Skip to main content

The Middle Ground – Supplier Management

By 20th August 2014No Comments

There is an art to negotiating with your business’s suppliers.

Negotiation is a dialogue between two parties about how to achieve a mutually acceptable outcome. Every manager needs to develop some core negotiation skills, which are not difficult to grasp. The key element is to realise that negotiating is an interactive communication process between the two parties involved. There are four key stages to any negotiation:

Preparation – remember that ‘Plans are worthless in themselves, planning is everything’:

  • Identify the requirements – products, volumes, timing of supply, payment terms, quality and service levels.
  • Establish your ideal price – the lowest price you think you can pay (your opening bid); your expected price – based on your research of the market; and your deal breaker – your walkaway price.
  • Prepare a list of extras; use these to improve the offer at no cost – extended payment terms, free delivery, samples, installation, training, price stability, additional discount according to spend.
  • Research the seller and learn his weak points (e.g. poor stock management); know the questions you need to ask; check references.
  • Identify your priorities – what matters most and the elements that can be omitted if necessary.
  • Research the market – other suppliers, pricing trends.

Exchanging information – this often results in reciprocity by the other party:

  • Advise the supplier of your requirements.
  • Explain your key issues.
  • Establish the supplier’s requirements and walkaway position.

Bargaining – the negotiation itself; the key is mutual trust:

  • Be first to open the negotiation by bidding your ideal price – this is known as ‘anchoring’. Because it is the first number on the table, both parties will work around it. The fear of going first and setting too high an offer should be negated by making sure your research justifies the price given to the supplier.
  • Always make a counter offer, even if the initial offer is acceptable.
  • Look for joint benefits and opportunities.
  • Always have an alternative position (another supplier, an alternative product) to establish an escape route and bring additional pressure on the supplier.
  • Ensure you take account of the supplier’s position and priorities; consider the deal from his angle – forcing the supplier to offer a ‘loss leader’ will only encourage him to look for inflated prices elsewhere or commit to an uneconomic agreement.
  • Do not be aggressive, and make sure your body language matches your mood.

Closing and commitment – the final stage to conclude the negotiation:

  • Make the final adjustments – try to add in the extras that you have identified.
  • Outline the benefits to both parties – present it as a ‘win-win’ for both of you.
  • Shake hands on the agreement to establish the trust between both parties.
  • Document the agreement.

Negotiation is a discussion of how to achieve a mutually agreeable outcome. The best deals occur when there is strong communication between parties, a clear understanding of their mutual responsibilities and the common objective to deliver. As John Ruskin famously wrote, “It is unwise to pay too much. But it is worse to pay too little!”