Avoid These 5 Supply Chain Negotiation Tactics

Imagine a typical checklist for business success and it’s likely to list fundraising, management team experience, design for manufacturability, and 5S, Lean, Six Sigma, protecting intellectual property, etc. You’ve heard it all before. Negotiation skills, however, are not usually included in the conventional wisdom success factor checklist. Negotiating ability is a key ingredient for building supplier relationships, reducing costs, and winning new customers. This common skills gap is even more relevant for startups. Startups have few leverage levers to pull other than their “future potential”. Since the oft-quoted startup failure rate is 95% selling “future potential” alone is inadequate.

The following 5 devastating negotiation grenades will blow up vital relationships. The best way to end a game is to expose it. Let the expose begin using fictional Customer-Supplier interactions to illustrate the points.

1. Can of Worms

Can of worms is a countering tactic using an implied threat to fend off an uncomfortable topic. Throwing up a smokescreen of misdirection prevents a productive discussion on the actual underlying issue:

Customer: “Since you plan to raise our prices, we will bid other suppliers.”

Expected Supplier reaction: “Uh, Oh we opened a can of worms, better not go there”.

Unintended Supplier Consequence: “After all the engineering support we gave this startup they now want to bid out the project over a reasonable price increase. We should walk away.”

Conclusion: Worms kept in the can will simply multiply until the container bursts. Worm castings are great as a fertilizer, not so great as a foundation for a relationship.

2. Shrink Ray

When the can of worms strategy doesn’t work the shrink ray is often pulled out of the holster. Shrink Ray zaaaap! This trivializing strategy is a way to reduce the perceived incentive to address the problem.

Supplier: “The increase in material prices are costing us $100K per year.”

Customer: “That’s only 1% of the total cost”.

Expected Supplier Reaction: “Maybe we do seem petty and should focus on bigger fish.”

Unintended Supplier Consequence: “We are going to start billing them for all the extra Engineering and prototyping we now do at no charge.”

Conclusion: If the shrink ray could also work on the simmering resentment it causes, this tactic might actually be useful.

3. Crystal-Ball Cost Reductions

 Is it written somewhere sacred that specific percentage cost reductions should be present in supply agreements?  Negotiating annual cost reductions in advance is a great way to make sure the most competitive prices are never offered up-front.

Customer: “Based on your purchasing power and manufacturing experience we expect a 10% cost reduction each year for the first three years. Your competitors have already agreed to it.”

Expected Supplier Reaction: “We agree and are confident in our ability to lower costs once production starts.”

Unintended Supplier Consequence: “We offered our best price up-front and are not playing games. We know our prices are the lowest in the industry. If we decide to accept this business we will pocket hidden cost savings and look for excuses to raise prices later.”  Mental note to self: “Next time we will quote higher pricing to start so we can agree to be fortune tellers on the exact percentage of future cost reductions”.

Conclusion: Hopefully, the crystal ball will also reveal the self-defeating nature of this negotiating tactic. Future cost reductions will simply be built into the present price.

4. Bait and Switch Ambush

The first step in the ambush is to ask for a meeting with the supplier, purposefully camouflaging the real agenda. The “hidden agenda” is a win-lose cost reduction negotiation.

Customer: “Thank you for taking the time to visit us. We want to review with you a should-cost study we have done. We believe that considerable cost reductions are possible. Let’s look for savings by reviewing each line item of our estimates covering your raw materials, labor, SG&A, gross margin, and profit.

Expected Supplier Reaction: “Wow, that cost estimate is close to our actuals. We’ve been exposed and have lost our leverage.  If we want to keep the business, we have to discuss each line item and offer cost reductions”.

Unintended Supplier Consequence: “This customer should have told us in advance they were going to discuss line item costs. They are just not going to let us make much profit.  We’ve got to move attention away from this customer and put more focus on sales diversification. Once they are less than 10% of our sales, we can decide to draw a line in the sand on our prices or just fire the customer”.

Conclusion: Luring suppliers into an ambush meeting, and surprising them with machine gun questions about cost will start a relationship war.

5. E-Auctions are Woke

E-auctions are also called “reverse auctions” because prices go down during the bidding.  It’s an attempt to replace masterful human to human qualitative negotiation with a cut and dried quantitative approach.

Customer: “We are inviting our valuable suppliers to an internet auction. This is a great opportunity to bid on a wider range of business than you have ever done with us before. Suppliers will benefit from higher volumes and we will benefit from lower costs. It’s a win-win!”

Expected Supplier Reaction: “We can finally get a look at all the business we have not yet been given an opportunity to bid on. Our sales volume will rise substantially which will lower our costs and increase our profits”.

Unintended Supplier Consequence: “We’ve been through e-auctions before. The customer has no intention of giving us new business. They have already spent years developing the product with a competitor and cannot easily change. Our bids will be used to beat up the current supplier and their bids will be used the same way against us. We are not going to play along with the customer’s Purchasing Department’s tactics. We’ll just enter our current pricing which we know is very competitive. Let the customer’s Purchasing Managers tell their Engineering Departments they have to requalify every part if we lose the bid. If our competitor wants to underbid and lose money they won’t last long.”

Conclusion: Demanding suppliers form a circular firing squad will put critical supply chain relationships in the deadly crossfire. They may just take their marbles and go home.

The Bottom Line

Too often negotiators interpret the Golden Rule to mean: “whoever has the gold, rules”. Many companies are so focused on bottom-line cost reductions, the total value proposition offered by suppliers is overlooked. Emphasis has shifted towards a tactical approach of lowering cost through supplier bidding wars and chasing the latest low-cost country. The more strategic concept TCO (Total Cost of Ownership) that takes into account quality, delivery, technical support, etc. is overlooked to meet COGS reduction targets. The best negotiators are masters at uncovering the underlying needs of both organizations and finding solutions that are mutually beneficial. Win-win negotiations build trust and commitment. Relationship savings accounts full of goodwill are an invaluable asset when problems occur.