Assessing Supplier Bargaining Power in Negotiations

Assessing Supplier Bargaining Power in Negotiations

It always amazes me how many procurement organizations I run into who enter into major, multi-million dollar negotiations, feeling like they have no leverage at all. How does this happen?

Like I’ve always said, negotiations are won and lost before they ever start. Almost all the negotiation training and consulting out there are focused on how to handle at-the-table negotiations. By the time you get to the table, it’s way too late!

The first thing you need to know is that salespeople are a special breed. It takes a certain type to succeed in those roles. And they spend up to 20% of their time in training, while you only spend up to 2% of your time in training.

More than that, they are taught to go into negotiations with attitude, confidence, and the ability to take full advantage of what you don’t know and what they’ve got you to believe you know.

For instance, salespeople are taught to tell you something like this after every negotiation:  “You guys really pushed us to the edge. We had to get so many approvals to put this in place. Nobody has ever gotten a deal like this from us before”.

Have you heard that maybe 100 times before? Do you know what it means? *Absolutely nothing*. Far from meaning you are a world-class negotiator, it may even mean you are just an average negotiator.

When suppliers say that, it usually also means they are laughing all the way to the bank.

Now how is it that so many times we let suppliers tell us “if you want to cut any deeper, we are ready to walk from this deal.” Sometimes we are spending millions. Tens of millions. I have even seen hundreds of millions, and suppliers are still saying this. Really?

Read this twice: You cannot rely on suppliers for bargaining power negotiation intelligence. You have to do your own homework.

The first thing you need to answer is this question: What exactly is the source of the supplier’s bargaining power? Once you REALLY understand this, you can do miracles.

There was a famous comedy team years ago named Laurel and Hardy. They were watched all over the world under different names. They were the biggest headliners of their day. They worked in the Hal Roach Studios.

Hal Roach was an untrained master negotiator. There was only one Laurel and Hardy comedy team in the world, but there were so many studios. So why did Hal Roach always have the upper hand in negotiations?

The reason was that he didn’t book them as a team. He booked Laurel and Hardy to individual contracts, and he made their contracts expire at totally different times, so they could never aggregate their business and use it against him.

If one walked from the deal, the other was still under contract, and they couldn’t go to another studio.

Laurel and Hardy’s bargaining power was in their duality, and Hal Roach identified that and took that power away from them. What Hal Roach did was pure genius, and he held the rights to them during the peak of their career.

Other things you need to know are how important your business is to the supplier.

You must find out what % of a supplier’s business you will be with the proposed level of business. If they are operating as a separate division, then focus on what % of that division’s revenue you will be. The higher that % is, the lower the probability that they can walk.

You also need to know where you stand in their customer ranking by revenue. This and the other question can be ascertained through online financials and through querying the supplier. Make it your right to know. Make it an RFX requirement.

Use the negotiation principle of “Social Proof” and tell them this is a requirement for doing business, and all your suppliers are providing this, and you can provide an NDA if needed.

You also need to deeply understand if this deal is about more than just your business. This requires research. Interviews, annual reports, analyst studies, news, and asking the supplier themselves.

Tata Steel, a division of the powerhouse Tata company in India, wanted to buy mining equipment. The European supplier was offering very high prices and a standard nominal discount schedule.

Tata then did some research and found out this supplier had not broken into the huge Indian marketplace yet. They produced a slide deck demonstrating that for every such supplier when Tata put them under contract, the rest of India followed suit – because nobody doubts Tata decisions.

Tata then produced a slide deck demonstrating that for every such supplier trying to break into the Indian market, once Tata put them under contract, the rest of India followed suit – because nobody doubts Tata decisions.

Once the supplier saw this, they sold all the equipment at cost, with delight. The reason was, Tata procurement got the supplier to see that the money is not with the Tata deal – it’s with all the money that rolls in afterward, domino-style.

You can’t believe how many times I’ve had clients who swore to me up and down that they did not have any bargaining power but were later shocked once I walked them through the research results. The suppliers not only couldn’t walk from the deal, they also didn’t have any of the supposed bargaining power that they claimed to have.

Don’t fall into what suppliers tell you. Do your homework and come in knowledgeable, and with a solid understanding of the bargaining power of both sides.

Want to become a master negotiator? Develop strategies to completely change the balance of bargaining power – before negotiations ever start.

Now go off and do something wonderful. Be your best!

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