value. Back-up your case with evidence and uncover defects in their argument.
3) Ensure that you are negotiating with the decision making authority at the suppliers end. Create an agenda for negotiation, practice and start confidently
After all the preparations, practice and hard negotiations if the supplier representative says he cannot take decision himself and need approval from his management then it’s a waste of time for you and you may have to start all over again while supplier is well prepared to counter your tactics this time. So communicate well in advance and say upfront if necessary that you appreciate to negotiate with the decision maker. Many buyers mess up things by not being able to have high level representative of supplier organization in the negotiation.
4) Identify the negotiation strategy (ex: tough, collaborative, leveraging etc). Identify the points you are negotiating and set least acceptable tolerance for each point
There are instances where supplier provides concession on pricing and ask for concessions on other areas. You may come to agreement at that point of time but realize the mistake committed once they are penned down later. Ex; a) A logistics buyer while negotiating with a freight forwarder for performing transportation of goods from a certain location to across the region proposes $7/ CBF against quoted amount of $10/CBF for shipping goods from A to B. The supplier agrees to that but asks for waybill charge of $20 for each shipment or relaxation in terms of TAT.
b) A OEM supplier proposes to provide concession on the cost of machinery you are buying while proposing an increase on the spare parts pricing, or same supplier proposes increase in the equipment cost while providing the discount on spares, warranty and maintainance etc.
There could be small shipments of less than 5 kgs at a higher frequency. Annual spend for spare parts, maintenance, service could contribute to a large amount. There is a potential pitfall if buyer comes to an agreement with out properly analyzing the scenarios, Product characterstics, their spend, usage details/ volumes, cost of machine breakdown and its implications on business etc
5) Don’t get emotionally involved threaten or demand to work things at your way. It may back fire, often breaks down. Don’t be aggressive be cool. Highlight the benifits of doing business with you, Justify that the budget you are specifying is valid with proper data or say you are forced to award the contract to another supplier if you cannot conclude in the specified budget limits or TOC etc. Get something in return every time you give up something ensure that you are conceding in small increments.
Though negotiation happens between 2 organisations in reality its 2 negotiating inividuals accountable for their relationships. Assume you are a sales guy for a moment. The buyer on the other side threatens you for taking other business from you or make things works his way by dictating terms with you. Though you agree to his terms and conditions, you may not like him at the personal level and that makes you give him next or less priority later on. Now switch back to your buying role and see, you are not in a pleasant situation now. There are companies who beat the suppliers for YOY reduction. A supplier who has extended 3% reduction on your pressure during the market down turn, with no volumes at all hesitates to came back to you with the saving when they have done some process improvements at his end that improves the production cycle time and cost of production or reduction is cost of the product with some alternate material and technology. Encouraging for cost reduction and collaborating for that is a good thing dictating is not.
History suggests that collaborative and leveraging approach has given better results to that of tough game approach.
Leverage your BATNA (Best Alternative to the negotiated agreement). Trade off concession encourages the supplier to concede first for you. Your supplier will have more appreciation for final outcome and respect for you
6) Do an assessment after each negotiation session with the supplier and change your strategies and tactics if necessary. Prepare notes for each point you are going to negotiate, review the notes from previous negotiations for tips. Anticipate and analyze supplier’s reaction to each tactic
Supplier can easily anticipate your strategy in the next negotiations when you stick to the same dialogue every time. Use various tactics unconventional ways of negotiations to work things at your way. Know their strengths, their weeknesses, their competitors, your strengths, internal & external atmosphere every thing that factors. Negotiate like a king. Dont use all your weapons for defending one point or proposing one point. They will have more power and other tactics to defend for other points. Ask more questions like why they want the price increase. Ex: If the increase is for labor rate hike dont jump in to decrease in the raw material costs, fuel, increase in your volumes or other reasons that justifies the price reduction immediately. Try to defend with a reason like job market situation, consumer index and any market forces affecting the labor which are more relevant to his reason. You can use the other weapons for next points or even stress for reduction with them.
7) Document whatever has been concluded in the negotiation. After the negotiation make supplier feel good about the contract awarded if he is unhappy for loosing the negotiation
There are many instances where suppliers agree to certain things but in practice they will not be followed accordingly. After reaching any agreement with the supplier document them and email to all the concerned parties to ensure that you both are in same page. This avoids any misunderstanding or disagreement after invested so much of time. Use that as a base during any conflicts and non compliance.
Supplier leaves the room with a dissatisfaction of losing the margin, or not being able to get what they wanted etc after a hard fought successful negotiation you had. You need to make supplier feel happy for what they have achieved, long-term benefits they gain by associating with you. Explain them how it could affect them if they had lost the deal. And how this deal is directly linked with their personal performance etc
Find the exact product you need by the specifications you require, your full-service sourcing agency, addressing your procurement needs 24 hours a day.Product development is a specialized activity. It is done to improve the existing product or to introduce a new product in the market.
ReplyDelete