Supply chain costs are a significant part of operating expenses. So, if you can negotiate those costs downwards, it can have a tremendous impact on your bottom line. However, when the balance of power is in the supplier’s favor, negotiating can seem like an uphill task.
Here are a few supplier negotiation training tips that can help you bargain effectively.
Consolidate purchase orders
Many multi-unit businesses use the same expendable items. It’s not uncommon, though, to find that each unit deals directly with the supplier. When you place individual small orders with a supplier, your bargaining power is not as strong as it could be.
Suppliers, even powerful ones, respond to volume. One large order from a company can make more of an impact than multiple small ones. So, you may be able to negotiate more effectively with a powerful supplier if your organization is trained to group its purchases.
Grouping purchase orders is usually easy and involves minimal risks. Also, this approach comes with some significant potential advantages for both the buyer and the supplier.
For one, the buyer can use the size of the order to request for quantity discounts. Buyers are also able to create a more efficient procurement process. For the supplier, there’s a guarantee of ongoing business, which helps with cash-flow projections. Suppliers can also streamline their operations as they are only working with one purchase order.
Create competition among suppliers
Companies often use multiple suppliers to supply similar items. One reason for working with more than one supplier is to protect against the risk of interruption. When there is a large number of providers in a market, the supplier’s bargaining power can decrease. So, you may be able to gain the upper hand when negotiating if you create competition among your suppliers.
For example, you can tell your suppliers that you only want to use one provider going forward. You may find that a supplier is more willing to meet you at the bargaining table when faced with the risk of being pushed out of the market by a competitor. Switching from one supplier to another involves risk, and can also be costly. So, be sure to weigh the pros and cons be of this option before taking action.
Use backward integration
There is a popular saying that goes, “If you can’t beat them, join them.” Sometimes, even with the most trained supplier negotiators, some vendors are too powerful to take head-on. In that case, you may be better off joining them. One way companies can “join” their suppliers is through a form of vertical integration known as “backward integration.”
Backward integration is a process that involves a business taking on all or part of the supply chain. A company can become part of the supply network either by buying out or merging with a supplier. Apple Inc. and Ford are examples of companies that have been successful at integrating backwards.
In addition to gaining a competitive advantage, backward integration allows for better controls and also cost savings. This process, however, is not without risk. Also, buyers would need to make a large investment, which may affect their bottom line.
Join a purchasing consortium
A small company can increase its negotiating power by joining forces with others. This arrangement is called a purchasing consortium. Companies can choose to partner either with others in the same industry (vertical) or in diverse industries (horizontal).
Examples of a vertical purchasing consortium include Pantellos and Exostar. WorldCrest and O’Hare Group are examples of horizontal purchasing consortiums.
Purchasing consortiums allow smaller companies to boost their ability to influence suppliers. Although this can be a beneficial arrangement, there are some challenges. For example, the needs of companies that may have more sway in the group may drive negotiations. Also, there’s a steep learning curve if you join a large, more complex group, which may need supplier training to overcome. There’s also a cost to join these groups.
That said, many companies have found these types of partnerships to be beneficial. So, take your time to find a group that’s a great fit for your business so that you too can enjoy the benefits.