A Perspective: Negotiation and Supplier Relationships
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I often teach the principles of negotiation to those working in the supply chain, primarily early stage purchasing pros that attend for some basic skills training. Occasionally, I’ll get more experienced folks like an engineer, operations or manufacturing manager. But no matter the level of experience, most admit with a show of hands that they don’t like negotiation very much. They are primarily at the seminar to try to get some tools and techniques to use during price increase negotiations due to pressure from management. They leave with plenty of tools, and hopefully some confidence gained from their classmates, or my often-awkward role-playing exercises.
I try to take away the pressure that surrounds negotiation from the start…when I tell them that negotiation is about improving overall supplier performance, not just cutting prices. In fact, price may be the last thing that is negotiated. Everyone understands the ongoing continuum of managing and improving supplier performance, something we do every day. The occasional discussion on cost is just a milepost in the ongoing highway of supply management. I look at ongoing negotiations holistically.
Here is my primary message: “When do you negotiate? Always”.
Be it manufacturing, not for profits, or the service sector, the fundamentals of negotiation are the same. It is not just about cost reduction but increasing supplier performance. That message does not resonate well in organizations that adhere only to a bottom-line low cost at all cost mentality. But improving overall supplier performance will result in long term cost reductions, service level increases, and reduced risk. A high performing supply base directly contributes to increased customer satisfaction. It all ties together.
Far too many with the responsibility to negotiate look at it as a hard bargaining process, popular with car dealers and labor unions. If one looks at negotiation with the big picture in mind…with ongoing give and take with trustworthy and high performing suppliers… it can be an agreeable experience where both sides do well over time. It is important to keep the relationship in perspective, but a strong relationship is not an excuse for lack of due diligence and a strong negotiation position.
Strong and evolving supplier relationships have proven to be beneficial to both the buyer and seller, but these relationships are not a replacement for active and ongoing negotiation. Buyers need to be aware that even those suppliers who are considered partners may not have their best interests at heart. Negotiation, posturing, and positioning continue to have their place in relationship-based supply management. From both sides!
The growth of successful supply chain management is anchored on excellent commercial relationships with critical suppliers. The benefits of close relationships are well known and documented. They include a focus on cost rather than price, early supplier involvement on key commercial and technical aspects, improved supplier performance in the areas of quality and on-time delivery, and an enhanced level of communication.
Many procurement professionals feel the need to negotiate may end once the purchase order or contract is set. Continued efforts for cost reduction, process enhancements, and overall supplier performance improvements are negotiated elements that need constant vigilance. Buyers need to focus on negotiating and establishing the performance framework early in a supplier relationship to allow for continuous improvement and continue to use relevant negotiation tools and techniques to continue to improve supplier performance.
While it is important to never lose sight that no matter the depth of the relationship, realize it has limits. Some years ago, I left my position with a high-tech manufacturing company. During my notice period, a steady stream of suppliers, typically my ‘partners’, came in to see me and wish me well. The accolades I received were appreciated, but self-serving to the supplier. The bottom line to them was learning whom they were going to work with when I left. My leaving was a risk.
Many of the suppliers asked if they could stay in touch with me, an odd request, but my ego said sure! In the 60 days post job, I received two calls from former suppliers. And both were from the same person. One call asked who took over my desk. The second was seeing if I could get my replacement to return his call.
Focus on the long term, aim towards improving supplier performance and leverage the relationship as hard as your supplier. And enjoy the process.
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