Sometimes, negotiating too hard can hurt chances of getting good supplier performance
Purchasingb2b November/December 2011 print edition
Organizations measuring performance mainly by cost likely look first at price when negotiating a proposal. But a report from Next Level Purchasing asks whether that should be the top negotiation priority.
While management likely looks to cost savings, internal customers may evaluate procurement performance differently, the report says. They want reliable products and services, supported by great supplier service delivered on time. If a supplier delivers a key product or service late, internal customers may feel the procurement department failed them. They may not even care much about prices as their work might have a value to the company that dwarfs the cost of the purchased product or service.
Can negotiating too hard on price hurt the chances of getting good supplier performance? In some cases it can, the report says, especially when buying services. Getting a lower fee may make a supplier less motivated to perform well and give priority to customers with higher margins. The report suggests negotiating price in a creative way to increase the chances of on-time supplier performance in time-sensitive situations.
For example, where on-time delivery is critical, the report suggests beginning a negotiation by saying: “What you’ve proposed is what we consider a premium price. We usually push for rock-bottom prices. However, we’d be willing to pay a premium price for premium performance. Here’s what we propose: you reduce your price by 10 percent; however, if you deliver within 30 days after receipt of our order as you promised, we’ll pay the price in your proposal.”
By negotiating this way, the report says suppliers feel they can win by providing on-time delivery. In some cases, getting on-time delivery might be the best way for a procurement department to contribute to profitability. b2b