Procurement departments are busy buying everything from paper to computers to janitorial services. Every purchase adds up, and if the procurement department members don’t have good effective negotiation skills, your company’s bottom line is at risk. Negotiation, though, is about more than just money. It’s about contract terms, legal ramifications, service levels, and relationships. Understanding contract negotiation in supply chain management can help your company improve its performance and allow a vendor to become a partner.
Here is Shipware’s complete guide to contract negotiation in supply chain management, including tips on how to negotiate parcel contracts too.
What is negotiation in supply chain management?
Procurement negotiation is when your purchasing staff works with vendors to agree on pricing and terms for buying supplies or services. This can happen with a new supplier, or the negotiation process can happen with an existing vendor, redefining the purchasing costs or terms. What is the contract negotiation process? Some of the areas ripe for the procurement professional to negotiate include:
- Cost and or/ cost savings
- Quality and quantity
- Contractual terms/payment terms
- Delivery time, frequency, and scheduling
- Warranty and return policy
- Performance KPIs
What are the 5 stages of negotiation?
A company’s negotiation strategy includes five stages. Following each of these stages can lead to effective negotiation by your procurement department. Using a methodical approach for your negotiation strategy allows you to ensure each step is thought through, so you can optimize your bargaining power and leverage.
1. Targeting your company needs
Needs is a broad term, as it includes your company’s objectives and strategy, which can change as the company grows. It also can mean balancing one person or department’s preferences with the company objectives. Your company may be more interested in fast product delivery and lower initial quantities purchased, as opposed to getting the lowest price. As the company grows, though, that strategy may shift to wanting lower costs and purchasing in greater volumes, with a willingness to commit to a longer contract. Understanding and prioritizing these different factors helps the procurement team in the negotiation preparation.
Collecting and analyzing data allows you to better understand your historic spend and who you’ve used as suppliers in that category before. You’ll know your past purchasing volumes, patterns, prices, and market data. And you’ll know the terms you previously had and how that worked for you. If negotiating with an existing vendor, your research on their past performance and your spend on their products will help as well.
2. Understanding the potential supplier’s business interests
It’s important to look at more than just your own business interests and to also consider the supplier’s perspective. Understanding their mission and drivers can help you align interests to provide the best outcome for both of you. This can be done by asking them about their objectives ahead of the negotiation and asking who will be involved in the process. Knowing who you will be negotiating with and their personalities, plus their influence and decision-making power, can affect your strategy and the outcome.
Perhaps they are interested in becoming a bigger player in your market. Knowing that, you may be able to negotiate a better deal because they are not just looking at the bottom line. Understand who their other clients are and where they are located. If you’re the only client in that location or industry, that could impact the sourcing process and logistics. Maybe they want a competitive advantage and will be willing to give a cost reduction as a result. You’ll also want to understand their financials to determine if they are in a good position to provide you the rates and terms you desire and be around for the long run. Understanding the potential supplier’s situation can allow you to seek out creative solutions and have a strategy in place.
3. The negotiation
By the time you reach the actual supplier negotiation process, you should have a lot of preparation under your belt. You now understand your company’s interests and strategies and know what you want out of the negotiation. You have a plan. You have greater insights into the vendor’s motivations. It’s time to start the negotiating process!
4. Go for a win-win outcome
With good negotiating skills, it’s possible to end the process with an agreement that works well for both parties. There’s a saying that if everyone leaves a negotiation with less than they wanted, that is a successful negotiation. Of course, each side wants to feel they received the best possible deal for them, but the deal should be sustainable for both. Taking a long-term approach and focusing on the supplier relationship is important, especially for ongoing vendor contracts, compared to a one-off purchase.
5. Plan for supplier performance evaluation
Establishing supplier management metrics during the negotiating process sets the expectations going forward. By setting the standards now, it will be easier to monitor the supply chain process going forward and to keep everyone on the same page for those expectations. It’s good to talk about communication, such as chain of command, timing, expected response time, and resolution processes. You may set up key performance indicators so everyone knows what is expected of them. These KPIs can include delivery timing, continuous improvement efforts, quality expectations, payment terms, and anything else pertinent to your business. This is all part of the contract management process.
Common mistakes in negotiating
Negotiation is an art, which is why some go to negotiation training classes or practice effective negotiations for important contracts before the actual event. Here are some common mistakes people make when negotiating.
Starting too low: Starting with a bigger ask leaves room to negotiate downwards. That doesn’t mean to start so high that the other party will think you’re not serious or for them to doubt you will ever agree on terms. But starting too low doesn’t leave you room to maneuver during the negotiation.
Assuming they can’t meet your demands: While it’s important to research your supplier to understand their potential strategies, don’t assume they won’t meet your demands. You don’t know what is happening behind the scenes, and if you don’t ask, you won’t receive.
Agreeing to demands too early: It’s important to understand the totality of the contract offerings before agreeing to any offers. That’s because the contract terms work as a whole, not individually. A price can change if you agree to buy larger quantities or contract for a longer period of time. Agreeing to the supplier’s demands early, even for one factor, could lead them to expect additional concessions as you go.
Not asking questions: If you don’t like one of the vendor’s offers and they aren’t budging, ask why they want to structure the deal that way. Seeking to understand the pressures they’re under or the driver for their offer can lead to new solutions that work for both. And sometimes you can offer something valuable to them that costs you nothing.
Getting emotional: It’s easy to get emotional during negotiations and to take things personally. Refraining from this behavior, though, puts you in a better position. It allows you to think outside the box to find resolutions that may be harder to see if you feel attacked or offended. Personality issues can bubble to the surface during a negotiation, and there can be upsetting language or cultural references. Taking a break from the negotiations can help you clear your head and move the negotiations forward.
Not acting in good faith: Some believe in bluffing or posturing to get a better deal. In the long run, though, that can harm a supplier relationship. By acting in good faith, you’ll create trust with the supplier.
Behaviors to look out for during negotiations
Paying attention to the other party’s tactics can help you retain some control in the process. Watch for these behaviors.
Good cop, bad cop
If you’re negotiating with multiple people, they may play different roles. One may be the likeable, relatable person who stays on your good side and says yes to everything. The other person may play a more authoritative or negative person, who agrees to little. They can play off each other, whether they’re in the same room or one is going back and forth for approval to a supervisor. Think about the stereotypical car buying scenario, where the sales manager is the bad cop.
The devil is in the details
You may negotiate a great price and fabulous terms, but the contract can show a different story. There may be language with high-interest rates for missing the payment by a day, or they may require long-term notice to make a change in quantities ordered. Understanding all the details in the contract is essential to ensuring the contract works for you. Remember that the contract has to go through the legal team too.
Low prices aren’t the only consideration
If the prices are too low, it’s possible you’re receiving cut-rate goods, or your business will be a lower priority to the vendor than other customers who are paying a better rate.
Throwing in added extras
Sometimes a company will try to sweeten the deal or get to a yes, by throwing in additional services or items. These additions don’t always increase the value to you, and the vendor may try to hold them over you, showing that they gave you something extra. If they offer you features you don’t need, you can ask to reduce the price by removing them from the contract.
Negotiating against yourself
Some skilled negotiators will try to get you to negotiate against yourself. After you’ve put a number or offer in play, they might come back with, “can you do better than that?” It’s hard to make an offer and then be silent, waiting for them to respond with a counteroffer, but it’s necessary. If they come back with a request for you to negotiate against yourself, instead respond with, “that’s our proposal, can we make this work?”
What is the contract negotiation process? Tips to negotiating well
Here are a few additional tips for the contract negotiation process.
- Supplier selection should come before negotiating. That means vetting a supplier to ensure they can give you the quality and products or services you need before you sit down at the table.
- Designate who from your team will play each role, whether leading the negotiations or taking notes. Ensure that no member agrees to a proposed price or term unless they are the designated person.
- Know your best alternative to the negotiated agreement, so you don’t feel stuck in a corner. That way, you know your “out” if you don’t like the way the negotiating is going.
- Be an active listener. You may find ways to get what you want by truly listening to what the vendor wants and finding creative ways to get there.
- Leave your ego behind. Don’t take the negotiating personally or feel there is a win or lose position. You both want a great outcome, and maintaining a positive relationship is part of that.
- Build trust and maintain your ethics. Even if the negotiation isn’t successful, your reputation matters.
- Focus on value for you and for the vendor.
- Debrief from the negotiating process when you’re done, and document the contract data and conversations for the future. That can help with negotiations going forward.
What is procurement contract negotiation?
Procurement contract negotiation is an important function in any company. Strategic sourcing means finding the best rates and terms for the best quality, and choosing the vendors who can provide it. A good procurement department takes this job seriously and prepares thoroughly for the negotiation process. In the end, a shipper can have a great relationship with its vendors, while paying a fair price for the services or products. The relationship can become a trusted and long-term one, where they see each other as partners, not adversaries.
While procurement departments conduct the negotiations themselves, they sometimes seek assistance from those with more expertise. Shipware assists procurement departments with parcel rate and freight negotiation, as Shipware’s experts are able to find savings in unexpected places. The Shipware process also starts by looking at the data – including past shipping invoices and usage, to determine what factors are most important and costly in that shipper’s business. Getting a rate discount is not always the most important thing, or the characteristics likely to yield the highest savings. Instead, that may sometimes come from accessorial fees. Shipware can do the research, develop a strategy, and walk you through that strategy to ensure success, and has saved clients up to 30% on their parcel spending, over previous contracts.
Whether it’s DHL contract negotiations, Fedex freight pricing tips, or something else, Shipware can help. Contact us for a consultation to see where Shipware can help you find those parcel and freight savings for your next carrier contract negotiation.