Negotiating with a critical supplier can be turned into an opportunity to create value through a long-term collaborative strategic supplier relationship. The key is to get the partnership going on solid ground from day one of the negotiation process.
— By Shaniqua Thomas
Negotiating with a critical supplier was once about getting the best price and concessions while hammering out an agreement. The hard work of developing a strategic relationship did not begin until after the purchasing agreement was signed. A better strategy is to employ best practices for managing the negotiation phase, with the end goal of creating a collaborative and productive supplier-buyer relationship that creates long-term value for both entities.
Businesses are increasingly dependent on suppliers to mitigate risks, provide critical services and materials, bring innovation to product design, and bring creative or innovative ideas for new products. How the negotiation process is managed will establish the tone of the relationship with a supplier, and determine whether full value is generated in the future.
Taking a collaborative approach to negotiations creates a positive, productive supplier relationship that will produce measurable value during the entire lifetime of the association.
Relying on Key Suppliers
Starting key supplier negotiations with a positive approach brings a number of benefits, but one of the most important is that the time is spent crafting an agreement with long-term value rather than haggling over price. The supplier and buyer will discuss topics like bringing innovation, shared interests, path to business growth for both companies and new market opportunities.
The process goes far beyond talking about the price of goods and services, which all too often ends up being a coercive type of discussion, i.e. do this or else. Compare a discussion on how to lower a price to the lowest amount with one that addresses business issues like mitigation and identifying potential new markets.
Negotiating with a win-win perspective to maximize value for both sides is the polar opposite of negotiating with a split-the-difference perspective. It keeps the focus on price and not on efficiency, collaboration, new solutions, future opportunities, and resources sharing.
Vantage Partners conducted a study involving more than 100 companies concerning relationship management practices with key suppliers across six areas of evaluation, with the first three being evaluation and selection, negotiation, and post-deal relationship management. Twenty best practices were identified, and a practice that could be implemented at the lowest cost to achieve the highest value was enablement. Enablement refers to creating a roadmap for negotiators to understand and clarify their respective company needs, gain alignment of negotiation priorities, brainstorm a wide range of options for meeting critical needs, research and analyze walk-away alternatives, manage communication and commitments, and establish the working relationship.
Negotiating with a win-win perspective to maximize value for both sides is the polar opposite of negotiating with a split-the-difference perspective.
By setting the stage for developing a value creating relationship, both parties close the deal with a deep understanding of the expectations for the working relationship, and this is critical for trust in (and reliance on) key suppliers.
Closing the Gap of Buyer and Supplier Perceptions
McKinsey & Company partnered with Michigan State University to evaluate the factors hampering supplier collaboration and its value generation. The five major dimensions underpinning successful collaboration programs can be addressed at the negotiation stage, instead of waiting until the signed contract is in place. The five dimensions are strategic alignment, cross-functional and cross organization engagement, organizational governance for sustainable collaboration, communication and trust, and value creation and sharing.
The study found close alignment between suppliers and buyers on the strength of most dimensions, but there was a significant drop in perceptions of strength when it came to moving from strategic alignment to value creation and governance. In other words, the supplier and buyer perceptions of strategic alignment had a small gap, while the perception gap between the two parties concerning value creation and organizational governance was wider.
Understanding the need to create value is not enough. Capturing the value is a different process of execution.
Some of the items that can be discussed during negotiations include the commitment of resources to support the collaborative arrangement, setting mutual targets and plans, metrics used to assess supplier performance, cross functional engagement on both sides of the partnership in areas like R&D, governance of collaboration projects, and cost transparency. These types of negotiation topics make expectations clear, and lay the groundwork for moving forward as trusted partners with mutual goals for business growth and sustainability. Developing trust early in the relationship is vital.
Starting on the Right Collaborative Foot
The McKinsey study identified steps an organization can take to start a supplier relationship on a collaborative foot.
The buyer first identifies the suppliers offering unique joint opportunities to create and retain value. During negotiations, the buyer and supplier begin strategic alignment by defining joint goals and objectives. A structured approach for joint projects is also defined, including the method for measuring value creation. Next, the value-sharing mechanisms and cross-functional incentives are defined.
Also discussed are the appropriate resources and infrastructure needed to support the partnership and governance model focused on performance and supplier collaboration as a permanent element of core operational processes. The buyer and supplier agree to foster a culture of transparency, knowledge sharing and consistency to support the agreement.
Clearly, establishing a true value-generating supplier relationship requires much more than price negotiations. Price is important, but getting the lowest price possible is frequently not the best approach. Haggling over prices tends to create an adversarial negotiation process, and it deflects attention away from important strategic issues.
Working together to grow the respective businesses makes more sense, especially in today’s hyper-competitive environment. Buyer and key supplier companies need close collaborative relationships, and it is a process that begins at the negotiation table.