Sourcing and Procurement
How to effectively negotiate with suppliers in sourcing?
Effective negotiation is critical for sourcing professionals responsible for procuring goods and services from suppliers. Negotiating with suppliers is essential for ensuring that your company gets the best possible value for money and quality from its suppliers. However, it can be challenging to negotiate effectively, especially if you are dealing with suppliers who are experienced negotiators themselves.
Let’s explore the right objectives for negotiation and the steps to follow.
Setting the right objectives for negotiation
Successful negotiation is not just about the price. It requires technology, soft skills, compassion, and emotional intelligence. This list of objectives translates into key performance indicators (KPIs) in the final contract –
Too high a price can make your product unaffordable for many, and too low a price can make the buyer perceive it as inferior quality. What you negotiate with your supplier has a direct impact on your selling price.
Value for money
Every product or service has a perceived value and an intrinsic value. Your goal is to match the price with the products’ perceived value for the buyer. The procurement price has an impact on the buyers’ perceived value.
Delivery and payment terms
Delivery timelines are critical to fulfilling the market demand. On-time payments keep cash liquidity at the suppliers’ end. Early payments can also get you additional discounts over the price that the supplier offers to other businesses.
After-sales support and maintenance
It is important to have an after-sales support and maintenance mechanism between the supplier and the buyer. This helps in resolving any conflicts.
Defining the quality of the product or service in the contract is crucial. This helps both parties know what they are signing up for. Any deviation from the agreed standard of quality should trigger a dialogue for improvisation.
Reporting quality, parameters, and frequency should be clear for both the supplier and the buyer. This provides a clear picture of the complete delivery cycle.
Improper or missing communication channels can cause misunderstandings, quarrels, and unwanted contract terminations. Both parties should know the right person or team to talk to resolve any conflicts.
Training and skill development
Delivery teams at both ends require training and skill development to execute the transactions smoothly. For example, the warehouse team must know how to label the incoming products correctly and provide proof of delivery.
Steps for successful supplier negotiation
Successful negotiation takes a strategic approach, and these steps can help you achieve the right contract terms.
Research the cost of service or product
By knowing the cost price of the supplier, you know how much wiggle room you have. You can speak to other businesses the supplier works with and conduct an independent market research to have an upper hand at the negotiation table.
Establish Clear Objectives
When negotiating with suppliers, it's important to establish clear objectives. You should know what you want to achieve from the negotiation and what your bottom line is. Your objectives should be specific, measurable, achievable, relevant, and time-bound (SMART).
Your objectives could include reducing costs, improving quality, increasing delivery times, or securing a long-term partnership with the supplier. By establishing clear objectives, you can focus your negotiations on achieving these goals.
Know the mission and business drivers of the supplier
Put yourself in the shoes of the supplier. They not only want a good price for their product or service but also seek long-term association with a trusted partner with a good hold on the target market. For example, a manufacturer of table lamps would readily partner with Amazon, given their market reach and credibility.
Build Strong Relationships
Building strong relationships with suppliers is essential for effective negotiation. You should aim to develop a collaborative relationship with your suppliers based on trust and mutual respect. This relationship will help you negotiate more effectively and ensure you get the best possible value for your money.
To build strong relationships with your suppliers, you should:
- communicate clearly and transparently with them.
- keep them informed of your company's requirements, budget, and timeline.
- make timely payments and resolve any issues promptly and efficiently.
Understand the mutual interests
Negotiating contracts should be in the best interest of both parties. Lopsided contracts will fail sooner than later. Understand what is important for the supplier. If the supplier is unwilling to budge on the price, try getting a better deal on insurance, speed of delivery, or bulk order discount.
Take the quotation from multiple suppliers
Negotiate with at least three suppliers. This will give you a broader perspective of the level of service and pricing available in the market.
Have a backup plan
Understand that negotiations do not always result in a sealed contract. Refrain from rejecting a vendor until you have a fully negotiated and signed agreement. Many businesses also keep multiple active vendors for the same product or service to manage market disruptions.
How can Infosys BPM help?
Infosys BPM sourcing and procurement services transform your procurement journey with AI-based technology capabilities for faster decision-making and better terms of service. The services and solutions include –
- Category plans and execution
- Sourcing support and Tail spend management
- Supplier relationship management
- Contract management
- Spend analytics
- Procurement strategy and consulting
Know more about sourcing and procurement outsourcing at Infosys BPM.