Monday, January 17, 2011


Most Suppliers Hate Competition.

Competition helps drive their price and profits down. There are a number of strategies that Supplier’s employ that are specifically designed to avoid competition either in the initial or follow on purchases.
  1. Rush to be first and get designed in.  To a Supplier being first to market and getting designed into their customer’s product has the ability to reduce competition. Replacing the designed in Supplier's product can require engineering redesign or re-layout that may not be a priority for assigning engineering resources. There will be a costs associated with the change that they may not want to fund unless the return is substantial. Both of these are barriers to change. By being first, you also usually have the ability to charge a premium price as the price curve and impact of competition isn’t at work yet, and even though there may be competition in the market, the barriers to change have a lesser impact on the Supplier that’s designed in. They don’t have to be competitive, all they need to do is not charge such a premium that it inflames the Buyer to make the necessary investments to change. As a Buyer, negotiate hard before you get locked in. Look for opportunity to change Suppliers at times when the barrier is low – e.g. if engineering needs to do a redesign or the product mid-life use that to have them give you the flexibility you need to bring in a lower cost competitor. Highlight the premiums that exist to prompt change discussions based on ROI of investing the design resources.  
  2. Have unique features that can’t be provided by other Suppliers. This is probably the most difficult one to deal with. You manage this by first not letting them know that you need or want those features. Where possible use a value equivalence negotiation approach to highlight the incremental cost for those features versus the competition that doesn’t have them. The incremental feature should have a cost that’s in line with the additional value provided. Provide the Supplier with the message that you will pay for additional value, but the Product still needs to be competitive from a value equivalence perspective.
  3. Use form, fit, or package makes it difficult or costly to switch Suppliers. One simple strategy is to work with other Suppliers to develop products that will be plug and play compatible that create competition.
  4. Take advantage of situations where the use of another Supplier’s products will add to the Buyer’s costs. For example with capital or process equipment if you start to mix suppliers it may significantly impact your service costs as you need to inventory multiple companies spare parts, have people trained on multiple companies products, and potentially have things like operational flexibility be impacted if they aren’t cross compatible. Negotiate the cost of all follow-on purchases before agreeing to purchase the product to manage the follow on cost. Consider negotiating with other Suppliers to get them to agree to purchase you existing inventory and provide you with compatible replacements to reduce the impact. For example, if you had one Supplier’s Air Conditioning equipment and there weren’t being competitive in quoting future needs, and you built a major new extension to your facility, negotiate with another Supplier to not just provide the new units, but replace the existing units to avoid the costs associate with having to manage two different Supplier’s products.
  5. Manage the design of the product so other Supplier’s parts aren’t plug and play compatible.  This is done to protect the service annuity stream of spare parts, maintenance, repairs etc. Make sure that you negotiate the cost of all those future purchases before you are locked in. Use any reluctance to do so to leverage a lower cost for the initial purchase so it’s less costly to change.
  6. Protect against after market competition by things like proprietary interfaces making if difficult to have 3rd party parts be plug and play compatible. Make sure that you negotiate the price of everything you need up front. If you have leverage, push to have them provide a second source for those items. Use the non-competitive nature as leverage to negotiate a lower purchase cost of everything up front so it’s less costly to change.
  7. Provide cash, financing, or services that make the initial use attractive, but be difficult or costly to be replaced.  Make sure that your internal customer understands the real cost of those activities in terms of higher cost on future purchases, services, maintenance or repairs. Always document exactly what is being amortized into the product cost and the basis for the amortization so those costs will be backed out of the price equation once the amortization quantity has been met. Develop alternative Supplier’s and products to use as leverage in negotiations once you have meet and committed quantity.
  8. Provide terms such as extended warranties that make switching sources less attractive. Use that as leverage to get other Suppliers to provide the same or better terms if they want to replace the Supplier.
  9. Provide services that make the Supplier more attractive in comparison to other Suppliers making it more difficult to replace (such as implementing VMI hubs and stocking). Negotiate similar programs with the competition.
  10. Provide convenience in doing business, design tools and support, and other services or support that the Buyer needs or wants that they don’t get from other Suppliers, which makes replacement a less desirable option. For example, Distribution is successful for a number of reasons. One is they will stock items making them easy to get. Another is they will allow purchases in lesser quantities than the Supplier would require which can be attractive.Have the user look at the relationship from a total cost perspective. Show them what the costs would be if competition were involved and compare that to what you are paying with the Supplier to highlight the real cost of those Supplier services. Get the user to tell the Supplier that while they like the convenience, they don’t need it and they aren’t prepared to pay the premiums for it with the message that if they aren’t more competitive in their pricing, you’ll do without the convenience and competitively quote it.
  11. Bundle pricing or make bids “all or none” to use the advantage they have on certain products to avoid competition on others. Consider telling them you’ll give them none. Most Suppliers wouldn’t want to lose out on the total sales and may reconsider their approach to keep the sales they are competitive on or the sales where they have an advantage.

The goal in each and every one of these Supplier tactics is to either eliminate or reduce competition not just on the initial purchase, but for all the follow on business and the annuity business like spare parts, maintenance and repair. The best time to protect yourself is before you make that first purchase. That’s the time to negotiate not just the price of the product, but the price of future purchases of the product, upgrades, options, add-ons, maintenance, service, repair, terms, support, and performance. The focus needs to be on getting the best life cycle cost, not just the lowest initial price.

The more difficult or costly it is change Suppliers, the more important it is to first make sure you selected the right one and that you negotiate the life cycle cost of everything before you make the commitment that locks you in to the Supplier. For those situations where changing Suppliers will be difficult or costly, you should have an exit strategy thought out before you enter into the relationship and make sure that the terms you negotiate support that strategy. For example, if there is difficulty or cost switching, you should be negotiating a number of additional price breaks that automatically apply as you hit certain additional volumes that may occur over the term relationship should the business grow. Structure your agreement so the impact of any change in Supplier is reduced or manageable. When I worked for a Bank and negotiated an agreement for processing of debit card transactions, the term of the agreement was an extremely important term. The reason is that if you ever wanted to change Suppliers at the end of the term, you want to be able to do that when it was best for you and will have the lowest potential impact or risk. The lower the impact or risk of change, the more leverage you have should you want to negotiate an extension. In my banking example, you would never have the term of the agreement expire during the busy times of the year such as the prime shopping periods of November or December because the impact of a problem in changing Suppliers could be huge. The last thing you want is have your agreement term expire when it’s bad for you leaving you with the options of  1) Having to renew the agreement with the Supplier you want to get away from, or 2) Having to negotiate an extension to a point where it will signal your desire to change where they probably can and will can charge a significant premium for that interim period, or 3) Having to make the change at the worst possible time.

Getting locking into a Supplier can happen in a number of ways. I remember being involved in a negotiation of a plastics contract in which we had reduced leverage because only that Supplier’s material was qualified to work in our application. To use other materials would require an expensive change to our tooling which was a barrier to changing suppliers. We knew it and the Supplier knew it and as a result we continued to see the price increases. Quietly we qualified another Supplier’s product for use in our application. We used that in the next round of negotiations. The Supplier came in still thinking that they had no real competition and were seeking another increase. We explained that we had qualified another source and were awarding them minimum of 40% of the Business. Then we gave them the simple message that they had a simple choice, if they wanted to keep the remaining 60%, they needed to significantly roll back their pricing to be competitive with the other Supplier or we would award all the business to the other Supplier. Whenever possible, re-introducing competition into the equation.

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