The Buyer-Supplier Relationship – Negotiation at its best
In the past years, the buyer-supplier relationship has been skewed a bit, favouring the latter more often. There are a number of reason that have led to this shift.
In some cases, suppliers have prevailed over their competitors by driving down costs or developing disruptive technologies, while for others, the growing demand for input has given them the opportunity to charge at their preferred rates.
No matter the reason, buyers need to have a strategic approach if they want to remain the stronger player in this exchange. To avoid weaknesses, they should not rely on hard negotiations through their procurement offices and before going through a strategic reappraisal, all buyers should take into consideration these four steps.
- Provide New Value
One of the easiest ways to re-establish the relationship with a strong supplier is by providing new value. By employing this strategy, you can gain the upper hand and transform a commercial transaction into a strategic partnership. You can do this in several ways, for instance:
- You can offer the supplier a market opportunity that he cannot pass up, in exchange for price concessions.
- You can reduce the suppliers’ risk and in doing so, you can demand some concessions in return.
- Change Your Demand Strategy
If you cannot help the supplier create new value, you can try to change your method of demand. However, this strategy can influence other parts of the organization, that is why you have to closely collaborate with other functions that can be affected. There are three ways in which you can change the demand pattern:
- The option that involves the least risk and is the easiest to implement is to consolidate purchase orders. It is easy to implement, as it involves acting on an internal audit of procurement data.
- The second option can be employed by those companies that cannot create large purchasing bundles within product categories or geographies. In such cases, companies should purchase across them.
- The third and last option is to shift volume away from a powerful supplier by switching to a substitute or lower-cost product. By threatening the supplier with this, he can become more open towards negotiation.
- Find a New Supply Source
If the first two options are unsuccessful, you can try to create a new supply source. Like the other two strategies, by doing this you can shift demand away from powerful suppliers.
This strategy is most useful in industries where price negotiations have driven most suppliers out of business, giving the survivors a monopoly. Such cases demand careful panning as the actions you take can alienate your supplier and change your company’s business model. You can choose between the following options:
- You can create a new supplier by bringing in a competitor from another industry, one that otherwise might not have had the chance to enter the market.
- You can create the new supplier yourself by investing in the required assets and capabilities, in a strategic partnership with a company that has some of those assets and capabilities. Such a threat could be enough to shift the balance of power.
- Be More Assertive
This last strategy is extreme, so it should be employed only as a last resort, when everything else fails. In such a case, you can try canceling all your orders, excluding the supplier from future business, or even possibly threatening litigation. This strategy can work but it is very risky and we do not advise pursuing it, accepting that it will only become viable if every other option has been expended, suggested or tried by that point.
As can be seen, there are plenty of ways for companies to wrestle the power away from suppliers. However, before choosing an option, all companies need to clearly understand the problem they are dealing with, be open to a new course of action, have strong analytical capabilities and be ready to open the road towards a different kind of buyer-supplier relationship.
It is also very important for senior executives to employ strategic, rather than so-called tactical gut instinct moves.
By having all these elements in place and by following one of these four steps, buyers will find that the task of negotiating with suppliers can become less daunting.
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Tags: Supplier performance
