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)

Choose the right timing

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:

  • Research the supplier to check if they experience seasonal variability in demand. Negotiating in peak demand times will be less likely to succeed.
  • Perform a cost structure analysis to determine the key cost drivers for the products you purchase. Follow the price variations of these inputs (raw materials, wage levels) and see if you could use them to your advantage.
  • Switching suppliers is an empty threat if you start your negotiations 2 months before the contract expiry. If you threaten your opponent, this threat needs to be credible and, in case the negotiations fail, you need to have enough time to find, select, validate and on-board the new supplier before the original contract expires. 
  • Check when your suppliers' salespeople start working overtime to achieve their bonus targets (usually round November, but it may vary)

Down with secrecy! Let your suppliers think for you.

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.

Define your alternatives

Think upfront of what YOU can give to your supplier in exchange for the cost savings. Be creative.

Here are some examples. Of course, whether or not they will work depends on your organisation and products/services:

Increasing volume

  • Move some products from other suppliers
  • If you are on a growth spurt, show this to your suppliers – a credible promise of 20-30% growth in the next years will work. (Emphasis on credible)

Minimum annual volume

  • Can you ensure your suppliers that you will buy a certain amount, no matter what? This may reduce the risk of any investment they may require for the relationship.

Reduce volume variability

  • If you require Just-in-time deliveries and have high demand variability this increases their production and storage costs.

Increase batch sizes

  • Small batch sizes increase production costs (machine preparation, coating switching, etc.), transport costs and warehousing costs

Change packaging and transport requirements

  • Ask the supplier if the logistics costs are higher than for their other customers. Don't stop there - ask them if any of their other customers came up with cheaper alternatives. No, it's not cheating.

Lower the urgency of your orders

  • Share your production plans upfront, so that they could adjust theirs. The longer the deadlines, the lower the cost.

Improve payment terms

  • If you pay your suppliers after 60 days, they have to finance this period though credit lines. Often their costs of financing is higher than yours.

Common marketing

  • Allowing your suppliers to use your logo, endorsing them or helping them find new clients will let them off-set your price demands. Mention your suppliers in articles, put their logo on your products, etc.

New product development

  • Develop new products with your suppliers. It's often a win-win situation, since many companies don't have the free cash to develop the ideas they have and to find the first/reference clients. You lower their risk and increase their innovation potential in exchange for lower profit margins on what they sell to you.

Size matters. Your strategy may depend on it

To be specific, RELATIVE size matters. Sometimes large customers have even larger or monopolistic suppliers and end up being the weaker partner in the exchange. Dealing with monopolistic and unwieldy suppliers is always the hardest thing for any company.

If you're big: don’t (just) rely on your purchasing power

Forcing your suppliers to bend to your will may work this year. But they will be twice shy to invest into a relationship with you in the future. In those spend categories that require ongoing innovation, this is an untenable position in the long term and you're just asking for a nimbler competitor to step into the void.

If you're small: there is still hope

Yes, you're at a disadvantage from the outset. But there are still ways of achieving your goals. Sometimes it may even be easier for the salesman to give in, since low volumes won't affect the bottom line that much. It will require much more creativity and soul searching to see how you could help the larger partner out. Again, you have to be frank with your counterpart and explore the possibilities of a win-win situation.