How to Negotiate with Suppliers
The latest installment of Purchasing magazine's Strategic Sourcing series gives real-world best practices for negotiating contracts with suppliers.
By Staff -- Purchasing, 9/13/2007 6:00:00 AM
This is the fifth installment in our series on how purchasing staffs at various companies implement strategic sourcing. You can find the other installments here.
This series is more of a conversation than a tutorial, and we invite you to join in on the conversation. Send your comments to pteague@reedbusiness.com and write "strategic sourcing" in the subject line.
Know the market
Familiarity with the market is key to successful negotiations with suppliers, says Paul Thornton, sourcing manager for indirect products and services at Boston Scientific in Natick, Mass.
Sourcing managers at the medical device manufacturer learn about the market for the goods and services they purchase through data gathered from suppliers during the RFP (request for proposal) process. For certain buys, especially those that are relatively new to the sourcing managers such as energy, they may also consult an analytics group within Boston Scientific that produces market intelligence.
With the data, sourcing managers develop strategy that helps reduce cost and minimize risk associated with the goods and service they purchase. “We examine all cost factors, Thornton says. “We don’t leave anything to chance.”
For service buys in particular, sourcing managers ensure that they have a strong SLA (service level agreement) that’s well defined in terms of the company’s requirements, expectations and potential consequences should a supplier not meet those expectations. “Because we manufacture medical devices, obviously the service levels are high,” says Thornton. “We want to ensure we’re protected for whatever reason those service levels are not met.”
 Paul Thornton |
Having done their homework, sourcing managers are in a good position to know whether they will be negotiating cost savings with suppliers or that there may be potential cost increases. “We would try to negotiate those away or be creative and mitigate to the best of our ability,” he says.
At Boston Scientific, negotiations with suppliers typically are conducted by individual sourcing managers, although the company also sometimes uses teams for the sessions. On these occasions, members on the team are assigned a role prior to entering into the negotiation. For instance, one team member may be more skilled at working out cost details while another may be better at developing relationships.
After the negotiation, the company enters into written agreements with suppliers, typically for two to three years. In fact, sourcing managers send a draft contract to potential suppliers during the RFP process and ask for feedback on the document. “We find it helps as we select a supplier,” says Thornton. “If the supplier has issues with the contract, it helps expedite the process.”
—Susan Avery
Be collaborative
Ideally, Jan Pinger, vice president of global procurement at Teleflex Automotive in Troy, Mich. says, all negotiations should have a collaborative tone. Why? Because in the end, the real goal of a negotiation is to get the supplier’s representative to go back to his or her company and “sell” your company’s position internally.
But not all suppliers are ready or worthy of that kind of collaborative negotiation and determining the supplier’s level of “collaborative maturity” is the only way to effectively select and execute a negotiation strategy. Deciding where on that curve a given supplier sits requires a fair amount of pre-negotiation thought focused on how long the buyer and supplier have worked together and what the nature of their work has been.
 Jan Pinger |
“Going through a few battles with a supplier lets you test the give and take they will provide,” Pinger says.
But far too many purchasing professionals rush into a negotiation armed solely with a price in mind (because, after all, the buyer’s bonus is based on purchase price variance) and without having thought through real potential this supplier could bring beyond price reduction, says Pinger.
“I think the metrics that govern the procurement function need to change,” she says. “Judging buyers’ success purely on purchase price variance breeds an adversarial way of thinking about suppliers and negotiations.”
Among the recommended homework for buyers: Know who you’ll be negotiating with. Pinger points out that each negotiator may have a different outlook or strategy and knowing who you’re sitting across the table from could, and should, impact a buyer’s strategy.
“We usually strive for face-to-face negotiations whenever possible,” she says.
Buyers should also think about the physical location for an in-person negotiation based on their goals for the meeting. While there are no hard and fast rules, negotiating in the buyer’s office often sends a “you’re on my turf” signal while setting the meeting in a neutral setting like a hotel or conference center tends to send a more collaborative message. Both have their place, but selecting the right location can help set the right tone.
Negotiating with suppliers in other countries or regions requires its own set of preparations, as well. Buyers should make an effort to understand the culture of the country in which your supplier is located. “Quite often, we Westerners tend to take a Westernized approach to negotiating with suppliers,” Pinger says. “We assume that if we do X, they’ll do Y, but they don’t necessarily think the same way we do. They often have very different value systems and ways of thinking and responding in negotiations. That’s a very common mistake in the U.S.”
And a negotiation process should not be considered complete unless any agreements made at the meeting (no matter how informal) are put down on paper and shared with the supplier’s representative to ensure there were no misunderstandings.
“We have a rule that those documents must be prepared and provided to the supplier within 48 hours,” Pinger says. “That prevents any misunderstandings or assumptions that may crop up over time.”
—David Hannon
Go for a win/win
When you’re the materials purchaser and supplier negotiator for a small company, “you’re often solely responsible for all aspects of the negotiations,” says Eric D. (“EJ”) Johnson, purchasing and materials control coordinator at Titan Air in Osseo, Wis., a manufacturer of industrial and commercial heating, cooling and ventilation equipment. “You may be able to divert to a higher authority in management, but it’s usually your deal to win or loose.” And that’s why his negotiations always center on the implementation of win-win strategies.
“Negotiations go best if everyone feels they have done a good job or has made a good deal,” he says. “Don’t beat anybody bloody and leave them for dead; you may want to wrestle with them again later.”
 Eric Johnson |
He says that buyers should prepare for any negotiation, large or small. “The larger the reward, the more time should be invested in preparation,” he says. “Learn as much as you can about the company and the personnel with whom you are negotiating and learn as much about the commodities and supply issues before you start negotiating.”
Research must be done before any major negotiation. Johnson insists that buyers must meet with engineering, sales, production staff, plant management and, if possible, end users of the product to obtain knowledge of the materials or components being purchased and how they should be used. “That allows the buyer to determine what really is being negotiated,” he says. He adds that needs analysis should be done to determine desired corporate goals, make vs. buy analyses should be implemented and all viable sources should be considered.
Once negotiations start, he suggests that purchasing personnel aim high—“since initial demands should always be higher than expected; concessions can be made, if needed, but only reluctantly.” He believes that buyers “always should get something in return when a concession is made.” He also says that verbal negotiations should be done in clear and concise language. “
“Be specific, do not use double talk or beat about the bush,” says Johnson, “Avoid clichés and slang; be clear about the issues, price, dates, times and performance.” And never assume anything. “Don’t assume you’ve made a good deal,” he says. “Be sure you’ve made a good deal.”
The ideal negotiation is one that helps build solid relationships, he says, since Titan Air doesn’t require all agreements to be in writing, depending on the complexity of the deal. “If proper research has been done and a trustworthy vendor has been selected and all parties feel confident that a good deal has been struck,” he says, “then we will move forward with a firm handshake and a promise to honor our side of the bargain.”
—Tom Stundza
Keep things fair
Good vendor management skills are central to good rapport and successful negotiation, says Bill Hardin, senior procurement specialist of finance-business services for the Judicial Council of the state of California. After around twenty years as a procurement specialist both for corporations and for government bodies, he’s had to keep his negotiation style flexible to fit a wide range of business climates. Right now he organizes procurement for all 58 counties in California, from courts in tiny farm towns to huge cities like Los Angeles. Since the needs of each county can vary so much, he has to keep his negotiation strategy nimble enough that it works in all scales.
Hardin doesn’t believe in strong-arming his suppliers when it’s time to sit down at the negotiation table. Preparation and clear predetermined goals are crucial when it’s time to strike a deal, but he is well aware that he has to find a balance. While getting the best deal for the Council, he makes sure he’s keeping his supplier viable by striking a fair agreement. “You don’t talk down to your vendors,” says Hardin. “They have to make a living too, so you want a viable vendor —you can’t take their last penny.” He wants to make sure he doesn’t intimidate his suppliers too much during negotiation, lest they not communicate with him if there’s a problem down the road.
 Bill Hardin |
When preparing for a negotiation, Hardin sometimes relies on a large network of sales contacts he has accumulated to use as a sounding board. These contacts, always in industries unrelated to the one he’ll be negotiating with, can give him a supplier’s view of the deal and alert him of any pitfalls that might come up when discussing the deal.
Hardin wants to be as prepared as possible, which means getting everything as clearly defined as possible beforehand. “Get within a budget, know the budget, and don’t play games,” he says. “The supplier is asking for the best they can get, so find as much information regarding what you’re looking for before negotiating.” This means finding out as much about a part or product before a meeting, using cross-functional teams if necessary. If it’s time to source an electronic office product, for example, Hardin is sure to pull in a member of his IT staff to tell him what he needs to know for prudent negotiating. It can also mean breaking down the terms of a lump sum. His motto is basically “no lump sums”—he wants to know exactly what’s in the entire quote, piece by piece, from materials, labor and delivery, allowing greater windows of opportunity.
One negotiation tactic he knows is a bit unconventional is that he doesn’t use fall-back points. “I don’t have a fall-back point, but I do have a walk-away point,” says Hardin. “A fall-back point is like conceding something in my own mind, so if the goal is not attainable, you want to know going in at what point you walk away.” His reasoning is that if the supplier offers him a deal that’s completely out of his range, or if his ideal point is completely out of theirs, chances are the fall-back point will also be “out of the ballpark.” By keeping negotiations with an ideal price and a walk-away point in mind, there’s no need for a fall-back.
—Maria Varmazis
Aggregate spend
Preparation is key for a successful negotiation, says Kristie Syndikus, commodity management director for semiconductors for electronics manufacturing services provider Celestica.
Preparation means taking a close look at everything that is purchased from suppliers from all of Celestica’s global locations, she says.
“You want to aggregate your complete spend,” says Syndikus. “Take a look at all the suppliers you are engaging with and the different needs of all your business units in different geographies,” she says. Before a negotiation, her team aggregates its spend by commodity and by individual supplier.
 Kristie Syndikus |
Syndikus adds it is also important for buyers to know and understand what the key technology trends are with the products being purchased.
While the EMS industry is noted for leveraging its spend to get the lowest possible unit price, Syndikus says Celestica negotiates for total cost of ownership (TCO) of a product rather than just price.
“You want to create a total cost of ownership solution for the supplier’s device,” she says. Celestica’s negotiators factor in the logistics cost of a supplier’s product, the proximity of the supplier’s manufacturing to its own manufacturing locations and the willingness of the supplier to do vendor managed inventory for Celestica to reduce the EMS provider’s inventory costs.
In some negotiations, Celestica will also bring up that a supplier can win more of Celestica’s business if it supports one of its megasite campuses.
Such campuses offer OEMs cradle-to-grave services, including new product introduction, board and box build manufacturing, fulfillment and repair services. Having suppliers near the campuses is important to Celestica because it enhances flexibility and can reduce leadtimes for Celestica and its OEM customers.
After a negotiation is complete, it is important for a company to honor the terms and commitments that were negotiated, she says.
“Being able to honor your commitments is critical” to future negotiations, says Syndikus. She says if a supplier knows you honor your commitments, they will be more likely to negotiate in good faith in future negotiations.
—James Carbone
Click here to read other stories in the “
How to: Implement strategic sourcing
” series.
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