By Rakhi Agarwal, MBA, C.P.M., CPIM
A negotiating strategy is the overarching plan that lays out the tactics used to accomplish negotiation goals.
The best tactic in a negotiation is to invite a supplier’s representatives to a meeting, make them wait in a room that’s too cold or too hot, arrive late and then begin the conversation. Just kidding. We no longer live in a time where suppliers and companies are enemies and engage in constant price battles. Today, customers and suppliers are more tolerant of each other than ever before, thanks to the increased trust and mutual sharing of information that leads to win-win situations.
Here are the top 10 negotiation strategies and tactics you can employ to make the most of your supplier relationships and achieve your target goals:
1) Always set a target goal. Do sufficient research before setting a goal. Always know your breaking and walk-away points. If you don’t establish a target goal up front, you could lock yourself into a deal that will come back to haunt you.
2) Pre-condition the supplier before a face-to-face meeting. Set the mood of the meeting ahead of time. Drop hints to the supplier: You’re negotiating with another supplier; volume needs to be spread to manage risk; or because the market has gone down for feed stocks, you expect a price decrease. When suppliers are conditioned ahead of time, they’re more apt to agree to your offer.
3) Play “good cop, bad cop.” Your boss — or a company executive — can always play the bad cop. Let management deliver unfavorable news like policy changes or rejection of a requested price increase. This avoids conversations getting personal and the likelihood of a soured relationship.
4) Never say yes to any deal in the first meeting. Always say that you must discuss the matter internally and will get back to the supplier — even if you have decision power and the deal is in your favor. This gives suppliers the satisfaction of thinking they did their job and didn’t give you what you want without a fight. In addition, this helps them maintain confidence in their own negotiating abilities by thinking they didn’t give too much, too soon.
5) Be creative. Too often, sourcing professionals are in a hurry to lock in negotiations. Instead, take a deep breath and think about the best way to get the same deal with maximum impact. For example, you might want to take a one-time savings in rebate form instead of a price-per-unit break, due to your company’s internal goals. You might, however, get the same price benefit while structuring the deal in a way to ensure price protection. It’s always important to think before locking in contract terms or signing on the dotted line.
6) Don’t hesitate to make a counter offer. Contrary to common belief, most sourcing professionals shy from making counter offers. However, there is no harm in countering, and you will be surprised how often it can work in your favor. Suppliers usually expect a counter offer, but if one is not made, they’ll happily lock in the price that they offered — and that you accepted.
7) Don’t hesitate to make more than one counter offer. If your counter isn’t accepted and the supplier counters back, don’t hesitate to make yet another counter offer. This is the point of negotiation. No one will be offended.
8) Understand the cost breakdown. Ask for cost transparency. The better you understand the cost structure, the better you can negotiate a price. Sometimes, costs such as excise, duty, value-added tax and others can be listed erroneously due to incorrect tariff codes that add unnecessary expenses. Labor, utilities, energy cost, packaging details, sizes, pallet types, shipping conditions, container sizes and the like also can add to the cost.
9) Ensure price protection. One of the most important strategies is tying raw material prices with the various indexes to prevent unnecessary price increases. For example, because most chemicals and commodity solvents are dependent on the oil and petroleum industry, the strategy would be to tie pricing to the oil and gas index. Also, suppliers are always quick to give price increases, but never to offer price decreases. If, however, you tie the raw material price to the industry index, you’ll get the benefit of the price decrease.
10) Offer trades. Sometimes, terms that are unimportant to you could be valuable to the supplier. For example, payment terms: While these may not make a difference to you, a payment term of 60 days versus 75 or 90 might be a concern for the supplier. Offer a payment term favorable to the supplier to negotiate for the price reduction you need.
Negotiation is a delicate mixture of art and science. It takes a long time to perfect the art, but the most pertinent data and effective tactics can help you get there. In upcoming negotiations, use these tactics and formulate your negotiation strategy accordingly to achieve your target goals. You’re bound to see significant benefits.
Rakhi Agarwal, MBA, C.P.M., CPIM, is head of strategic sourcing at AMRI in Albany, New York.