"By failing to prepare you are preparing to fail."
— Benjamin Franklin
Benjamin Franklin was a smart man. His thoughts on preparation still hold true today, just as they did over 300 years ago. Preparation might seem like drudgery, but when it comes to negotiations with key suppliers, it will make the difference between a successful and unsuccessful negotiation. In fact, some experts say that about three-quarters of the total time you spend on a particular negotiation should be spent on preparation.
Before you even begin preparing your procurement negotiation strategy and gathering information, prepare your mindset. Go into the negotiation with a “win-win” approach; the goal of your negotiation should be to arrive at a solution that meets both your organization’s needs and those of your supplier. While hardline tactics may be required for some suppliers with whom other strategies have failed or a single-supplier market may necessitate relinquishing some control, overall you should focus on developing a relationship with your supplier, not forcing them up against a wall.
Use the following pre-negotiation checklist to help guide you in your preparation for meeting with suppliers.
✔ Obtain buy-in from top management and internal customers.
Before any actual negotiations begin, you need to get your stakeholders on board, especially top level management. Make sure your goals and objectives align with theirs and they understand the rationale behind the negotiation. Keep them informed throughout the process, albeit on a need-to-know basis (i.e. not all stakeholders will need to know about all details of the negotiation).
✔ Identify your suppliers.
If necessary, run an RFX first to find new suppliers or get more detailed information from your preferred suppliers. While you will likely have a top choice, keep more than one supplier on the table as a negotiation tactic as well as having additional suppliers as backup in case you’re not able to agree on terms. You may even want to consider entering into negotiations with more than one supplier simultaneously.
✔ Research the supplier’s company.
The importance of this step cannot be stressed enough. The more you know about your potential supplier, the better you will be able to understand their motivation. Study their website and the LinkedIn profiles of top management and anyone on their negotiation team. Read through annual reports, and speak to current and former customers, if possible. Even if you’re negotiating with a supplier you’ve used before, you should still check their financial background since it can change quite rapidly.
You also need to know how important you are as a buyer to your suppliers. You should know how much of the supplier’s revenue is associated with your organization. If more than 20% of their revenue comes from your organization, they would probably be willing to provide you with a more detailed overview of the product cost structure. Accounting for a large part of the supplier’s revenue will also give you the advantage during the negotiation. Even so, remember your win-win mentality; look for ways they can provide you with additional value without completing eliminating their profit margin.
✔ Review the supplier’s past performance.
If you have done business with the supplier in the past, look carefully at their performance. Ideally, this information has already been entered into some type of SRM system. In addition to what has been formally recorded, speak with colleagues who have worked with them directly, and ask for honest feedback.
✔ Anticipate the supplier’s agenda.
This step goes hand in hand with researching the supplier's company. Once you have gathered all the information you can about the supplier, put yourself in their shoes. If you were the supplier, what would you look to achieve during the negotiation? By anticipating their agenda, you can prepare responses to potential requests and look for areas of collaboration.
✔ Set your goals and least acceptable alternatives.
Again, this is best approached with a win-win mindset. Of course, you have to look out for the needs of your organization, but you will have a better chance of achieving your goals if you show a willingness to help the supplier achieve their goals as well. Keep in mind that unit cost is not always the most important factor to negotiate. If you cannot get the price down, try to obtain more value for the same price (delivery terms, smaller order batches, longer payment terms, shorter delivery time, etc.).
✔ Decide on a negotiation strategy (but be prepared to change as necessary).
In cases where you’re negotiating with a preferred supplier, speak with colleagues who were on the negotiating team before. They can give you an idea of what to expect. This is also where all your research will come in handy. It’s a good idea to go into the negotiation with a strategy, but at the same time you have to be prepared to change tactics. For example, avoid starting out with hardline tactics, but you may have to resort to them if all else fails.
If you need some help coming up with an approach, take a look at this list of 25 procurement negotiation tactics.
✔ Create an agenda for the negotiation and run through it with your team.
Practice makes perfect. A negotiation room can be a stressful place, and the better prepared you are, the lower the chance is you’ll be caught off-guard by the opposing side. Know your agenda and make sure it’s clear to everyone on the team. You can even run through possible scenarios ahead of time, including any basic non-verbal signals you may want to use.
Mastered the art of negotiation? Add strategic sourcing to your skillset: