How to Negotiate with Procurement Vendors for Better Prices

Sarah Sinnett – VP of Marketing and Technology
01/13/2020

In part one of the series, we outlined how to conduct a spend analysis. It is the first step you should undergo when looking to reduce costs to your supply chain. A cost spend analysis is a process of cataloging your company spend data. With the help of spend analysis software, you can easily identify points within the supply chain that you can alter to make your business more efficient. What you’ll most often find from this analysis is that procurement is your biggest pain point. Negotiation with vendors is often the first recommendation for reducing such costs, and luckily, it’s one of the simplest tasks to tackle.

There are some caveats when approaching negotiations. This was once a very common, and albeit, necessary method for manufacturers and distributors. Over time, suppliers have pushed back, altering the view of this method to one of exploitation. Despite this, negotiation with vendors is still your best approach to reducing procurement costs. Done right, you and the supplier can/should benefit.

Below are the ins and outs of how to negotiate better prices with vendors to help you reduce your procurement costs and improve the efficiency of your supply chain.

What is Contract Negotiation?

Contract negotiation is the process of working with vendors on an agreement that benefits both parties. Often, this results in lower prices for you and a higher volume of product (or the expectation of future sales) for them. The goals of these negotiations are simple:

Goods and services need to be defined
All terms and conditions are clearly laid out
Compensation is clearly outlined, including payment schedule, terms of financing, and total cost
Renewal dates, completion and termination dates, and delivery dates are decided
Risks and liabilities are identified
Expectations from both parties are set, including time constraints, quality, etc.

This process can sometimes be difficult for procurement managers or supply chain managers if the supplier’s power far outweighs theirs. Vendor contracts are very one-sided. While both need each other to survive, a vendor can set their prices with few consequences. So long as they are on-par with other vendors, and/or they excel at one function over the others, then their business will not suffer. Find a solution that works for both parties by following the steps and tips below.

Preparation for Vendor Contract Negotiations

Preparation should always be the first step in negotiating a contract. Walking into a negotiation without proper presentation will always result in failure. You may strike a contract, but the likelihood of achieving better prices or better terms is slim. It’s vital that you know about this vendor and their competitors. Research how their prices compare to the market, what it costs the supplier to deliver the goods, and terms commonly used in negotiations and across the supplier side of the business.

How to negotiate pricing is entirely reliant on the preparation you do before the negotiations. The following should be first your first steps:

Research Vendors

You cannot negotiate with vendors if you do not know anything about them- their pricing, their terms, their quality, their reviews. You want to work with a vendor that has the right balance between price and quality. One that delivers exceptional service, delivers on time, and has fewer potential risks of working with.

You don’t want to dive into negotiations with just any vendor, and it’s a waste of time to negotiate with every vendor. Develop a list of available vendors, and slowly widdle your choices down to 5-10 vendors for consideration. Do this by:

Identifying your company’s needs in regards to procurement and working with a vendor
Identifying which vendors can meet these needs (keeping a curated list of potential suppliers and what they offer is best for present and future negotiations)
Collecting quotes or offers from suppliers that includes your basic fulfillment information
Weed out vendors by identifying ones that meet your needs, have reasonable prices to begin negotiations, can deliver on quality, and have adequate reviews from clients

Collect Offers From Multiple Vendors

During your initial invitation for suppliers to send their offers, you may want to pose it as a bid for your business. This may conjure better prices and better terms, and reminds suppliers that they are competing with other vendors.

Collecting these offers makes it easier to compare them. Therefore making it easier to determine which 5-10 you want to negotiate with.

Identify Potential Issues & Risks

Negotiations often start with a quote from the supplier, and possibly even a full offer for agreement. Before jumping into agreement or pricing negotiation, highlight parts of the agreement you find important. Take notes on areas of concern, parts that you are unclear about, and sections that you wish to negotiate.

Identifying these issues helps build an outline for the negotiation process. It also gives you a chance to do your research about the company and their competitors.

Mode of Communication

Certain negotiations are better done in person, while others can be handled over the phone or email. It is common for negotiations to be done in person by those who are good at leveraging body language and other tools of negotiations. In-person negotiations can’t be ignored, are harder to turn down, and cannot be so easily dismissed. That being said, there can be a lot of back and forth that could take weeks. Travel is also a cost concern. Consider a teleconference as a happy medium between email and in-person vendor negotiation.

Identify Authority Figure

When negotiating contracts, you want to speak to someone with the authority to negotiate on behalf of the company. Speaking to any manager or representative won’t do. If you spend a hefty amount of time in negotiation, only to hear that they’ll have to get back to you once they’ve discussed it with a manager, you’re unlikely to see the results you desire. This is especially true if you’ve traveled to meet with them on-site. Identify an authority figure with negotiating power before you speak with them to avoid this potential failure.

Legal Concerns

Contracts are complicated, and can often feature loopholes, lapses in liability, etc. This can be complicated further when it regards small items with a large mass, such as fasteners or other hardware. If you feel there are too many legal terms, or contracts may contain details you or your team cannot handle, then don’t hesitate to contact a lawyer. Your best choice is a lawyer specializing in procurement/contract negotiations.

Meeting Agenda

Developing a meeting agenda, or an outline for negotiations, you are ensuring that you do not leave important items out of the discussions. This also benefits the negotiation itself. The more prepared you are, and the more prepared and organized you appear to the vendor, the more negotiation power you hold.

Procurement Negotiation Strategies

Strategic sourcing requires good negotiating strategies. Implementing these strategies takes just as much skill as knowing which tactics to use. While skill can only be developed on your own, we’ve outlined procurement negotiation strategies below for you to employ.

1. Discredit Value Proposition

When negotiating a suppliers price, value proposition can often be destroyed. This is in line with the view of pricing negotiations as exploitation of a vendor. This happens because procurement tends to focus on discrete units rather than overall deals. By comparing pricing of the least common denominators, you’re able to get the “best deal”, but you’re destroying the relationship with the supplier.

Instead, demystify the value proposition. Build strong relationships with the supplier before negotiations even start.

2. Value-Based Buying Approach

A deal that quantifies the value of the total solution, and supplies both parties with a winning agreement, should be your goal. To do this, you need to understand what your supplier wants. It is just as important as your own goals. What risks do they take by working with you? Offer a solution. What areas are they struggling in the most? Is it retaining long term contracts? Do they need to get rid of old stock? Know how your business could impact theirs, and where. You want to target the areas where they are weakest.

If they won’t budge on price, what other areas can you focus on? Down payment? Warranty? Bulk purchasing discount? They want your business, but they may not be willing to discount their overall pricing. Be willing to compromise, but show the value in each measure.

3. Vendors Are Partners

There has been a shift from purchasing singular items in bulk from multiple vendors, to longer term contracts with fewer suppliers. Negotiating long-term contracts with a handful of suppliers, and keeping them close by viewing them as partners, yields better results with pricing. In this relationship, you can promise renewed contracts in exchange for better pricing, quality, or service without contention. The supplier feels confident with expected sales, and the buyer feels confident that they are receiving superior service or product. You may even consider transferring all of your procurement to one supplier, or to a VMI (See Vendor Managed Inventory article for more information). Suppliers would rather work with clients that order large amounts of product from them. Some suppliers can even manufacture a product you’re looking for but have had difficulty finding. In exchange, you may find more willingness to agree to bulk discounts.

The goal is to be a company that the vendor wants to do business with. Just like any individual, companies want to work with easy customers. They want to work with those that will cause fewer problems for them throughout the partnership. Sell yourself as a company that will give them a lot of business, and that will be easy to work with.

4. Demonstrate That You Understand Their Business & Position

If you’ve done enough research on the company, you understand where they are weakest, what areas they have failed at before, what their customers say about them, but also what they excel at. You should know how they operate. It will inform your negotiations, evoke empathy, and make you an easier buyer to communicate with.

By showing you understand their challenges and underlying costs, you are ensuring a stronger relationship. This could motivate them to extend goodwill, and prompt the same empathy for you that you share for them.

Working with vendors has its challenges, but by doing your research, understanding your needs and theirs, and building partnerships, you can lower your procurement pricing and improve the efficiency of your supply chain.

Our biggest tip when working with suppliers, is to consolidate as much of your purchasing to one supplier. Vendors enjoy bulk purchasing, and are more willing to work with buyers that demonstrates a willingness to purchase more over a longer period. Huyett makes it possible to consolidate your fastener procurement by providing on-site manufacturing for parts that are hard to find or hard to make. We source our non-threaded fasteners such as washers, nuts and bolts, grease fittings, keystock, and much more from industry leading low-cost producers. It’s easy to reduce your procurement costs and your overall supply chain costs with Huyett.