Suppliers come in all shapes and sizes. The majority of us have worked and negotiated with local suppliers who understand our markets, business needs and constraints.
Every once in a while, you may need to negotiate with a larger supplier – this could be a multinational company, a niche product manufacturer or a sole-source supplier with near-monopoly for a product or service.
The key characteristic in such deals is that the balance of power moves from buyer to supplier. Big suppliers know their market power and don’t hesitate to flex their muscles to maintain the status quo.
These conditions arise in markets for various reasons or a combination of factors which may influence supply chains. In some markets, the majority of suppliers have been eliminated due to tight competition, giving the remainder significant clout in the market.
You need to tread carefully when negotiating with a large supplier as playing hardball simply may not work, and could backfire in some instances. Knowing you’re more or less dependent on this supplier due to market, technical or commercial constraints, it may be worth looking at the negotiation in the following way:
1. Pitch your business as a “blue ocean”– a new or untapped market. Large suppliers tend to have tunnel vision and do not always focus on the big picture due to the transactional nature of their dealings. If framed correctly, an opportunity to enter a new industry or market segment is often too good to pass up for large suppliers. Finding out what might entice your supplier could take some time and will require creative thinking on both sides. To sweeten the deal, you could also potentially look at increasing the length of the contract to further de-risk the relationship.
2. Be prepared to negotiate well. Negotiation is a process and should be treated as such as it could takes weeks or months to achieve the desired results. Here is a list of some common negotiation tactics you should be prepared for when dealing with large suppliers:
• Limit of Authority. During negotiations, you will often hear that taking a decision is above their authority and must be approved by a VP/CEO who is based overseas or unavailable at the time of negotiations.
• All or nothing. A supplier may demand that you must contract for all the products and services or none, in an attempt to reinforce their market power.
• Indifference. A ‘take it or leave it’ stance, claiming it makes no difference to them whether or not you go ahead with the proposal.
Be creative with your counter-tactics when dealing with a difficult supplier. Tactics should ideally be developed with input from a cross-functional group of commercial, technical and strategy people.
3. Consolidate your demand. Combining your company’s spend into one contract/purchase order is not only a logical way to spend, but is also an effective way to boost your corporate negotiation power. The only caveat is that you need be able to collaborate internally to assess the total demand across the business.
If you work in a small company and you do not have the right demand profile to negotiate with a large supplier, you may also consider joining a local small-business purchasing consortium to help boost your buying power.
Large suppliers are perceived as a challenge because of their inability to adapt to buyer needs and react in a flexible manner. With the right negotiation tactics, not only you will be able to anticipate and respond to such suppliers, but you can also turn these challenges to your advantage.
☛ Ricky Baharwal is a procurement specialist in the oil and gas industry in Australia