Thursday, January 27, 2011
Part of preparation for any negotiation is assessing your and the Supplier’s power. Herb Cohen’s (“You Can Negotiate Anything”) list of Powers is a good starting point.
What power of competition do we have? Is it open, or do we want or need them? The more they think there is still competition (real or perceived), the better your chance for getting what you want. What is their power of position and do they know it? If we want or need them, do they know it? If they do, what is our strategy to overcome this? The fact that they know that you want or need what they have to sell makes it a little more difficult to negotiate, but you need to think of what other power can you use to get what you want. E.g. Is it the promise of future business or the threat of no future business, or commitment you will make to purchase more.
What power of authority will we both use? How will we overcome their authority? Suppliers use legitimacy such as published price lists, standard discounts, standard terms, anti-trust laws and everything else available to keep you from negotiating the best deal possible. The best way to overcome authority is to have competition and remind them of their competition. Cherry pick the best from each Supplier and try to get all the others to give you the same thing.
What power of precedent will be both parties use? How will we get what we want and explain away the rest as being different for this particular deal? In a long term relationship one of the things that you have to overcome is the stupid things that your predecessor or others may have agreed to. Explain why the circumstances are different. Remind them of what the competition will do to get them to change. Tell them “if you do things the way you’ve always done them you will get what you’ve always gotten”. Let them know that if they want a larger or closer relationship things need to change.
What power of commitment can I use? The greatest power of commitment is the promise of future business (either real or perceived).
What power of knowledge does each of us have? If they have done a good job at “back door selling” they will know what you need and where they and their competition stand. The time to start managing that is in the earliest stages of the relationship. Otherwise it is like trying to “close the gate after the horses have already left the corral”. Conversely, if you do a good job in pre-qualifying the Supplier, touring the facility, probing their people about what they do and who they do it for, and check references of people who are doing business with them, you can understand what their hot buttons are, what is negotiable, what they need, what their backlog is etc., etc.
What power of risk taking can we offer? The greatest power of risk taking is to understand what the risks are, where they have built contingencies into their pricing to cover them and then decide which of those you may accept and manage and which they should continue to manage.
What power of time does each of us have? How much do they know about when you need something and why you need it then? The less they know the better. The more they know the more they may be able to determine exactly how much competition there really is. The more you know about things which motivate them like the end of selling periods, end of fiscal years which may be motivation to close the deal the more you may ask for.
What power of investment does each of us have? This comes into play usually when there was a large up-front cost to get to this point in the relationship such as a very expensive response to your bid or request for proposal. It also comes into play when you want to close. Sales people make commitments to their management about the amount of business they will deliver and when. The more they have invested and the more they have told their management of the likelihood of a win, the more you can play on what the invested.
What power of size do we have? Make no mistake about it. Being big and offering the advantages of a big company can provide give you power. If you are with a big company you can always dangle the carrot of potential large amounts of business to get concessions. Smaller companies frequently are intoxicated with what the potential may be rather than what the real business is.
What power of money do we have? It also helps to understand their financial status. If they have cash flow problems, can you offer things to get greater concessions from them? E.g. shorter payment period or pay for certain investments. Conversely, if they have substantial funds, can you use them to have them be the banker in the relationship by financing / amortizing certain major investments.
What power of leadership or prestige do we have? If you are a leader in the industry and companies will follow your decisions you probably have both the power of expertise and identification as they will want to do business with you for the value it provides them with other customers
The power of precedent can by either what you have agreed with them in the past or what you have agreed with others. When you can show them that others have agreed it becomes the combined power of competition, precedence and legitimacy for your position.
The power of rewarding or punishing works best when there is competition and you can change the volumes you provide them based upon how they respond. If they give you what you need they are rewarded by keeping or growing the business, if they don’t they are punished by losing the business. One of the best ways to let a Supplier know you are serious is change the amount of business they get.
The Power of Investment doesn’t need to be financial, it can be something as simple as you investment of time and the impact that has on your options. If a Supplier has delayed coming to agreement to a point where you have no other option than to either use them or face a major schedule impact, you’ve probably given them a form of power of investment. Always have a walk away date to help you retain your competitive leverage.
While there are a number of types of Power, the most important factor to consider in determining Power is their motivation and motivation can change quickly. The simple fact is the more motivated they are because they need or want your business, the more of these powers you will have. If it makes no difference to them whether they get your business or not, you may have very limited power even if you’re a large purchaser. Motivation can shift rapidly, sometimes with the occurrence of a single event. A disaster at a major production facility can immediately change a market from excess capacity to allocation and their motivation and each party’s power will change immediately. A sales person making a large sale to another customer can change how they feel about your sale. You need to be aware of things that could change the Supplier’s motivation and the longer it takes to come to agreement the more changes there can be that impact their motivation. Someone once said that “the time to negotiate replacing a roof is not what its raining and the roof is leaking”. If you have the power you need, move to close your contract or purchase as quickly as possible before the power changes. Power can change easily and one of those shifts is what I call “the point of no return”.
For anyone that negotiates I would recommend reading Herb Cohen's book.
Negotiating contract terms that represent a higher cost or risk for a Supplier provides a great example of power at work. Your probability of getting the Supplier to accept such terms will be impacted by a number of different factors that impact your power such as:
Are there competitive products or alternatives available?
If the answer is no, you have little chance unless they really need or want to do business with you for some other reason.
General Marketplace Requirements
The risks a Supplier will assume will be dependent upon what’s demanded by the marketplaces they sell into and Suppliers may sell the same products into multiple marketplaces which have entirely different issues and risks. The more markets they can sell into with less risk than what you’re asking, the less your leverage. Marketplace leverage is also impacted by the supply/demand position of the Supplier. If there is sufficient demand in other markets where there is less risk, your odds are even less. If they have excess capacity across all markets, your odds increase.
Is Their Competition Providing It?
If they are, your chance is better as you have both competition and the potential for real loss of the business. If they aren’t, your probability is significantly reduced because they won’t feel threatened about losing the business.
Supply / Demand Position
The risks a Supplier will assume in a buyer’s market of excess capacity are more than what they will assume in a market of excess demand. No one wants to accept additional risk or cost unless they have to. If there’s excess demand you probably won’t get what you want. If there’s excess demand plus other customers or markets don’t require it, your chance decreases. If there’s excess Supply other factors will come into play in the decision.
Volume / Price Sensitivity
If the Supplier can significantly increase market share by minor adjustments to price, they can cheaply offset the loss of your business and if they can do that cheaper than what it could cost them to assume the risk, you probably won’t get it.
If it’s similar to what other customers require your odds are better. If there are limited customers for the product or service (so they can’t avoid the issue by selling to someone else) you have better leverage. The bigger and better the potential customer you will be for them in terms of other risks, reputation, advantages from the relationship, the more leverage you should have. If you aren’t dealing in significant volumes making your business worth pursuing or keeping, your odds are significantly reduced. Customer leverage only works well when you also have advantages in both marketplace and supply/demand leverage.
Sales channels can negate leverage. If the Supplier sell direct to all customers, your other leverage may work. If they sell only to major customers, and you don’t fit those requirements your chances are significantly reduced. If they only sell through 3rd party channels you have even less leverage. You may have leverage with the 3rd party Channel or between multiple Channels selling the product, but usually the 3rd party Channel doesn’t assume significant risks on their own and many times the sales channel can’t cover the risk on their own. For many issues, you really need the Supplier’s commitments and resources to manage the risk.
Will The Supplier See An Immediate Benefit?
If they will, your odds get better. If they don’t your odds are further reduced. They only way they’ll give something is if they’re getting something they want or they’re forced to.
You’ll have less leverage if the Supplier is sole sourced or designed into your solution. The degree of the loss of that leverage will depend upon the ease of changing Suppliers. You can be locked in by nothing more than having passed the window of opportunity to change Suppliers without impacting your schedules.
Ease Of Changing Suppliers
If the cost of replacing the Supplier is high, or the ROI period or benefit of replacing the supplier is small, or it requires a significant commitment of limited resources (design or engineering), you’ll have limited leverage. When it’s fast, easy and cheap to change Suppliers, you’ll have more leverage. Where you stand versus the point of no return will further impact the ease of change.
Magnitude, Precedent and Uniqueness
If what you are asking for is new, unique or represents a significant expansion of their risk, there are two factors a Supplier will consider even if you have significant leverage. One is whether they want to start the precedent, because of the impact it could have on other business. The other is whether it makes sense as an investment decision. If it becomes an investment decision, they will weigh the value of your business against the incremental cost and risk. The lower the incremental value your business provides them versus other customers, or the higher the potential magnitude or the risk of your business against others, the less likely you’ll get what you want. Suppliers will walk away from business that doesn’t make sense to them and if acquiring new customers can be done by simply cutting pricing to grab additional market share, they’ll weigh that cost against the cost and risk of what you want. If it’s cheaper for them to discount pricing your leverage is less.
What’s Really At Risk
A small supplier who has few assets may be willing to sign up for all types of liability. It’s like the lyric from a Bob Dylan song “when you’ve got nothing, you’ve got nothing to lose”. The problem is that since they have little to lose, they don’t offer much protection against the risk to the Buyer. Major Suppliers with significant assets could provide the necessary protection, but they are more cautious and less willing to accept risk. Large suppliers will only make significant concessions on risk if they really need or want your business.
If the expectations about the need for the item weren’t set in advance, your odds of getting it will be less as they won’t have set internal expectations with their management that it was needed to win the business.
Need or Want
How much the Supplier needs or wants of your business is really the overwhelming thing that determines how much all your other sources of potential leverage are really worth. If they don’t need your business, or it doesn’t matter much to them if they lose it, they’ll probably never even consider whether the investment required to get your business makes sense. They must really need or want your business to have leverage to get concessions.
Following the above logic, you have the greatest ability to get what you want when:
- You have set the expectation of what’s needed from the beginning
- What you are asking for is demanded by the marketplace
- There is excess Supplier capacity
- The Supplier’s ability to replace your business by simply dropping price is limited
- You’re a customer they need or want
- You’re a direct customer
- You’re not locked into them and you have ease of changing Suppliers
- The amount and value of your business warrants the acceptance of the risk
Anything that impacts any one of the factors can dramatically reduce your leverage. For example once a market goes into allocation your leverage drops dramatically as the Supplier has enough demand from others to not be driven to accept less or give you more. They have less concern about losing your business because your demand can be easily replaced by another. In fact, they may even make more money selling to others. They don’t have to compete because everyone is getting more business than they can manage. The more short term their focus is, the greater the impact and the less they see an immediate benefit to them, the less willing they’ll be to provide you with what you want.
Just because all the factors may not be in your favor doesn’t mean you shouldn’t ask. You can never predict what Suppliers will or won’t agree upon. Things can happen, such a a major cancellation by another customer, that can potentially change the leverage. In preparing for a negotiation I would use these factors to establish realistic goals and expectations for negotiations so you don’t spend substantial time negotiating points which have a slight likelihood of success. I would also use them to set realistic expectations with your management and internal customers of what likely outcome will be. If you can do better they’ll be pleasantly surprised. If the leverage scale its heavily tilted in favor of the Supplier, you should consider shorter term agreements or other means by which you can escape from the agreement and avoid being locked in by Suppliers. You also need to on the watch for Suppliers that have significant point-in-time leverage who will try to lock customers into terms that will be more favorable to them when the market changes.
In aviation there’s a term called “the point of no return”. It’s the point in the flight beyond which the remaining fuel is insufficient for a return to the starting point. Once you pass the point of no return, you have no option but to continue on your current course. A similar point of no return also exists in many negotiations. It’s the point in the negotiation process where you must continue on your current course of action and try to close with that Supplier. It’s the point when starting the process over with another party may no longer be feasible. It could be driven by simply economics where you have too many sunk costs to walk away or it could occur when other alternatives become no longer available. More frequently it will occur when changing directions or Suppliers is simply not acceptable because of the impact that would have on activities that are dependent on that purchase such as project or development schedules, implementation plans, etc.
When Herb Cohen talks about the Power of Investment its similar to the point of no return. The power of investment comes from the sunk costs or sunk effort that a party doesn’t want to walk away from. It could also mean the fact that you’ve invested so much in this Supplier that you have limited your options, and that’s significant leverage the other party can use against you.
Timing impacts the viability of other alternatives and also can create a form of point of no return. The point of no return places you in the position of having to choose from two less than desirable alternatives. One is to contine to try to resolve it with the Supplier which may mean to accept less or give more to the Supplier to close the agreement because you’ve lost leverage. The other is to walk away from that relationship, and have to deal with the impact is has. The more investments you’ve made in the relationship, the more difficult it may be to walk away from those because a change in direction with cause other costs or problems and may require more investments on top of those already made.
As a Buyer its important to manage the point of no return in your negotiations as it can significantly impact your leverage. The more you have invested in creating the relationship with the Supplier, or the fewer acceptable alternatives you have if you don’t reach agreement, the less leverage you will have. The larger the impact to you of not reaching agreement, in comparison to the impact to the Supplier, the less leverage you will have. The point of no return can totally negate any competitive leverage you may have initially had and turn the negotiations into a quasi sole source negotation simply because you effectively have no other alternatives available without adding more cost or impacting schedules.
They key is to manage the closure of the negotitions in a manner where it maintains the most leverage for you. If a point of no return situations can occur, you need to manage the closure of the contract quickly where you still have maximum leverage and still have other options. If you won’t be impacted by the delay but the Supplier will be continuing to make investments of time and resources, don’t be in a rush to close as the more they have invested, the closer they are to being at the point of no return where it may be better for them to give you what you want than to wallk away from the business. When there are delays to the negotiation being caused by the Supplier, always consider the potential impact of those delays on your leverage and what their motivation may be. If they will put you at leverage disadvantage, Don’t let them occur. If you can’t control them, consider starting a parallel activity to continue to keep your competitive leverage. Once time or circumstances has you locked into them, you’re at a disadvantage. I’d never threaten to walk away unless we were prepared to do it. If you are prepared to walk away and deal with the impact you no longer have a point of no return and simply telling them that you are prepared to walk away then shifts the leverage back to you and forces the Supplier into having to alternatives that are less desirable to them. They can simply walk away and loose all they’ve invested, or they can attempt to meet your needs to salvage the sale.
In Herb Cohen’s book on negotiating, he espouses that “You Can Negotiate Anything”, in fact that’s his book’s title. That’s the right attitude to have for negotiations, but the reality is sometimes more like the title of the Rolling Stones song: “You Can’t Always Get What You Want”.
I’ve seen negotiators become frustrated and fail by doing the equivalent of trying to put square pegs into round holes. Leverage is relative and there is an overriding factor in most leverage. Leverage helps you get what you want when giving it only impacts the Supplier’s relationship with you. The probability of getting what you want falls off dramatically when what you want will impact the Supplier’s larger interests. Suppliers will weigh the benefits your business provides against two things. The impact to providing it to you, and the impact it will have their other business. Here’s three common examples of this type of situation:
- In an outsourced environment you want the Supplier to extend your price and terms to that 3rd party. Your motivation may be simple, have the Outsourced Supplier get the price and terms directly so you don’t need to be involved in the transactions. The Supplier will consider the potential impact to them, not just on your business but for all the business they do with that 3rd party. Remember when we talked about the practice of tiers where Supplier’s have different terms and prices based on their volumes and how desirable a customer is? Your request to have the Supplier extend the price and terms to the 3rd party may directly conflict with their tiering practices. If you had better pricing or terms, the 3rd pary will try to use them for all the other business they do with the Supplier and that’s difficult to stop. The net impact to the Supplier could be a loss of profit (because they are would selling at your lower prices to a much broader base and an increase in it risk (because they are selling at your terms preferred terms to a much broader base). If the Supplier says no to your demands, It may not be because they don’t want to support you, it may be because your business may not be worth enough in comparison to the total impact to them.
- A second example is what’s referred to as channels conflict. I’ve seen a number of Buyer’s that wanted to buy direct from a local channel at their contracted price and weren’t able to. You may want to manage your purchase direct with the Supplier to avoid using a local channel or buy through the Channel at your price and terms. The Supplier must take into account the impact that could have with channel. They don’t want to expose special pricing or terms to the channel, as the channel would want those for all their business (which would once again decrease the Supplier’s margins or increase their risks). Further as they are dependent on the channel for sales, they do not want to alienate the channel as that could impact the business they receive from the channel. The channel may carry more weight from a sales perspective than the Buyer, so the Supplier may not want to do anything that would alienate them.
- A third example is sales location. Buyers may frequently want a Supplier to sell in a particular location so they can run VMI programs. For the Buyer a VMI program is win. To the Supplier, a VMI program can mean a change in the sales location which can create additional costs and risks. A change in the location of sale can impact the income taxes they pay. It can subject them to duties or import expenses. It can subject them to other taxes such as transfer or inventory taxes. From a risk perspective, a change in the sales location would require that they be registered to operate there. It would make them subject to both local laws and local jurisdiction which may not be favorable to them. Any profits they make on those sales could also make them subject to other issues such as currency exchange or issues with repatriating the profits. A Supplier may refuse to agree to sell at a VMI Hub simply because of the many impacts that a different selling point could have on them financially or legally.
For agreement to be reached it must work for both parties. Trying to force a Supplier into doing something that’s against their broader interests is seldom successful. Think about the potential impact your request will have on their other business. Consider alternatives that can provide you with an equivalent to what you want, but structured in a way where it also works for the Supplier. For example, if the Supplier is concerned with giving a outsourced supplier with your price and terms, the parties could agree to a number of alternatives to provide something close. The Supplier could sells to the 3rd Party at the normal price and terms they would get at their tier, but agree to rebate you any price difference and allow you to enforce your terms directly on those outsourced supplier purchases so you continue to get the benefits you want while their relationship with the 3rd party won’t be impacted. They key is to not let the Supplier use these issues to keep the status quo or prevent it. Find out why the Supplier is not willing to agree to see if there is a workaround.
You know what the next portion of that Rolling Stones lyric is? “You can always get what you want, but if you try sometime you might find you get what you need.” Who knew the Stones were negotiation experts.
When many Buyers do pre-qualifications, the pre-qualification is focused on the ability of the Suppler to perform the work. Do they have the necessary finances, technology, capacity, quality, design and support structures? Pre-qualification is important to help manage against problems that occur if you select the wrong Supplier for the job. What Buyers miss is the fact that the pre-qualifications, especially pre-qualifications of Suppliers for long term buying relationships, should be three-dimensional. It’s important to make sure that the Supplier is qualified to perform the work or provide the product, but it’s equally important to evaluate the Supplier from a cost perspective and evaluate the Supplier, what the supplier does, and how they do it, for future use in your negotiations.
Here are a number of factors that you would consider from a traditional qualification view, and some examples have been added of how the same item should be looked at from a cost and negotiation perspective:
The traditional view: Do they have the financial resources necessary to perform the work?
The cost view: With their financials, what do we believe is their cost of money? How burdened are they with things like debt and depreciation expenses? Will that impact their ability to reduce costs further? Can they make further capital investments to reduce cost? How competitive are each of the individual elements of their cost structure?
The negotiation view: By looking at their financials, can I see how important things like cash flow and payment are to them, so I can use that in negotiations to get higher value concessions that may reduce my total cost? . Look for critical financial factors that will help negotiate items that are critical to them. For example, if cash is a problem for them, use cash flow issues to get you a better deal. If they have a surplus of cash or low value of money, use that to get them to provide you with low cost financing by extended payment terms, carrying of inventory, etc.
Design Capability and Tools:
The traditional view: Do they have the capability to design what I need today and in the near future?
The cost view: Do they re-use a substantial amount of their designs to reduce their design cost and investment in new products, new equipment, and new tools or tooling? Do they create products of standard building blocks that can reduce design time, costs, and drive materials standardization for lower materials products? Based on the designs, what type of opportunity is there to reduce cost?
The negotiation view: The degree of standardization will impact their ability to drive further cost reductions. If they don’t have standard approaches that they can use to lower materials costs, how do I get them to reduce cost? Should we be dealing with a different supplier who can provide that?
The traditional view: Does their design meet our requirement?
The cost view: Does their design use standard or custom parts? Is the design easy to manufacture so costs of production can be reduced. Does the design allow use of automation versus substantial labor assembly? Does the design allow easy service?
The negotiation view: The more they use custom parts, the greater the exposure
I’ll have in the event of cancellations or engineering changes, so increased attention needs to be given to negotiating those liabilities. Will the design impact my total cost or life cycle cost? If it does, can I use that to leverage a lower purchase price? For example, if the design drives a higher life cycle cost because the product is more difficult to service and maintain because of the design, can I use those higher life cycle costs to negotiate a reduction in the purchase price?
The traditional view: Is the equipment capable of producing high quality products in the volumes required?
The cost view: Does the production equipment allow for the lowest cost manufacture with a minimal amount of hand assembly work? Are their costs driven into their process because of the type of equipment they use such as additional labor costs because of the operator involvement? The more their equipment creates costs you can’t avoid, the less likely you are to reduce the assembly cost.
The negotiation view: If there are shortcomings or limitations with their equipment, how can I use that against them in the negotiation? Can I force them to agree to price benchmarks against suppliers with more efficient equipment so they must make reductions in other areas to be competitive?
The traditional view: Does the supplier have enough capacity to meet our needs?
The cost view: Is the production capacity being managed in a manner where they are running close to full capacity thereby being able to spread their allocations over a broader base?
The negotiation view: What is the level of usage of the equipment and does that provide me with leverage to negotiate a better price if it shows that they have excess capacity?
Quality Management systems:
The traditional view: Are they managing production in a manner that consistently produces quality products?
The cost view: Are they efficient in producing those products or are their costs being burdened with high degrees of checking, re-work, returns etc.? If they have high degrees of checking, re-work, returns, what is the likelihood they can reduce them as they impact cost? Can I build price or yield parameter in that provides me with reductions to cost and forces them to bear the cost of there failure to make any changes needed to improve quality and reduce quality costs?
The negotiation view: Based upon what I see, what do I need to build into my agreement to ensure that all the costs associated with their shortcomings in quality are borne by the supplier and not passed on to the Buyer.
The traditional view: How is the re-work process managed?
The cost view: What is the extent of the amount of re-work being performed and what is the cost impact of that degree of re-work?
The negotiation view: If we see substantial amount of re-work being done which will burden the cost of the product, can we force a price benchmarking requirement so they must compete against suppliers who have little re-work, so they either need to clean up the problem or find other ways to reduce costs in other areas to remain competitive? If there is substantial re-work there is also a higher probability that some quality problems will slip through. What do I need to add to my agreement to ensure that if there are those problems I can recover all my costs associated with them?
Customer Warranty Returns
The traditional view: Do they have an efficient process for managing customer returns?
The cost view: What is the level of the returns and what impact does that have on their costs? Are the returns based on quality problems with production, design problems or reliability problems of the materials? Depending upon the root cause problem, it will impact the ability to reduce the cost and the timing. E.g. design related problems may not get fixed until the next generation.
The negotiation view: With the level of returns seen, what can we include which drives all the cost of those returns back to the supplier so they need to correct the problems? Should we require commitments to performance so depending upon the degree of the problem the supplier assumes increasingly greater costs if the problems increase? Do I need longer warranty periods to alleviate costs of field failures? If they have high warranty returns should we even be considering this supplier as that will impact our warranty costs, the frequency of service calls, and any profit we make for providing post warranty service or maintenance contracts? There price is low but their life cycle cost is high.
Maintenance and Field Service
The traditional view: Do they have the necessary infrastructure to provide maintenance and field service needs on a cost competitive basis which meets our customers needs?
The cost view: How competitive are their costs to provide these types of services and what impact will that have on both the pricing for any maintenance agreements we may offer and the types of margins we can expect?
The negotiation view: If we are going to provide long term support and maintenance of these products for our customers, how do I use the leverage I have now to get the best deal I can get for the life cycle of the product?
Materials / Logistics systems / Supply Chain Management
The traditional view: Do they have a materials / logistics / system and supply chain that will provide predictable deliveries and response to our flexibility needs
The cost view: Is there supply chain the most efficient it can be in terms of where operations are performed, inventories are held, etc.
The negotiation view: Is there opportunity to reduce cost within their supply chain and how can I use that to establish price reductions over time which forces them to either make their supply chain more efficient or reduce the cost of the product elsewhere.
Who are their Suppliers?
The traditional view: Is their supply base representative of the type of quality and requirement we want?
The cost view: Is the nature of their supply base cost competitive or do they use many of the higher end suppliers which will impact the cost and the ability to generate cost reductions?
The negotiation view: If they use higher end suppliers, can I work with them to have them qualify more competitive suppliers to reduce the cost? If they use lower end suppliers, do I need to be more concerned about potential quality problems make sure that my total cost isn’t impacted?
Who are their Customers ?
The traditional view: Is their customer base representative of the type of quality, and requirements we will want?
The cost view: Is their customer base driven by the same type of cost pressures and needs as we would require, so they will understand and respond to out needs?
If all their customers are calling for cost reductions, the pressure to reduce cost will be much greater that if you are the only one driving cost. If their customer base doesn’t have the same needs as you to reduce cost, understand that driving cost reductions will be an up hill battle.
The negotiation view: With the customer base they have, will the things we require them to do in the agreement be business as usual versus new. If they want to charge extra for certain requirements, can I use this information to avoid those charges, knowing that they would be performing those activities for their other Customers. If their existing customers have higher level needs and requirements, does that present an opportunity to negotiate a reduce price.
The Supplier Survey
The traditional view: Use the survey to discover things that will help qualify them
The Cost view: Use the survey to discover things that will impact their cost. Look for things that will potentially add costs to doing business with them or which limit their ability to reduce cost.
The negotiation view: gets key information about them that can be used in the negotiation. For example: Product data sheets or specifications will provide things like Mean Time Between Failure rates or reliability rates that you can use against them in negotiating quality, warranty periods, defects, etc. Key Customers will allow you to check references to identify specific issues you may need to cover or negotiate.
Perform evaluation of Parts/product.
The traditional view: Understand whether the product meets you requirements
The cost view: Look at the product, how the product is made, the materials used, the processes used to see if there are opportunities to reduce the cost.
The negotiation view: Based on the evaluation, identify any issues with the product that can be used to drive the price down. E.g. lack of features, not an exact match with needs. Especially look at it from a life cycle cost basis where their higher costs in the future should force them to give you a better price today..
Interview the Supplier:
The traditional view: Check to see that they have the necessary capability to do the job.
The cost view: Tour their facility. See what they are doing, how they manage the business, the tools they have. Look at who their customers are. Look at who their suppliers are to see their qualify and character. Understand their process and quality steps. Look at capacity to understand how much they need your business. Look for indicators of problems (high volume in warranty or returns areas, large re-work area for production). It will give you a better understanding of the Company and what is driving their cost.
The negotiation view: Use all the areas where you have identified issues to either negotiate a reduction in the cost, or include contract terms and commitments to make sure that the cost of those problems aren’t passed on to you. I’ve been in a number of negotiations where the supplier wanted to either charge additional costs because of our requirements, or fought against accepting our terms arguing that the terms required them to do something unique. If you tour their plant, you’ll know what their standards are. Many times their standards were exactly the same as what we required or what they were already doing for another customer. If you don't tour their operation you'll never know what the baseline is to measure against in price in the negotiation.
Have them present a representative project.
The traditional view: Check to ensure that the supplier has the ability to perform the work.
The cost view: Look at their approach from a cost perspective to see if they may have steps in their process that aren’t needed, add cost, and can be eliminated. Check their management systems for scheduling, buying of equipment and materials, quality Processes, field service and support capabilities. Understand what you are getting that is included in the cost and what may be extra. Use the information to force them to reduce cost on the basis of a competitive benchmark if others are more efficient.
The negotiation view: Use their response as the standard you will hold them to. If they say they do certain things as standard, include those requirements in your agreement as tasks they must perform. You can always then come back to the looking to reduce cost for something less.
Check references on the Company. Use that information in the negotiation to substantiate contract requirements, demands for reduced pricing, incentive, etc.
The traditional view: Look for any potential problem areas that would disqualify the supplier.
The cost view: As references about matters that impact cost, cost reductions,
efficiencies, processes, quality performance, delivery performance, changes, cost reduction programs etc. If their experience is good, use that as the standard the must meet for your dealings. If the experience is not as positive, use that to drive either price reductions or contract commitments to better performance and reduced cost.
The negotiation view: Use the knowledge that you gain as a tool to help negotiate what you need from the supplier.