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Features

Calling a Supplier's Bluff

Author(s):

Omid Ghamami


September/October 2008, eSide Supply Management Vol. 1, No. 5

6 questions to determine how much they need (or don't need) your business

Walking away from a negotiation is an often misunderstood tactic. Far from being a spur-of-the-moment decision or a method of dealing with heated emotions, it can actually be a strategy. When used correctly, it can enhance results without negatively impacting business relations.

Quite simply, to walk from the negotiations means that one or both sides is given time to reconsider their positions, with possibly significant consequences in the event progress is not made. The intent to walk should always be handled professionally; both sides should state their concerns, how they would like to see the situation rectified, why these issues are important to them, the logic behind these requirements, and the actions to be taken in the event no resolution is reached.

Often times, a supplier threatens to walk away if certain conditions are not met. This leaves the supply management professional unclear if the supplier is indeed serious or is using a clever negotiation ploy. As such, important measures should be taken before every negotiation to best prepare the purchasing professional.

When engaging in a pre-negotiation meeting with a supplier, six questions can provide key pieces of information to determine their level of need for the business — and, therefore, their ability to walk. If necessary, a non-disclosure agreement may also be signed by both parties to ensure confidentiality.

Question 1:

What percentage of your business will be coming from our firm with this proposed contract value?

How to interpret the response:
The intent of this question is to determine how important the business is to the supplier from a revenue perspective. The interpretation of the answer is very industry-specific. For some firms, even single-digit percentages are significant. If the organization is a conglomerate, or if its division is a separate financial entity, the focus should shift to the percentage of divisional revenue which the contract in question would represent. Concerns of detrimental reliance might come about if the percentage is too high (greater than 35% is a good rule of thumb). In such cases, the legal department should be consulted before contracting with this supplier.

Question 2:

Relative to your other customers, what is our organization's expenditure ranking with this proposed contract value?

Calling Supplier's Bluff

How to interpret the response:
The key here is to determine how your organization ranks compared with the supplier's other customers at this level of proposed business. The importance behind this question is that the purchasing professional might find that, despite being a very small percentage of the supplier's business, they are one of their top customers. Again, this should be assessed at the divisional level if it is a separate financial entity. Ranking in the top 10 is considered positive, and a ranking in the top five generally indicates a business opportunity the supplier likely cannot afford to walk away from.

Question 3:

Are you currently operating at full capacity?

How to interpret the response:
Another way to ask this question is, if the supplier walks away, will it be easy to fill the demand elsewhere? If they are operating at less than full capacity, they stand to significantly benefit from your business. On the other hand, if they are operating at full capacity and have other customers vying for the business, they might be able to walk away without consequence.

Question 4:

Are you doing business in any capacity with other divisions of our organization?

How to interpret the response:
Due to enterprise purchasing system limitations in large organizations, a purchasing professional might be unable to confirm if the supplier in question is already doing business with other divisions, or the extent to which they are. If this is the case, it is acceptable to verify this with the supplier, positioning it as a validation of data gathered by the purchasing agent. If the supplier is not doing business with any other division in your firm, and stands to lose your organization as a customer entirely, this weakens their ability to walk from the deal.

Question 5:

If an agreement was reached, are there any target dates for placing the first order?

How to Interpret the Response:
This question affords the opportunity for the supplier to disclose whether or not they would like to book the revenue by a particular date. Their level of desire should be evident; the more emphatic the answer, the less likely a walk-away. (This is especially true if a supplier is operating at less than full capacity.)

Question 6:

Are there any industry segments or new markets for which you would like us to use this contract as a gateway?

How to Interpret the Response:
This question ascertains whether or not the supplier wants to do business with your organization not only for the inherent value it presents, but also as a means to break into a new industry segment — as a foot in the door, so to speak. If the supplier indicates this is indeed their intention, ask clarifying questions to gauge the magnitude. The greater the opportunity, the less likely it is that the supplier will walk away from the business.

When assessing the big picture painted by these questions, points can be assigned to each category as an indicator of supplier negotiating strength. The purchasing professional should then be able to look at this trend data and make an assessment of the supplier's ability to walk away based on what is at stake. Once this pre-work is done, any potential walk-away situation that arises with that supplier can be handled with confidence and resolve.



Omid Ghamami

Omid Ghamami has more than a decade of experience negotiating multimillion-dollar contracts and managing regional and global purchasing departments with Intel Corp. He is the President and Chief Consultant of Purchasing Advantage, a purchasing course and seminar solutions provider. To contact this author, please send an e-mail to author@ism.ws.

To read a related eSide article about negotiation prep work, visit the ISM Web site.

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