Procurement Explained

Everything you need to know about supplier negotiations

This article covers how to improve supplier negotiations in procurement, including how to leverage spend data and analytics in negotiations.

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Updated: Dec 19, 2022

Supplier negotiation combines interpersonal skills, tactics, market understanding, and data-driven insights.

Negotiation is a key activity for procurement. Successful negotiation helps mitigate further performance, schedule, scope, and service issues.

This article will cover many tips and best practices to improve supplier negotiations in procurement. 

This article covers:

 


The 7 types of negotiation

Negotiation can be an unpleasant experience for some, as others thrive under pressure. People approach negotiation in various ways, and these negotiation types can be divided into seven main negotiation types.

The seven types of negotiation include:

  1. Competitive - result-driven, assertive and aggressive
  2. Principled - value-driven, uses parties' key principles
  3. Collaborative - open, understanding, and solution-driven
  4. Compromising - fair and cooperative, seeks middle ground
  5. Avoiding - intimidated, uncomfortable, avoids conflict
  6. Accommodating - relationship-focused, personal, sensitive to emotions
  7. Data-driven - fact-based, well-prepared, impersonal, uses data insights
handshake


How to prepare for contract negotiation

When allocating time for supplier negotiations, a lot of the time should be reserved for preparation for the negotiations.

There are no shortcuts. Preparation is the key to a successful outcome. Spend analytics provides a good starting point for preparations and negotiation insights.

The steps in preparing for negotiation include:

 

Determine the negotiation strategy

Conduct an internal workshop with all involved to establish the desired outcome and agree on how to approach the supplier. Define your preferred negotiation outcome and minimum satisfactory outcome.


Gather the facts and look into spend data

Understand in detail the cost drivers of the product or service under discussion. This includes raw material costs, overheads, labor, packaging, transport costs, and profit margin. Have a 360 deep-dive into category or supplier expenditure and spend trends.


Map supplier's interests and desired outcome

Try to get as much information on their interests, goals, and pain points in advance. Understand whom you are negotiating with and how their negotiation team is formed. Is the decision-maker present? Will they bring their legal advisor? Do they need to review & confirm negotiated aspects with their management after the negotiation? These aspects will impact the schedule, who you should bring to the negotiation table, and how binding the agreements are.


Assign roles for the negotiation process and agree on practicalities

Agree on who will lead the negotiation. Decide on the location of meetings. Agree on who covers documentation. Ensure your internal team is familiar with the presentation order and flow of the negotiation as well as their roles in negotiation to avoid unwanted surprises.


Agree on the presentation order and priority of the items in negotiation

Asking your supplier's preference in the order of priority may reveal what they are most concerned about. Should the negotiation take an unwanted turn or proceed in the direction you did not plan for, there is always an opportunity to park topics and take a 5-minute breakout with your team. Agree on such practices and breaks before heading off.

 


Setting up the perfect negotiation team

Most experienced negotiators select and brief their team well in advance. This entails setting objectives, defining roles, deciding on negotiation tactics, and planning the flow of the meetings.

Consider the structure of the team so that only the relevant team members who can add value are present in the room. If your negotiation team does not understand their position and roles, it can lead to unwanted outcomes and negotiation gone wrong.

A good practice is to have a dedicated person who only listens and takes notes. It is important to have a technical subject matter expert to answer questions. A business sponsor or procurement category manager would be the best person to take the lead.

 

Importance of relationships in contract negotiation

Competent negotiators research their counterparts in advance. Knowing who will join the discussion, their exact influence in the negotiation process, and their preferred outcome is best practice.

This is especially important when there are international participants where culture and language may play a part in achieving the desired objectives. The more information you have on hand, the more you can consider and overcome any obstacles that might come your way. Do not underestimate the power of interpersonal relationships.

High-context cultures emphasize the preparatory stage and attempt to build a personal relationship with their negotiation partners. High-context culture adopts a long-term orientation and tries to maintain relationships beyond the negotiation.

 


The 5 stages of negotiation

 

1. Preparation is a key success factor in supplier negotiations.

This is where we develop a fact-base that becomes the basis for future actions. Facts will include information about historical spend and suppliers we are negotiating with.

See Spend Analysis 101 to get started. Defining negotiation targets internally with stakeholders and the walkaway point is essential.

 

2. Building trust through information sharing enables common ground.

Here we take time to understand the scope of negotiation and aim to discover what's in it for both parties. Defining the ground rules and sharing of information creates the opportunity to establish trust and enables shared understanding on the starting point.

 

3. Bargaining is an essential part of any negotiation.

Understanding our position leads to the give and take - making and receiving of concessions. Bargaining often recovers monetary aspects but also focuses on timeliness, quality, and service-related terms.

The aim is to achieve a fair result that suits both parties' interests without creating conflict or unhealthy business cases in the long run. Do you have something relatively easy to offer with little or no cost or effort that would be valuable for the other party and make their daily life easier?


4. Concluding the negotiations in good faith.

At this point, the parties confirm that items within the scope of negotiation have been covered and that both parties are willing to sign the legally binding agreement document.

After signing, the contract is archived and shared internally with stakeholders. It's purposeful to archive all relevant documents utilized in the negotiation process (such as price lists, the scope of work, and audit reports) for future reference.


5. Determine the strategy and ensure proper handover.

Conduct an internal handover meeting with relevant stakeholders to agree on contract execution and management practicalities. Key person changes happen now and then. It's vital to ensure the written agreement is well-documented for the future relationship management team. See the article on Contract Handover best practices to get started.


Stages of negotiation



Data-driven negotiation approach

Data-driven negotiation approach can help people overcome their inherent negotiation type. Even the most avoiding or accommodating negotiator can get added confidence and guts in negotiation by using historical data and insights and facts as argumentation.

Detailed information is necessary to support your position when conducting negotiations with a supplier. It leads to a more focused discussion, avoids misunderstandings, and ensures meaningful dialogue.

Spend analysis supports knowing your numbers and understanding your negotiation position. The better your fact base, the stronger your negotiation position will be.

A fact-based strategy keeps your negotiations based on facts and figures rather than on assumptions and guesswork.

 

online meeting

How to use spend analytics in negotiations

Spend data gives you superpowers in negotiation. Utilizing the data and facts that will support your interests, desired objectives, arguments and claims is vital for your success.

Sources of information are both internal and external. Historical spend and supplier performance provide valuable negotiation insights that you can leverage.

For example:

  • is there an opportunity to agree on longer payment terms (or shorter payment terms for a discount)?
  • Are there any benefits of scale to be gained from volume-based discounts or rebates based on the past spend?

Supplier performance history on quality, delivery, risk, and sustainability can promote discussion around improvement opportunities. Performance against key performance indicators (KPIs) and service level agreement (SLA) should be input to these discussions and negotiation focus areas.

Time taken to benchmark market pricing, category trends, supplier performance and alternative suppliers for the same product or service is time well spent. There are sources of market intelligence that you can use to enrich your spend data, but there are also free resources available such as the World Bank database.

 

Final thoughts

In dynamic procurement environments, there is a need for timely hyper-relevant data and ad-hoc analysis that comes in an understandable and actionable format. To be prepared for negotiations the results of external and internal analyses should be integrated.

Access to real-time information will allow you to dig deeper into the cost elements of your category.

Sievo procurement data hub provides access to market indices for raw materials and components, manufacturing and labor costs, and transportation rates. This information can be benchmarked against your current prices as the basis for frequent price reviews with the supply base. Continuously updated reports on external market factors release time to focus on preparations, actual negotiations, and turning opportunities into bottom-line savings rather than finding and combining the data.

 

Header photo credit: homajob (unsplash.com)

Jasmiina Toikka

Jasmiina is a Head of Content Marketing at Sievo with broad expertise in procurement and category management.

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