“People buy from people they trust, and they trust people they like,” according to sales and business author Garrison Wynn. Procurement and sales teams see the importance of working with trusted partners daily. However, I’m not convinced that I need to become lifelong friends with the people across the negotiating table (or Zoom) to be successful in supplier negotiations.
That said, focusing on fact-based negotiations and being mindful of how you express your position can go a long way to removing emotion from this often long and complex process.
aPriori enables cost engineers and procurement teams to access a complete breakdown of costs including: labor costs, overhead costs, tooling investments, and manufacturing process costs. Companies use this detailed cost breakdown to guide discussions by focusing vendor discussions on the most significant discrepancies regarding cost or requirements. (For more should cost insights, read How to Collaborate with Suppliers to Reduce Product Costs.)
But having the right tools or accurate sourcing information doesn’t guarantee a smooth negotiation process because emotions can cloud the decision-making process. Read the following tips and strategies to strengthen your supplier relationships and work collaboratively with your partners to reduce costs and accelerate production.
Keys to Productive Supplier Negotiations
Procurement Teams Set the Stage
- Provide the reason for the meeting (e.g., improve market share, accelerate part delivery, increase supply chain resilience, improve sustainability, etc.)
- Recognize valued suppliers. Partners that feel appreciated are more willing to negotiate and collaborate than a vendor primarily concerned about losing an account.
- Stress the importance of transparency for mutual success (e.g., shared savings), which includes:
- Sharing business information including margins, cycle times, workflows, etc.
- Sharing expertise. (An in-depth discussion may provide a supplier with ideas to optimize a specific manufacturing process.)
- Understand your supplier’s goals and identify commonalities (e.g., each company wants to expand its presence in sustainable manufacturing).
Use this Negotiation Process to Foster Collaboration
- Document every supplier’s idea – even if it seems impractical. This shows that you value their input seriously and can enable you to dig deeper and find actionable ideas. Then take all of the ideas back and discuss them.
- Ask suppliers to quantify the impact of their ideas (e.g., cost, speed, etc.).
- Have your supplier help to rate the ideas that you generate. How hard would it be to make this change? When could this take place? How would this change affect speed, cost, or sustainability?
- Follow up with your supplier regularly on all actionable cost savings ideas until they are implemented.
- Celebrate each win, even if some are small. Give your supplier credit for helping you improve and tie each success to one of your key objectives.
Use Clear, Impartial Language in your Negotiation Strategy
How we communicate matters. And it’s important to focus on the issue at hand without implying the person you are negotiating with is at fault or responsible for a specific component cost, availability, or other challenges.
1) Don’t say: “You are charging us too much.”
Once production is up and running, current suppliers typically don’t conduct another deep dive regarding your product/component and associated cost. And suppliers need your guidance to identify cost savings (e.g., is there an opportunity to change product tolerances or other specifications?).
Consider the following alternatives to phrase your concern during negotiations
- Let’s look at this part. I want to understand the processes that built up to the final cost.
- Our costs don’t align on the (fill in the blank). Can we look at that more closely? (Don’t say, “My aPriori should cost report shows that you are charging too much for (feature or process name).”
- I ran a cost analysis on (feature or process name). Can you help me make sure my numbers align with your processes?
- After aligning our processes, it looks like your (process, cycle time, etc.) is still slightly higher than mine. Is there potential to reduce costs? How can we align better? What is driving that cost?
- Our analysis of this part showed us that this (feature/process) was difficult and time-consuming to manufacture. Did it require a special (tool, fixture, machine, etc.) to make? How can we help make that feature easier to manufacture? How much time would that save? Can we work together to bring our costs down on that feature?
2) Don’t say: “Your material costs are too high.”
Suppliers may not know they are paying too much or don’t qualify for volume discounts. And it is common for suppliers to mark up raw materials to offset perceived lower margins for, say, labor and handling, and added margin to the final roll-up.
Consider the following alternatives to phrase your concern during negotiations
- How do you purchase your stock material for our parts? Would it be possible to make changes to get a better overall price? Besides the obvious political changes, do you have any suggestions to reduce raw material costs?
- I show an average price per pound for X stock size is (fill in the blank). How does this align with what you are paying?
- Let’s focus on raw material costs for this part. I used X for the raw stock size, and I used Y for material removal time. Is this information aligned with your operations? (If not, there may be a potential to reduce costs.)
Try These Negotiation Skills to Address Supplier Objections
Q1: “Your material cost is wrong! I paid $XX dollars the last time I bought it.”
A: We used averages based on the metals market when calculating material costs. I show X dollars per pound for that material. Please provide your average cost per pound for an apples-to-apples comparison.
Q2: “Did you account for my overhead and set-up cost in your cost analysis?”
A: Yes, we estimated it would take about X hours to set up the machine, and we also included $X dollars for overhead, SG&A, and margin. Do these numbers line up with your processes and percentages?
Q3: “That (fill in the blank) feature drives a lot of the part cost because (fill in the blank).”
A: My analysis of that feature shows an estimated time of (fill in the blank seconds) to do (fill in the blank). My speeds and feeds are based on the published data in the Coro tool cutting key. How do these compare to your times, speeds, and feeds? Let’s see how we can get more closely aligned and see if there is an opportunity to reduce costs. Additionally, our team will look at the design more closely to improve manufacturability.
Q4: “We don’t make that part on the machine that you specified.”
A: When we analyzed this part, we selected the most efficient process based on our information. If you make it with a different machine let’s work together to understand the decisions that lead to that machine selection.
Note: This information helps you in two ways: First, it provides valuable information regarding your supplier’s process and machine rates. Secondly, suppliers commonly manufacture a part in “any open” machine, not necessarily the most efficient one. Using the most suitable machine to produce a specific part can deliver a product with higher tolerances more efficiently than alternative production methods.
Strengthen Supplier Relationships
Understand that every conversation with every supplier is a negotiation (even with strategic sourcing partners). Everybody is looking to operate faster, get a better price, improve their cash flow with better payment terms, or bolster their bottom line. Encourage anyone who interfaces with the supplier to also ask for ways to improve. And then ask them to share feedback with the procurement team, and then take action as appropriate.
The goal of the should cost negotiations is not just to reduce component cost directly, but to also remove adversarial negotiations in favor of a cost-reduction collaboration with suppliers. Detailed should cost estimates help move away from “accusing” a supplier of having a price that’s too high and toward investigating why the price is so high.
And don’t underestimate the importance of establishing clear goals before vendor negotiations, setting a clear agenda during sales meetings, and understanding the human element in all communications and sales activities.