PROFITABLE PURCHASING NEGOTIATION

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1 PROFITABLE PURCHASING NEGOTIATION New Approaches to Managing Critical Supplier Relationships by Paul Hennessey Executive Vice President

2 Supplier Negotiations: An Opportunity to Improve Profits and Competitiveness Fifty-five cents of every dollar in sales of the typical corporation goes back out the door to suppliers. In some companies the number is even higher. And as any CFO will tell you, every penny saved in supplier negotiations falls immediately to the corporate bottom line. In today s profit-conscious business environment, successful supplier negotiations are critical to implementing cost containment and profit improvement plans. Because of this, many leading companies are looking for ways to improve performance in this key area. As the global business environment has become more turbulent, supplier negotiations have taken on an important new role: helping improve corporate competitiveness. Those who manage supplier relationships are increasingly called on to help their companies: meet or beat aggressive product launch schedules; develop radically improved approaches to inventory management; meet aggressive quality standards; protect intellectual property while ensuring access to leading-edge technology. Profitable Purchasing Negotiation New Approaches to Managing Critical Supplier Relationships BayGroup International Performance Report The goal of most supplier negotiations today is no longer just to get the lowest price. It is also to find new and innovative ways to meet a wide variety of business challenges, often by tapping into the knowledge and expertise of the supplier community. Traditional Negotiation Approaches Don t Go Far Enough Traditionally, purchasing professionals (and others who negotiate with suppliers) have focused on the competitive aspect of the buying process. This old mindset is characterized by an arm s length, adversarial relationship between vendor and buyer in which the buyer: takes orders from internal customers, then identifies a pool of potential vendors; pits suppliers against each other, and forces them to compete on price; and awards the business to the lowest bidder. This traditional approach is becoming increasingly ineffective, especially given the trends toward smaller supplier bases and global procurement.

3 rather than seeing themselves as prize fighters looking to beat up their vendors, those who work with suppliers need to see themselves as strategic relationship builders A new approach is needed: rather than seeing themselves as prize fighters looking to beat up their vendors, those who work with suppliers need to see themselves as strategic relationship builders who: focus on price as one part of total cost negotiation equation which also includes quality, delivery, responsiveness, inventory management, and other non-financial factors; act as partners (rather than order takers) with internal customers to identify suppliers who can meet internal customer needs; and identify and partner in a more collaborative way with a smaller number of critical suppliers. In short, they realize that they must continue to negotiate profitable deals, but to do so in a more strategic manner which builds rather than erodes supplier loyalty and partnership. Traditional Model Lowest bid wins à New Model Lowest total cost of partnership wins Internal order taker à Value-added strategic partner to internal customers Prize fighter à Relationship builder The traditional, adversarial approach to supplier negotiation no longer works in today s global business environment. A new approach emphasizing profitability and supplier relationships is required to succeed. What It Takes: A Challenging, Counterintuitive Negotiation Approach In today s rapidly evolving sourcing environment, it s not surprising that corporate negotiators are being told to become strategic partners with their suppliers. Unfortunately, though they want to change their approach, many simply don t know how. What does it take to conduct supplier negotiations that work for both sides? Based on almost two decades of experience working with purchasing professionals and others who negotiate with

4 Supplier Relationships Are Changing: Are You Changing with Them? Four recent trends in the supplier-buyer environment have made effective negotiation more important now than ever before: 1. A radical reduction in the number of suppliers Today, most major corporations are depending on fewer suppliers to help them succeed. One estimate is that the typical Fortune 500 company has reduced its number of suppliers by 33% over the last 10 years. The result: the average supplier negotiation is larger, more complex, and of more strategic importance. 2. Stronger partnerships with key strategic suppliers As the number of suppliers shrinks, companies are finding that they need to develop deeper partnerships with each one. The result: supplier negotiations need to be conducted in ways which protect the company s interests, yet foster trust, creativity, and sharing of knowledge. 3. Integration of purchasing into core business operations In the past, many purchasing organizations were considered standalone organizational units. Now many see themselves as partners with their internal customers. Rather than just taking orders from those internal customers, they are being called on to provide expertise in resource selection, to understand the objectives and plans of internal operating groups, and to work sideby-side with their internal customers to solve business problems. The result: sourcing professionals must use effective negotiation skills inside of their organizations as well as with outside vendors. 4. More team purchasing Today, more purchasing is done in teams than ever before. Team members must have a coordinated negotiation strategy, and be skilled in how to work together to craft the best possible supplier agreements. The result: a wider population of employees need to learn effective negotiation skills. suppliers, BayGroup International has concluded that high performers are fundamentally different from the rest. The negotiation approach they take is challenging, and often counterintuitive. What do high performers do that the others don t? They differ in six key areas: 1. They aspire to much more than money Successful supplier negotiations now revolve around much more than money. High performers realize this. They aspire not just to get the best price, but also to achieve goals in areas such as: radically improving logistics and delivery (often on a global scale). sharing of information in new and more strategic ways through electronic data exchange and linking of information networks. improving efficiency through creative staffing (for example, asking suppliers to provide dedicated on-site service personnel). achieving stringent quality standards. When they focus excessively on cost, sourcing professionals can miss opportunities in these more strategic areas, and end up with less profitable long-term relationships with their suppliers. High performers, on the other hand, have higher targets: they aspire to protect their companies financial interests, and to build profitable, mutually beneficial relationships with their suppliers. 2. They manage information strategically Today s high-performing buyers manage information during negotiations in new and better ways. They avoid obvious tactical mistakes (for example, disclosing information which erodes their negotiation power: We really need these parts next week ). They also take a more strategic, comprehensive view of information management. For example, they: gather information about supplier cost structures to help them understand where economies might be realized. understand their own company s current and future needs and search for supplier partners who can grow with them.

5 The goal of most supplier negotiations today is not just to get the lowest price. It is also to find new and innovative ways to a wide variety of business challenges, often by tapping into the knowledge and expertise of the supplier community. collect information about the financial strength and business strategy of potential suppliers, to help determine whether and how a viable long-term partnership might work. By managing the flow of information more strategically, high-performing negotiators are in a better position to create agreements which get outside of the box, maximize the value their suppliers bring to the table, and at the same time help their supplier partners win, too. 3. They identify underlying supplier s needs Most negotiators focus on their own needs and how to meet them. High performers put an equal emphasis on uncovering and addressing the needs of the supplier. Rather than prizefighting over what a supplier says they want from the negotiation, the high performer asks why, and gets to the underlying issues. By doing so they can increase the number of creative ways to strike a mutually advantageous deal. The heat shrinkable tubing story on the following page demonstrates how this approach can work. 4. They manage concessions effectively Traditionally, supplier negotiations have been seen as a battle between buyers and vendors, where concessions of value are made in both directions, and negotiating power determines which side gives up the most. In today s new environment, this view is insufficient. High performers take a more sophisticated view of concession-making during negotiations. They realize that different concessions have different costs, and have different value to the different buyers. By evaluating the cost/value equation for the negotiables they might give up or ask for, they craft agreements which both lower costs and build supplier loyalty. Here is an example: a major consumer goods company was in the midst of a tough supplier negotiation, and wanted to get better pricing and payment terms. Through effective information gathering they learned that the supplier had a need for certainty of future order flow. Realizing this, the buyer was able to trade regular reports forecasting orders for the supplier s product for better pricing and payment terms. A creative agreement was reached which met important needs on both sides. The cost to the buying organization was minimal; the value to the supplier was great.

6 Heat Shrinkable Tubing: Negotiating Outside the Box with Suppliers A number of years ago, a major auto maker identified a new, innovative heat shrinkable tubing product which would solve a number of design challenges in their manufacturing operation. This product was fabricated by a small, growing company with a young management team. When the auto maker approached the company with an offer to buy the tubing for ten cents a linear foot, the response to the buyer was brisk: There s no way we could produce the product profitably at that price. We need to charge you at least 22 cents a foot. The two sides quickly became locked in a competitive price negotiation, and deadlock appeared imminent. At this point the buyer tried a different, partnershiporiented strategy. He said, You d like to sell your product at 22 cents, we d like to buy it for 10 cents. We d love to do business with you, and you d love to do business with us. Let s see if we can find a creative way to resolve this problem. Through a process of data collection, research, and discussion, the buyer discovered that the seller s manufacturing process was highly inefficient, leading to artificially inflated prices. This led to the following innovative solution: the auto maker provided technical consulting to the tubing company to help them improve manufacturing efficiency (and hence lower costs). In return, the automaker was able to get a much better price. Both parties benefited: the buyer was able to control costs and the supplier was able to broaden their market and improve profitability.

7 5. They plan before executing Busy buyers often fail to plan effectively for their negotiations. High performers realize that poor planning costs money, leads to less creativity in negotiations, and fosters more conflict with suppliers. There are many components to an effective supplier negotiation plan. In addition to thinking through the relevant cost issues, the negotiator must consider questions like these: What is the best approach to giving and gathering critical information during the negotiation? What are the toughest questions we will be asked during the negotiation, and how will we answer them? What negotiables other than money, can we trade in this negotiation? Which ones are of relatively low cost to us and high value to the supplier? What is our bottom line, the point beyond which we will not go with the supplier? By taking the time to answer questions like these, the negotiator can avoid costly and unnecessary giveaways, and identify opportunities for mutual gain. 6. They welcome creative tension Tension is a natural by-product of the pressures put on today s sourcing professionals. In their negotiations with suppliers, they must manage many competing interests, such as: delivering to shorter cycle times vs. delivering higher quality products. negotiating better prices vs. building a better supplier relationship. sourcing the product the internal customer wants vs. sourcing the product which makes the most sense for the company. Most people are uncomfortable with tension created by competing interests like these, and look for ways to reduce it. High performers, on the other hand, realize that tension is a natural state in supplier negotiations. They know that if there isn t tension, there probably isn t a real negotiation going on at all. They also realize that tension, when handled constructively, can be a catalyst for achieving creative negotiated solutions.

8 What makes these approaches so challenging for the average negotiator? If they are so logical, why don t we see them in use more often? The reason is simple: the skills of effective supplier negotiation are counterintuitive. The instinctive, natural reaction of most negotiators is often the opposite of what they should do (see table below). They know that if there isn t tension, there probably isn t a real negotiation going on at all. Area Setting Aspirations Profitable Supplier Negotiation: It s Counterintuitive What Negotiators Typically Do Aspire to get the best price. The Counterintuitive Right Way Aspire to get the most profitable deal...and to build a stronger supplier relationship. Managing Information Making Concessions Responding to Demands Planning Managing Tension Give away too much information get too little in return. Give away too much too quickly to end the negotiation. Focus of concessions: money. Negotiate about what the supplier says they want. Begin negotiating with minimal planning. Look for ways to reduce tension in the negotiation, or use it in a competitive way to win at the supplier s expense. Manage the two-way flow of information to ensure a successful negotiation. Gives concessions reluctantly. Focus on concessions: Items of high value to supplier and low cost to the company. Identify underlying needs which can lead to more creative, profitable deals. Anticipate likely negotiation situations, and plan approaches for dealing with them. Use the natural tension in the supplier negotiation as a constructive source of creative, profitable solutions.

9 The Bottom Line: It s a Strategic Challenge Today s buyers are the key link between their companies strategies and the acquisition of resources to implement them. Today s corporations demand more of the people who manage their supplier relationships. Building new and better approaches to negotiation has become a strategic challenge, critical to achieving aggressive profitability goals. Buyers are no longer simply managers of cost. In their expanded role they are the key link between their company s business strategy and the acquisition of the critical resources needed to implement it. What does it take to build critical, often counterintuitive, skills for success? The most effective approach includes formal training and management reinforcement which: helps your people see the shortcomings of their current approaches to supplier negotiation; provides simple, systematic ways to negotiate better agreements in today s new business environment; teaches fundamental principles and planning methods to help them model the approaches used by high performers; gives feedback on their negotiating strengths, the mistakes they make, and the skills they need to build; provides opportunities for them to refine new skills in a safe, low-risk environment; builds their competency in negotiation planning; and enables them to apply new learning to current, actual supplier negotiations, so time spent in the classroom has immediate payback on the job. Based on two decades of successful negotiation training in major global corporations, BayGroup International s Negotiating With Suppliers TM provides the principles and skills your negotiators need to improve the quality and profitability of their supplier negotiations. After completing Negotiating With Suppliers TM, your people will be able to: distinguish between strategic and tactical supplier negotiations, and know how to negotiate in each situation; use six fundamental Principles of Negotiation to improve supplier negotiation performance;

10 obtain the best possible pricing while maintaining supplier loyalty and good will; negotiate more creatively when faced with potential deadlocks; negotiate effectively inside your organization; develop and implement effective concession strategies for supplier negotiations; and plan more effectively for all supplier interactions. Using the Negotiating With Suppliers TM approach, you can boost the performance of your buyers, procurement professionals, and others who negotiate over resources for your company. In the process you will improve profitability, and at the same time build better longterm relationships with the suppliers that provide you with products and services. Paul Hennessey is Executive Vice President of BayGroup International, the nation s leading provider of negotiation training to major corporations. He oversees the firm s marketing, research, and development efforts.

11 About BayGroup International BayGroup International is a global performance improvement firm that helps corporate leaders reach critical profitability, cost containment, and team effectiveness goals quickly, with high impact. The firm helps its clients improve individual performance, organizational profitability, and shareholder value by: Ensuring that key business initiatives demonstrate significant ROI; Helping implement corporate strategies successfully; Building planning and execution skills across the organization for creating profitable agreements, both internally and externally; and Leveraging online technology to improve individual and team performance. BayGroup International implements strategic projects that include research, highly relevant performance improvement activities, and the tracking of results. Our work in client organizations is supported and reinforced through executive leadership communication campaigns, management coaching processes, and online performance support tools. Our proven approach to performance change has helped clients achieve desired business results, and improve the ability of key employees to build better agreements with: Customers, especially when competitive sales pressure threatens profits. Suppliers and other outside parties, whose increasing costs can erode the bottom line. Internal team members and between individuals, where failure to handle tough, contentious issues can threaten quality, customer service, restructuring, and other strategic initiatives. Strategic partners, where poor agreements can threaten the success of mergers and acquisitions, as well as other missioncritical alliances (in areas such as distribution, research and development, and marketing). By partnering with BayGroup International, clients achieve significant improvements in human performance and millions of dollars in bottom-line results. Since its founding in 1980, BayGroup International has built a select client list of major global corporations, focusing on the technology, telecommunications, pharmaceuticals, transportation, consumer products, and financial services industries. Our consultants have worked in North and South America, Asia, Europe, and the Middle East. We serve our clients from offices in major cities around the world.

12 To find out more about BayGroup International s approach to improving bottom-line results through more effective sales strategy execution, please contact us: 2200 Larkspur Landing Circle Larkspur, California USA BayGroup International. All rights reserved. NWS PPN White Paper_