Companies that invest extensively in preparation for negotiations with their suppliers and develop a detailed procurement negotiating strategy can achieve significantly better results. First and foremost, this requires a professional procurement team.
No Heinz Baked Beans or Tomato Ketchup, and no Whiskas cat food either. At the end of June 2022, supermarket customers saw what happens when two companies fail to come to an agreement. Some of the shelves at Tesco, the UK’s largest supermarket chain, were empty. US companies Mars and Kraft Heinz wanted to raise prices.
Tesco did not want to accept this, so both companies stopped their deliveries to the supermarket. These conflicts seem to have since been settled, and the products are now back on the shelves. But these price disputes show how serious the consequences can be when negotiations stall or fail.
In many cases, things don’t need to go that far. Companies with professional negotiating teams can benefit from taking an active approach to supplier management. The way to do so is to follow the eight rules of negotiation excellence.
1. Don’t fear negotiations
Many procurement professionals struggle when entering intensive negotiations with their suppliers. Potential fears include the risk that they negotiate too hard, and their supplier walks away. In most cases, these fears are unfounded. Ultimately, it’s in the interest of both parties to do business together.
Good preparation is the key to gaining confidence and the right mindset, because then you know what you can and deserve to achieve in negotiations.
The former US President John F. Kennedy said it a long time ago: “Let us never negotiate out of fear. But let us never fear to negotiate.”
2. Prepare within your company and learn about the market
Successful negotiation preparation starts with the engagement of all relevant stakeholders within your own company. It’s important to have a workplace culture where various departments work together, because most of the time it’s not only prices quoted by suppliers but also their technical capabilities, product quality, sustainability measures, geographical locations, and much more that matters to the business. It falls to the procurement team to engage, for example, with the research and development department to understand their technical requirements, the production department to get a better sense of the timeline, and the sales department to estimate customer needs in terms of business volume. The procurement team needs to make sure that all these aspects are addressed during the negotiation and captured in the final contract with suppliers.
Good preparation also means that the procurement team conducts a thorough market analysis of both the company’s competitors and potential suppliers. When it comes to suppliers, it’s good to not only consider the incumbents, but also to assess other suppliers available on the market
as it can help bring in competition and thus increase your bargaining power. It’s also important to be clear on each supplier’s strategic significance to the company and vice versa. If you are a small supplier’s main customer, this gives you a greater leverage than if you are a small customer to a large supplier.
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