July/August 2011, eSide Supply Management Vol. 4, No. 4
Often overlooked, this meeting delivers improved negotiation results and reduced total negotiation cycle time, and ease of long-term supplier relationship management.
Holding pre-negotiation planning sessions with suppliers is an often overlooked part of a negotiation. Far too many supply managers enter negotiations with high-expenditure or high-criticality suppliers without including this step, usually in an effort to save time. However, pre-negotiation planning sessions allow supply management professionals to be much better prepared and enjoy improved results. And, if used appropriately, they can reduce total negotiation cycle time.
Holding pre-negotiation sessions — some might call them kick-off meetings — provides a forum for both parties to communicate their objectives. These can be held anywhere between one week to a month before negotiations, depending on the complexity of the negotiations and the amount of needed information to be gathered.
There are three key outputs of the pre-negotiation planning session:
Succeeding in negotiations requires being versed in both the art and the science of the process. Part of the "art" is nurturing the relationship with the supplier as negotiations ensue. The supplier typically has a lot on the line for negotiations, including commissions, targets, management perceptions of the deal and personal pride. The supply manager's job is to break this tension and help make the business environment more trust-based, so the supplier is more open to making concessions entering negotiations. Having a quick coffee or juice and engaging in small talk with the supplier in the café or break room, or even in the conference room in which the pre-negotiation session is set to take place, will help achieve this. The supply manager can discuss a nonbusiness topic of mutual interest, or even share personal stories with the supplier. All of this has a business purpose: The business relationship and trust levels are improved, the supplier's defense shields will be lowered as its comfort level rises and the supplier will be more inclined to make concessions in negotiations.
Those supply managers who want to get right down to business are missing a significant opportunity. Fifteen minutes, spent wisely on building a rapport with the supplier on the front end of the pre-negotiation planning session in this manner, will pay great dividends on the back end, both during negotiations and again after the contract is signed.
The second major focus should be to collect and validate industry and supplier cost information for the purpose of preparation. The supply line manager should ask the supplier the following questions, stating that the intent is to augment and validate research gathered by the supply manager.
Who do you see as your top five competitors? Understanding the supplier's biggest competitors helps ensure the supply manager is also benchmarking — and, if appropriate, soliciting bid responses from — those organizations.
Where do we stand in your customer ranking with this proposed level of business? Understanding the customer ranking helps the supply manager understand the extent to which the supplier needs the business. This information is critical in developing a negotiation strategy, and also assessing any associated risks.
What percentage of your divisional revenue would be coming from this proposed level of business? Understanding this percentage provides the same information as above, but from a different angle. If the supplier is a large multiproduct or conglomerate, it is important in both cases to have the supplier focus only on the corresponding division or divisions providing the products and services, not their entire company, when answering these two questions. Not doing so will greatly impair the supply manager's assessment of positional strength going into negotiations.
What percentage of capacity are you currently operating at? Asking this question of the supplier gives the supply manager an understanding of the supplier's cost structure. Because manufacturing and personnel (in the case of a services supplier) are largely fixed costs, the supplier will largely only be incurring variable costs in taking on new business in an excess capacity environment. This creates a favorable marginal cost and profit structure that the supply manager must recognize and use as a negotiation strategy.
What is your NAICS code? The supplier's NAICS code should be used to obtain industry-average profit margins for the supply manager's cost model. This information may also be gleaned from the company's annual report or SEC filings if it is a public organization.
What do you need to be successful as a result of this deal? Asking the supplier what it needs to be successful out of the negotiation allows for the development of a short list of concessionary items. The supply manager can then use this list to achieve his or her biggest negotiation objectives.
The final focus must revolve around gaining crystal clarity regarding who will be brought to the negotiations by the supplier — by name, title and role. The supplier cannot be allowed to bring whomever it wishes; often times, superfluous individuals are brought along whereas key players are left out. It is the supply manager's, not the supplier's, responsibility to ensure the appropriate people are present. The attendee model must be expressly authorized by the supply manager.
Ideally, the decision-maker should be at the pre-negotiation planning session, and especially at the negotiation itself. In cases where the supplier is exclusively based in a foreign country, the pre-negotiation session might be held over the phone. In all other cases, it should be held face-to-face at the supply manager's facility. Attendance by legal personnel from either side for legally complex negotiations is also a consideration and should be understood in advance.
A copy of the purchase agreement should be given to the supplier at the pre-negotiation session. The supply manager should state this caveat upfront: "As we determine with whom we want to do business and in what capacity, a major part of our decision criteria is the number of requested changes to our standard contract terms and conditions, and pricing provided should be based on these terms and conditions."
A weighted scorecard might even be provided, indicating how the supplier's bid will be graded, with number of requested changes to supplier's standard contract terms and conditions having a significant percentage allocated. (Twenty percent is a good target level.) This will alert the supplier that requesting changes to the supply manager's contract might have financial consequences, dramatically reducing the number of supplier-requested changes and contested clauses in the supply manager's contract. This single step can dramatically reduce the cycle time of negotiations and the extent to which legal personnel need to get involved.
Finally, the supply manager must tell the supplier exactly which terms they do, in fact, want to negotiate at the negotiation session, and request that the supplier be exclusively prepared to negotiate these terms. These might be conditions such as pricing, lead time, warranty, inventory management models and so on. The supplier will then not only be very clear and focused on where it needs to generate an aggressive proposal, but also regarding areas that will not be discussed. This keeps the discussion very focused on the supply manager's objectives. It also ensures the supplier is adequately prepared, knowing what these topics will be in advance. If there are multiple suppliers being negotiated with as a part of an RFP response, there might need to be some flexibility to manage individual supplier questions regarding the RFP requirements.
The supplier proposal might then either be presented at the negotiation session, or sent in advance of it. The supply manager must decide which is preferable.
A small time investment planning the pre-negotiation session will pay itself back generously. Benefits will take the form of improved negotiation results and supplier relationships, as well as reduced total negotiation cycle time and ease of managing the supplier to the supply manager's objectives over time.
For more articles and resources on negotiation strategies, visit the ISM articles database.
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