To truly generate procurement value in your organization you can’t just qualify suppliers, obtain pricing, and choose the best option. A computer can perform this task equally well. Instead, you’ll need clever supply negotiations fueled by shrewd business sense, people skills, and intelligent preparation to create value above and beyond what’s easily attainable by average procurement personnel. The most impactful of these three is preparation, the key to a successful supply negotiation, and the act of preparation requires a framework of its own to be most effective.
Details will change from company to company, and market to market, but by focusing on and discussing the four key areas outlined below, your team will be poised to capture all the value available during your next supplier negotiation.
4 Key Areas to Focus on When Preparing for a Supply Negotiation
1. Understand Your Team’s Best Outcome
Sometimes it’s clear before any preparation begins, but it usually takes thorough internal discussions to fine tune what your firm’s best outcome from negotiation will look like. Whatever the case, it’s important to understand, as well as agree upon, what the desired outcome is and what underlying issues your team should address to help achieve that result. Recognizing this helps you identify the most critical variable in your negotiation: the Best Alternative to a Negotiated Agreement – a.k.a., your BATNA. This refers to your best option if no agreement can be reached with your target supplier; basically, your worst-case scenario.
The more attractive your BATNA, the harder you can push your target supplier because you’ll have a more palatable fallback plan if negotiations breakdown. On the flip side, if your BATNA is weak, then you’ll have less leverage and might be willing to enter into a supply agreement that’s not ideal but is still workable.
2. Understand Your Target Supplier’s Best Outcome
It’s also crucial to determine what your target supplier’s goals are and what their best outcome looks like. This allows you and to understand how far you can push a potential supplier and estimate the total value available for capture; essentially the act of estimating your target supplier’s BATNA.
In preparation discussions with your team, focus on rating how important each issue is to the other party and where you’re likely to encounter resistance. After these discussions develop your team’s negotiation goals based on the trade-offs between your best outcome and that of your target supplier.
3. Secondary Negotiation Constraints
Understanding your BATNA, along with target supplier’s, is more than half the battle, but there are other fundamental variables to consider. For instance, what deadlines exist for each party and which party is most impatient? This can impact decisions the supplier makes during the negotiation. Are there general fairness norms that might be challenged and should be considered? What topics do you want to avoid and how will you react if they’re brought up? The key here is to brainstorm and practice with your team prior to the actual negotiation so you’re not caught off guard, as this may lead to a less than ideal outcome for your firm.
4. Current & Potential Relationship with Your Supplier
As supplier relationships evolve, various negotiation strategies will be more appropriate at different times. Along these lines, it’s important to understand if negotiations will be repetitive, or if the results of the negotiation will have a finite duration. In either scenario, it’s important to understand the consequences of your negotiation strategy as it applies in both the short and long term.
For instance, if you expect to develop a supplier relationship that requires ongoing repetitive negotiations, then taking an uncompromising stance on your negotiation targets could be detrimental to future negotiations. You could get what you want in the short term, but developing a mutually beneficial supplier relationship might be challenging and your organization will pay a significant price later when you need emergency support or when the proverbial market sands have shifted for the next negotiation.
Achieving substantially better negotiation results is well within your organization’s capabilities and they can be realized through detailed preparation. By focusing on the four key areas outlined above, you and your team will have an advantage over your target supplier and be in a position to capture much more value than your previous efforts.