How to Renegotiate Costs with Suppliers

Leah Archibald: Today we’re talking about how to have difficult conversations with your suppliers about cost.

My guest today has a lot of experience initiating difficult conversations inside of manufacturing teams. At Solar Turbines, Daniel Chacon was in charge of comparing internal cost data to worldwide benchmarks. He acted as the go-between between design engineers, buyers and supply chain specialists, starting hard conversations about whether potential savings opportunities could be reached and what to do about it. Today, he’s going to talk to us about how to use out-of-the-box data to start difficult conversations that leave everyone better off in the end. Daniel Chacon, welcome to the podcast.

Daniel Chacon: Thank you, Leah. It’s great to be here. I’m very excited to have this conversation.

Leah Archibald: I wonder if you could start by describing a difficult conversation you were involved in, either with your strategy setting team or with your company suppliers. What made it difficult and how did you get through it?

Daniel Chacon: Absolutely. At Solar Turbines, most of the conversations that I was a part of were to better understand what a component costs versus what it should or could cost. And I remember when I was first introduced to my role at Solar, I didn’t have much experience around manufacturing or cost. So, when I was tasked with identifying and validating any savings opportunity or having these type of conversations, I felt very nervous. I felt slightly unqualified to provide any kind of assurance or confidence. So those conversations right off the bat were challenging for me just because I felt a little bit out of depth in having them.

I remember kind of questioned the validity of the information. They’d ask a lot of questions about how the information was being generated, what assumptions were coming into it. And this of course forced me to go back and take a closer look at things like material costs, what process routings we had assumed, and that way I could get them to not just understand and trust me, but understand and trust the data.

Leah Archibald: That makes me think: If you set yourself up as expert in the ideal way parts should be manufactured, that only works if indeed you are indeed an expert.

Daniel Chacon: That’s right. If you’re speaking to a supplier that currently manufactures the part and that has a good understanding of how that part is manufactured, come prepared. Do your homework beforehand. Make sure you know the cost of that component is backed by some logical calculations and reasonable assumptions. You’re going to need to have assumptions, but make sure those assumptions are reasonable. That can be a very powerful tool that will give you credibility first and foremost when you’re speaking to your supplier.

Leah Archibald: You may have to gather that data from a third party outside yourself. It may come from market data, for example the fluctuating cost of inputs, or the labor cost in their particular area in which they manufacture.

Daniel Chacon: Exactly. You don’t want to come in with these over-generalized assumptions that just don’t make sense for the market you’re speaking to. A lot of times we would deal with suppliers in California. You have to know your audience. If you’re in California, you’re not in the Midwest or in China, and you have a very costly labor market.

Leah Archibald: So that’s number one: you need to have a good understanding of all the forces, including economic forces and material constraints that are upon your supplier. What else?

Daniel Chacon: Another thing that you want to try to gather is past experiences with that component, or with that supplier. If they’ve been quiet for a long time, it could be that they were comfortable from the get-go, and maybe it is time to try to see if there is an opportunity to adjust cost based on what they’ve learned making this part.

Leah Archibald: Would you go in as yourself or would you go in with a team all negotiating together?

Daniel Chacon: I always found the best way was to go in with the team. The way we would typically do it is we had a supplier technical engineer who was very knowledgeable of the manufacturing processes, we had a buyer, and sometimes we also had a sourcing specialist. I would come in as a cost expert, with the outputs of our aPriori model. Between the four of us, we could have a very collaborative conversation.

Leah Archibald: How did those meetings usually go?

0:18:03.2 Daniel Chacon: We would start with explaining to them why we were here, and aPriori would help with that. We would say, “Hey, we have a new tool that is helping us as an organization understand the cost of our components better and understand any issues in manufacturability that we may be having. We’re hoping to get that feedback into our design engineering space to see if there’s a room for improvement in any of these designs. But we want to make sure that we’re capturing the cost and any manufacturing issues as best as possible. So we want to present to you our cost model, and you can let us know if there’s anything that you’re seeing that we’re not capturing fully.”

When you come in with that approach. It gives the supplier that ability to say, “Hey, you’re definitely asking the right person. We can give you insight on that.” And that kind of opens the door.

Leah Archibald: I like the way you’re presenting that because it really seems like you’re giving your supplier an opportunity for collaboration.

Daniel Chacon: Yes. That approach, made these conversations very easy to have for the most part. But it wasn’t always like that. There were definitely other people within our team that would have harder conversations or maybe more resistant suppliers that weren’t willing to talk too much.

Leah Archibald: Do you think there’s a fear around these types of conversations? And if so, how can we all get better at them?

Daniel Chacon: For me personally, I come into any situation understanding that I don’t know everything right up front. When I come at someone with the understanding that there’s a lot the other person could teach me, it puts their guard down. There’s no defensiveness, like “Who knows more – who’s the bigger person here?” It’s more along the lines of “I’m willing to hear from you – I’m willing to be corrected.”

As an engineer, it’s my nature to want to understand and grow in my knowledge. So having an engineering mindset – that definitely helps in difficult conversations.

Leah Archibald: Daniel Chacon, thank you so much for joining us on the podcast.

Daniel Chacon: Absolutely. It was great having this conversation with you.