5 Key Steps of Supplier Negotiation Excellence
Firstly, the good news is that the best practice supplier negotiation principles are still relevant and valid. In fact, they might be more critical than ever for successful negotiations with suppliers in today's world. It's no longer enough to just "wing it" or "muddle through" negotiations, as the gap between mediocre and best practice negotiation performance continues to widen. Additionally, the consequences of not getting it right are more severe than ever, and no organization can afford to suffer from poor negotiation outcomes.
"In a mental hospital, we do not want psychotic doctors." Roger Fisher's book, Getting to Yes: Negotiating Agreement Without Giving In
The five-step approach to negotiation best practices involves a strong focus on preparation. Some organizations may have slightly different steps or terminology depending on their specific needs, but the underlying principles are the same.
Supplier Negotiation Steps
Step 1 - Determine the facts
The first step is to determine the facts by building a comprehensive fact base before negotiating with suppliers. This fact base should provide superior insights into the value at stake, including estimating current spending, future demand, and profit margins for the respective suppliers. It's also important to stay ahead of the curve by understanding the market dynamics and drivers of change, estimating the current and future supply and demand balance of the supply market, assessing the impact of supplier capacities and investments, cost structures with margin expectations, and understanding how other customers or "supply competitors" are behaving.
Remember that negotiation is not just about winning or losing; it's about creating value and building relationships with your suppliers. Keep a long-term perspective and focus on mutual gains by trying to understand the perspective of your suppliers; by simply putting yourself in their shoes. This can be done at an organizational or individual (account manager) level.
You must also determine your business needs such as what do your stakeholders want? And how will the demand evolve going forward? What is the impact of new product launches or entries into new markets? How does this affect your supply base?
"When the pressure is on, you don’t rise to the occasion ― you fall to your highest level of preparation." ― Chris Voss, former FBI negotiator
Step 2 - Evaluate your position externally and internally
The second step involves evaluating your position both externally and internally. Assess your position and determine the kind of negotiation archetype you are in to decide how to approach your supplier. Understand the power balance or bargaining power and how much leverage you have over your supplier or vice versa. This should happen short term at a deal level as well as long term at the relationship level.
Consider the entire portfolio you could source from this supplier and set aspirational targets that are still credible. Use these targets as anchors for the negotiations, which will strengthen your position. This has become more difficult due to the volatility of input factor costs and the tight capacity.
Step 3 - Align your supplier negotiation strategy.
The third step is to align your supplier negotiation strategy by considering how you will approach negotiations and practice this approach. Understand your internal stakeholder needs, and create alignment on negotiation objectives, your approach, and the roles within the team. Do not sacrifice negotiation preparation sessions, develop a game plan and practice how to execute it despite the lack of time. Internal dry runs are essential before meeting your counterparts.
Create a compelling storyline and have your opening move ready, while agreeing on the communication strategy with your supplier and ensuring that it is in line with the key messages of corporate communication. Have all your ducks in a row before meeting your supplier.
"Good stories surprise us. They make us think and feel. They stick in our minds and help us remember ideas and concepts in a way that a PowerPoint crammed with bar graphs never can." ― Joe Lazauskas and Shane Snow, The Storytelling Edge
Step 4 - Lead the execution of your supplier negotiations
The fourth step is to lead the execution of your supplier negotiations. If possible, open the negotiations with a strong anchor, and stick to your plan and storyline. But be open to change as you gather new insights on your opponent during the negotiations. Also, be straightforward, professional, and careful when applying your tactics.
Do not use too many tactics and focus on tactics that enhance the deal value and strengthen the relationship with your supplier. With that being said, prepare yourself to counter tactics that your supplier might use against you. Lastly, Debrief after each negotiation round and adjust your approach and messages because each negotiation is a great opportunity to gather more intelligence on them. Take advantage of that.
Step 5 - Secure the impact of the deal
The fifth step is to secure the impact of the deal with suppliers by capturing the results of each negotiation round in writing and sharing minutes of the negotiations with your supplier to confirm them and avoid any misunderstandings. In many virtual negotiations, information might get lost or be misunderstood.
Cross all your T’s and dot all your I’s to ensure that all details are in place to close and implement the deal, and do not let the deal fall through because the lawyers cannot agree on minor contract terms. Also, set a clear implementation plan to ensure that all internal stakeholders commit to making the deal work.
Conclusion and next steps for a successful supplier negotiation
While these fundamentals for negotiation with suppliers have not changed, applying them successfully is more challenging, because building a comprehensive fact base has not become easier, but supply markets are much more volatile, and you will have to consider supply chain bottlenecks, stoppages due to Covid-19, changing trade patterns, sanctions and regulatory requirements, changes in cost structures, and input factor costs.
Your suppliers will likely be under more pressure as they must push through a price increase to cover higher energy and raw material costs. At the same time, you are under pressure to protect your bottom line.
As mentioned earlier, this also requires a significant shift in every procurement negotiator’s mindset. They have to deal with a shift in power balance while being flexible in terms of their approach and style, efficient in executing an increasing number of more complex negotiations, get creative and spend more time exploring alternative options, overcome the "fixed pie" mindset and think about how to nurture the pie before distributing it. To successfully navigate these challenges, it's important to keep in mind the five-step approach and focus on preparation, alignment, execution, and follow-through.
Additionally, it's crucial to continuously learn and improve your negotiation skills because the best negotiators are not born with innate skills, but rather they are made through practice and continuous learning.
If you are interested in more resources, check out our handbook on supplier negotiations as it contains other interesting topics for your next negotiation.