Category Archives: Negotiations

Could Word Smarts Get You That New Supply Management System Sooner?

You’re an ambitious Supply Management Professional who wants to do the best job you can. (That’s why you read SI everyday.) However, it’s tough to be the best when you don’t have the best tools at your disposal, as it limits your productivity and savings potential. You know you need that new system (be it spend analysis, decision optimization, or next generation supplier information management) and the sooner you get it, the better you’ll do.

However, you know that the company still has tighter reins on spending that are tighter than a prairie dog’s butt in a dust bowl. You need to get around them. Your boss has to want to buy that new system if you have any hope of getting it. How are you going to make that happen?

Ask smart. As per this recent post in the Harvard Business Review on “why it’s better to be smart and wrong than just silent”, if you ask smart, even if you’re wrong, you impress your boss and make it easier for her to help you. Similarly, if you ask for a new supply management system smartly, it will be easier for the boss to agree with you and fight your case.

Which is more likely to get the boss’ support?

I’ve been doing my homework and I think our best chance of hitting that 15% savings target is to identify the categories with the biggest savings potential, not the categories we spend the most on. We’ve been hitting those hard for the past two years and I don’t think there are much savings to be had in them at this point. If we procured a modern spend analysis system, we could quickly rank our categories by total spend and then compare the prices to index prices for the categories using these indexes I’ve identified. A single report would identify our most likely opportunities. Furthermore, we could use the tool to compare our purchase order totals to invoice totals at the end of every quarter and make sure the supplier isn’t overcharging us. And that’s just the beginning of what we’ll be able to do.

I don’t know how we’re going to save 15%. Maybe we should buy some consulting services from Supply Management Vendor XYZ and then buy whatever new-fangled tool they recommend.

I don’t know about you, but I think one way is superior.

And if you can spin it in a way that will let your boss take all the credit, then you’ll probably double your chances of success.

What do you think? Can you apply psychology to this situation or not?

A Should Cost Model Is Great For Negotiations

But whatever you do, don’t stop there.

But let’s back up. In his recent edition of PurchTips (#221), Charles Dominick of Next Level Purchasing discussed “Using a Should Cost Model in Negotiation” because it’s one way to ensure that a custom item price is fair. And he’s right.

Not only will a good model help you better understand your supplier’s true cost model, and what is driving the price of your final product (raw materials, labor, expensive tooling, shipping, etc.), but it will help you get a better deal. Either the projected costs will be right and you’ll be able to negotiate the supplier down to a fair profit margin, or the costs will be wrong and the supplier will have to point out precisely what is wrong and back it up with real cost data, and you’ll have a better understanding of true costs. (And even if the cost is more than you expect, you’ll still be able to avoid paying more than you should based on the true cost. So even if you don’t “save”, you’ll still “avoid”, and that’s better since, in reality, you only have “savings” if you’re spending money that you shouldn’t be spending in the first place.)

But a good should-cost model is more than an opportunity for negotiating cost savings during negotiations — it’s an opportunity for across the board cost reduction. With a good should-cost model, you’ll not only know how much you are spending on each cost component, but which cost components are the most expensive. You can then focus in on the most expensive cost components one by one, determine why that particular cost component is high (possibly with another should cost model if the component is not an unprocessed raw material) and determine if you could help your supplier reduce that cost or if you should be looking for a substitution. Maybe you’re using expensive natural rubber (which is skyrocketing) and can use a cheaper synthetic rubber. Maybe the supplier is relying on an inefficient logistics carrier and you can identify a cheaper one. Maybe labour costs can be drastically reduced with processed changes. Every cost presents an opportunity for reduction and improvement.

So start with the negotiate to make an immediate cost impact, but continue until you’ve reduced costs across the board. That’s how you make a lasting impact.

A Short Term Win IS NOT A Long Term Gain

I was really disappointed by this recent blog over on the Harvard Business Review that said you should “play stupid to win smart in negotiations”. While it’s true, and great advice if you’re making a one-time purchase of an expensive, over-priced, and always marked-up item, it’s not the best way to build a good long-term relationship with a (potentially) important supplier. How do you think the relationship is going to go if the supplier figures out six months in that you played him for a fool?

Ask yourself before your next negotiation.

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Great Tips on Negotiating for Mutual Benefit

A recent article in eSide Supply Management on “Negotiating for Mutual Benefit” which outlined seven tried-and-true strategies for your organization to get more of what you both want from procurement negotiations had a number of tips that should not be forgotten if the goal is mutual benefit.

Survey the Landscape and Share the Wealth
Don’t limit purchases to nearby suppliers as suppliers in other geographies might bring additional benefits. Plus, if the number of suppliers is limited, spreading business among multiple suppliers can help to ensure their financial security and maintain a competitive market.

Negotiate for cooperation using the rules of “smartnership”
Don’t use win/lose tactics. Confrontation is not likely to elicit the collaboration and trust necessary for success. Instead, work with the supplier’s negotiating team to come up with a win/win scenario that the supplier will be incentivized to deliver on.

Insist that your supplier make a decent profit
A supplier that does not make a decent profit will not stay in business. It doesn’t matter how great the deal is if the supplier does not stay in business long enough to deliver. Plus, a buyer who insure’s a supplier’s financial success is likely to become a preferred customer, and this can deliver benefits for years to come.

In other words, the best results come from ensuring that your success is your supplier’s success.

You Don’t Put Up With This Crap When You’re Making a Major Purchase …

Let’s say you’re out to buy a new car, you know what you want, so you walk into the biggest dealership in the area, walk up to a salesman, point out the vehicle, and say:

“I want that one!”.

At this point the salesperson says:

“Fine Choice: Top of the line. Powerful engine. No Fade Paint Job. Exceptional Performance. I can let you have this beauty for only 40,000”.

At this point you’re a bit taken aback, because you thought the MSRP was 30,000 and you also thought there was a manufacturer’s rebate for 5,000 as part of the year end clear-out. So you go down the street to the next biggest dealership, walk up to a salesman, point out the same vehicle, and say:

“I want that one!”.

The new salesperson says:

“Excellent Choice. Solid vehicle. V6 engine. High quality paint job. Great performance. I can sell it for 35,000 and throw in service for three years.”

So you say to yourself that sounds about right, maybe the first person was confused about what car, model, and features I wanted and you decide to go back to the first dealership because you know they are bigger, move more inventory, and are more likely to be able to offer the best price. You walk up to the salesperson and say

“I just visited the dealership down the street and they said I could have that car for only 35,000.”

At this point, the first salesperson says:

“Oh, that car! Sorry, I misunderstood. I can let you have that car for only 20,000.”

At this point you say to yourself what the heck is going on here? You know that the automotive market is very competitive now. No one quotes a price above MSRP and no one drops the price, even on a luxury car, more than 20% anymore as the fierce competition for limited market share combined with the price transparency of the internet age has taken the vast majority of margin out of car sales. So if the sales person is dropping the price 50%, you know you’re buying a piece of junk that will be back in the shop every other month running up repair bills that will quickly exceed the purchase price of the car. So you get out of there as fast as you can and cut a deal with the second dealership for 27,000 after a fair round of negotiations.

In other words:

You Don’t Put Up With This Crap When You’re Making a Major Purchase …

So Why Do You Put Up With It When You’re Buying Your Enterprise Software?

It seems that not a week goes by where I don’t hear a vendor complaining about how a (certain) other vendor dropped their price by 50% or more at the last minute to steal the deal. You’re probably saying “what’s the problem with that, the customer negotiated a great deal, right”? Wrong! In many of these cases, the (certain) vendor in question literally bends the customer over the table, sticks a vacuum cleaner in their backside, and sucks out every dollar the customer has in one-time “implementation fees”, “support fees”, and “upgrade fees” as the initial quote didn’t include the “enterprise” version, didn’t include “training”, didn’t include (24/7) support, and didn’t include implementation costs, etc. (while the other vendor’s quote included all this at a price that, in the long run, would have been multiples less than the “best price”).

In other words, the next time a vendor suddenly drops their price by a ridiculous amount, tell them to take a hike — before they cut the bottoms out of all of your pockets with the knife they used to “slash” their price.