While some believe that the ability to close a negotiation successfully relies on personality, empathy or both, preparation is key in reaching a mutually-beneficial agreement.
Many negotiations are won or lost before the purchaser enters the meeting. Gaining insight into your own product, your supplier’s product, profit margins and external market factors is vital if risks are to be reduced and a favourable contract secured.
• Product knowledge. Understanding what the final product will look like and how it will perform is essential, as this provides a benchmark for output specifications that must be met by suppliers. Knowledge of component requirements also allows the supplier’s product to be adequately analysed or tested to ensure it is of the correct quality. Furthermore, buyers can identify areas where cost savings should be made as well as risks involved in the manufacturing process.
In 2007, Boeing outsourced elements of its 747 aircraft supply chain to manufacturers which subsequently failed to deliver reliable parts that met the product specification. This upheaval cost the company a two-year delay in the aircraft launch as well as nearly £2 billion in charges, both of which could have been avoided if the product had been properly tested before the supplier agreement was signed.
• Supplier product knowledge. Buyers often underestimate the impact that supplier knowledge has during complex negotiations. Taking the time to understand a vendor’s business will allow deeper appreciation of any risks or challenges they might face. These issues, once identified, can be overcome jointly.
Purchasers should also attempt to estimate the cost elements involved in manufacturing the product. Conducting a "should-cost" analysis will provide insight into the firm’s profit margins and indicate how much room there is for manoeuvre during price negotiations.
Analysing the supplier’s financial health should also be a priority. Before finalising an agreement, procurement leaders should look into the company’s cash flow, cost structure and credit limits. This way any vulnerabilities can mitigated and addressed as necessary within the contract.
• External influences. Knowledge of market conditions is another vital weapon in a purchaser’s negotiation arsenal. Suppliers often use such factors as a basis to maintain or increase fees, particularly at times of contract renewal. Research into commodity prices, exchange rates and labour rates will reveal whether the supplier’s claims are genuine and should be accepted or whether price expectations are too high.
• The human factor. During preparations, it is important to take time to understand who will be on the other side of the negotiating table. For example, while a sales manager may be motivated by doing the deal and any commissions that may be due to them, a managing director is more likely to have long-term objectives and may be willing to flex their offering accordingly.
Being aware of a supplier’s motivations provides the basis for a negotiation strategy and can help to highlight areas where it is possible to apply more bargaining pressure.
☛ Michael Sharp is a consultant at Vendigital