The benefit of applying the above five tactics systematically results in better, faster and more sustainable procurement savings (see the following table for comparisons). Generally speaking, there are six procurement methods used by the procurement team in a company. The magnitude of the premium or penalty will depend on the value of the performance to your business. Basically there are 2 types of objectives and approaches to purchasing negotiation. Negotiation for Procurement Professionals No matter how much reporting or digitalization procurement pros do these days, negotiation is always at the core. NEGOTIATION IN PROCUREMENT It is good to understand the meaning of negotiations. The total-value- of-ownership (TVO) framework allows you to do just that. Individuals with a collaborative negotiation style are willing to invest time in finding innovative solutions and building business partnerships with other organizations. © 2021 | Web Developed by Web Intelligenz, best alternative to a negotiated agreement, Category: Supplier Relationship Management, Want Responsible and Resilient Supply Chains? Choose the negotiation and decision mechanism that is best suited to the bidding situation. Negotiation Styles. With the new financial year already rolling, let’s make some great deals while building long-lasting, mutually beneficial purchasing relationships. The first is the A procurement director who has mastered the art of negotiations is able to collaborate and creatively develop negotiation plans, strategies, and actions which result in strong but fair negotiations. 5. But if you don’t trust the supplier, walking away is the right negotiation tactic. Having established “comparison prices” with the TVO framework, you can start negotiating with your suppliers in an effort to lower prices and/or improve performance. They too must then re-negotiate contracts with their suppliers, thus impacting entire supply chains down to the raw materials. The six times of procurement are Good preparation is vital to a procurement negotiation that results in a good deal. While it can be hard to walk away after we’ve already sunk money into the negotiation, it can also be hard if we’re under time pressure. There’s no risk to you, but some pretty obvious benefits. Negotiationis an open Declining market demand and over-capacity is driving finished product manufacturers to put price pressure on their suppliers. Even if you already have alternatives, it does no harm to expand the range of suppliers from which you can invite bids. Usually in this kind of negotiation, a range of prices is offered of a product buyer is looking to buy and it often results into a price on the higher range. The following 5 tactics will help your organization achieve excellence in procurement and accelerate savings to your bottom line: Companies are aggressively looking for tactics to reduce costs and unlock savings on all their indirect and direct purchases and to more effectively manage their cash flow in procurement. 1700 7 Ave Suite 116 PMB 348 Seattle WA 98101, Coronavirus Recession Resources for Procurement, Kearney Includes Suplari in 10 Tech Imperatives Organizations Need to Adopt Today, Blog Series: Playbook for New CPOs – Part One, Suplari Customer Nordstrom Press Coverage in SupplyChain Management Review – Transforming Procurement at Nordstrom, How Procurement Impacts EBITDA Initiatives for Private Equity Firms, Suplari Announces Integration of Industry-Leading Financial Health Ratings into Suplari Spend Intelligence Cloud in Partnership with RapidRatings. They Two factors that operate during the actual negotiation are the You need a way to bring into the picture all aspects that determine the performance of the offerings of your suppliers. No one wants to deal with a buyer who makes empty threats. You could use an all-or-nothing strategy as a negotiation tool and run a traditional eAuction event. https://www.pon.harvard.edu/daily/batna/10-hardball-tactics-in-negotiation Applying the negotiation mechanisms described in guideline 4, it looks like a straightforward process. In such situations it’s up to the negotiator’s skill to adapt and interpret the mechanism prescribed. Given that assessment, you may decide to deploy a Dutch auction and give target pricing for 100% of the business until one of the suppliers takes the price target. On the other hand, persisting with negotiations that are throwing up red flags can also land you a bad reputation, or worse – a bad deal. It presents the potential for win-win scenarios, as suppliers have an incentive to improve their performance. Conversely, if every day lost represents a loss of $2 to you, a supplier who can only deliver in 11 days gets a penalty of $2. This group approach saves GPO members an average of 22% on their indirect spend. Negotiation is an underutilized, yet critical business skill that lies dormant within most organizations. Choosing the most appropriate mechanism depends on the competitive characteristics of the situation. Research and preparation on your part not only sets you up well for the negotiation, it’s also a sign of respect for your supplier. As your data and insights are driving a prioritization of opportunities, utilize a decision matrix for the levels needed for approval for switching suppliers. The following 5 tactics will help your organization achieve excellence in procurement and accelerate savings to your bottom line: Negotiation Tools & Tactics for Procurement Teams. We often approach negotiation being very guarded and wary of showing our cards. The actual names of these could vary depending on your company and industry, but the process remains the same. For example, if you expect a delivery lead-time of 10 days and every day gained represents a value of $1 to you, a supplier who can deliver in eight days gets a premium of $2. The approach you take should mirror the intended relationship for the engagement — eg if the relationship is to be highly collaborative then the negotiation approach should reflect this. https://hbr.org/2015/07/how-to-negotiate-with-powerful-suppliers Those involved in procurement and supply activity will therefore be able to effectively negotiate with stakeholders and/or suppliers and to understand the methods associated with preparing for and carrying out commercial negotiations. The TVO framework shows all preferences and decision criteria for all the suppliers concerned. It leads to the selection of suppliers with the best price-performance ratio. Negotiation can be a bit of a daunting prospect to some people, whereas others thrive under the pressure. So what can sales professionals do to avoid having … The complication is that for all but the simplest components you cannot compare on the basis of price alone. Ask the potential vendor to justify their higher prices and, if they can’t, well, they should offer you a better deal. That question offers a handy segue to the next tip. In these cases, it’s important to stick to communicated decision mechanisms as far as possible. The combined use of the competition matrix and the TVO framework enables you to let price negotiations go hand-in-hand with potential supplier switching discussions. Purchasing processes are sometimes structured so that higher levels of approval are required for more important purchases, including intervention by the executive board. Don’t hesitate to inform the vendor that you’ve spoken to others, some of whom have quoted lower prices. It creates more intense competition, lending itself to the use of powerful negotiation techniques, as we will see later (guideline 4). For instance, an aggressive supplier suddenly appears to lose interest in a deal. How to apply a rich tool set of different negotiation strategies makes the difference between the unexperienced buyer … The creation of formalised agreements is a critical part of the success of any organisation. Only when a supplier is certain that a concession granted during negotiation will decide the deal in their favor will they be prepared to offer the best price. Analyse the sources of power in commercial negotiations and promote the organisation's objectives to achieve effective procurement and supply. distributive negotiation, lose-lose approach, compromise approach, integrative negotiation and the outcome of the negotiation … Empower the procurement department to both negotiate and decide. If done correctly, the supplier may come back with a better deal. When you start negotiating with your suppliers, they can improve not only their prices but also the factors that determine their premiums and penalties. Here are my top tips for negotiation approaches in procurement. Consistently applying guidelines 1-4 above creates sustainable negotiation power. Taking the uncertain economic climate into consideration, you may conclude the risk of the two suppliers employing defensive strategies is extremely high. Doing so may give off the impression that the other party may have underpriced their transaction or that they could have gotten more concessions out of you. The Ninja Corporation has one of the largest factories on the East Coast. Asking open questions is a good way to steer a procurement negotiation in the right direction. The sales people who come through your door may offer you a price range that makes it difficult for you to receive the BATNA (best alternative to a negotiated agreement) advantage. So, compromise when it’s necessary, but prepare well so that any compromise leads to a mutually beneficial arrangement. For sales professionals, sales negotiations with Procurement is an ongoing struggle of dealing with third party negotiators, blind RFP’s, reverse auctions, commodity pricing, and hardball sales negotiating tactics. A diverse range of effective procurement eRFx negotiation tools and tactics exist to boost savings this way. Creating the right environment for a commercial negotiation including the choice of location, its surroundings and timings Other negotiation styles are often too impatient to invest this time, but collaborative negotiators are confident that they will benefit in … Contract Negotiations should not depend on who’s smarter (supplier or seller), but on achieving the goal of concluding a contract that is fair, reasonable and beneficial to both parties. Those involved in procurement and supply activity will therefore be able to effectively negotiate with stakeholders and/or suppliers and to understand the methods associated with preparing for and carrying out commercial negotiations. Let’s get to the meat of the contract negotiation process 3 steps. Your success mirrors theirs, and you need them to be successful so that you can have a stable supply chain. You should always be prepared to walk away, no matter how much you’ve already sunk into the negotiation. As an example, consider 2 active suppliers who might take over each other’s business. 4. In any case, you’ll be able to gauge how hungry they are for your business by their reaction. Regardless of where your firm holds contracts or negotiations within a given supply chain, it’s crucial to extract price concessions without harming the long-term prospects of vital suppliers. Further, the use of an approved TVO framework allows you to empower the procurement department to decide about switching suppliers even during a negotiation. WINNER: ACA-Bruel 2013 - Special Mention Prize (1st edition) Highly effective