3 Methods to Improve Supplier Negotiations
What best practices should businesses adhere to when involved in supplier negotiations?
Direct negotiation ought to take all the guesswork out of supplier agreements. However, when done without careful consideration, supplier negotiations can do more harm than good, injecting ambiguity into agreements rather than clearing it out – or worse, forcing both parties to walk away empty-handed. What best practices should businesses adhere to when negotiating contracts with suppliers?
1. Consider a commercial “mediator”
Two heads may be better than one, but bringing in a third party during supplier negotiations can help both sides of the table see each other’s arguments with greater clarity and appreciation.
Instead of quibbling over bill of materials and other static costs, effective mediators encourage an open discussion between both the supplier and the client about their respective needs and operational limitations, so either party doesn’t waste time or patience holding their cards close to the chest, so to speak.
Trained in the art of conflict resolution, arbitration could help supplier negotiations move away from price wars and get straight to the heart of the matter: setting the groundwork for a fruitful, long-lasting relationship that benefits everyone involved.
2. Know your supplier
It is unwise for businesses to head to the negotiating table without a full image of the supplier they seek to partner with. Not only could skipping out on this valuable “homework” mean signing a contract with suppliers that can’t offer everything a client expects, but it gives clients little to bargain with during supplier negotiations.
“Businesses with the best supplier relationships often receive perks”
After all, according to information released in the 2015 Working Relations Index, businesses with the highest supplier relations ratings see noticeable increases to market competitiveness and operating profit. That’s because clients with the best supplier relationships often receive perks like early peeks at new supplier offerings, more responsive service, and lower prices.
3. Define all terms as completely as possible
For both parties to land on a client-supplier agreement that satisfies everybody’s demands, contract must clearly and wholly specify all terms so as to foster a mutual understanding.
When suppliers and clients enter into a contract, they’ve essentially made their companies vulnerable to each other’s risks for the possibility of success. If a supplier receives no business, it cannot keep its doors open. If a client doesn’t receive raw materials or parts from a supplier, it too could severely damage operations. That said, spelling out terms plainly and precisely protects everyone’s interests, especially if both parties use active metrics to make agreements less susceptible to interpretation, according to the Acquisition Institute.
For example, should a client’s demand for materials grow beyond a supplier’s capabilities, the transitory period spent finding a supplementary supplier could cost the client significantly. However, if the client makes the supplier liable at the offset for any deficiencies in service, businesses effectively avoid cost-intensive issues that may occur. Moreover, this also gives suppliers glimpses into where their partners are headed and how suppliers’ own operations will need to adjust to keep them on as clients.