Negotiating with suppliers is the most typical approach to achieve savings in procurement and yet I'm always surprised how UNPREPARED people are when they come to the negotiating table. Remember, unless you're one of the few gifted and lucky negotiators, your success will always be result of hours or days of upfront preparations.
It's not the purpose of this article to teach you how to negotiate - rather, I want you to stop for a second and try to come up with a more creative way to approach your suppliers.
The key to successful negotiations is the achievement of a win-win situation (albeit sometimes the winner on the supplier side may be the particular employee and not the whole company)
Typical fallacy concerning negotiations is that their timing is determined by external causes – for example the upcoming expiry or renewal of the existing contract – those dates are usually random and may not be beneficial to you. Most procurement professionals set their expiry reminders to 60 or 90 days and blissfully forget about their existence in the meanwhile. Wrong!
Another common external cause is "we have a cost cutting project" which usually has a totally arbitrary timing (it's partially related to the company's financial situation but, considering how long it usually takes the top managers to decide to start the actual project, it's still pretty arbitrary).
What is the "right" timing? It's the timing that gives you more relative power over your supplier than usual. It may be 10 days before the contract expiry, but it may just as well be 12 months upfront (for multi-year contracts). Here are a couple of examples:
The first tendency of a negotiator is to keep your cards to yourself. After all, this is what most negotiating books teach you. Or at least that's the lesson that people take away from reading them. This is the easiest way to end up with adversarial negotiations, where parties think it's a win-lose situation.
Don't expect suppliers to co-operate with you if you're not openly communicating with them. When you invite them for negotiations, CLEARLY TELL THEM what you want to achieve:
"Dear Supplier, we would like to achieve 10% savings on the products we buy from you. We want you to come prepared for these negotiation – don't tell us why you can't do it, tell us how it could be done - we're open to creative ideas."
The premise is that suppliers have many more objectives than simple unit price – sometimes it's income security, sometimes it's volume, sometimes it's marketing or new product development. They may be willing to horse-trade with you, but they won't be able to do this if you surprise them and force them to make up their minds on the spot. They need time to prepare.
Sometimes your suppliers can share product innovation ideas – they will come up with alternative designs that will still achieve the stated aims but will require less time, effort or material to produce. Important thing here is that you can't just dismiss their ideas off-hand. Give them the courtesy of thorough evaluation and constructive feedback.
Very often the cost of the product or service is artificially inflated by your company's processes. Suppliers will be able to tell you the possible solutions to lower these process costs. Basically, they will go through the savings levers for you. In fact, you might wish to send our article on savings levers to them upfront, to start them thinking.
Those process-based costs may include special packaging, transport requirements, but also your constant delays in payment processing or over-specified SLA requirements. For example in our case, some of our clients require absurd levels of insurance coverage in relation to the turnover they make with us. The reason is that those values appear in their basic contract templates (that were designed for "the worst case") and nobody dares/bothers/has the authority to reduce this sum. As a result, we need to buy additional insurance and pass on the cost to the client.