Supplier relationship management is a key aspect of your procurement function. The costs of your existing suppliers definitely play and huge role in the margins of the organization.
The main focus of cutting down your costs completely bestows on how you maintain relationships with your vendors.
The right re-negotiation does not really mean that you get the lowest possible price. There are various other components that can lead to a successful negotiation. It can be payment terms, delivery lead times, inventory management, quality, etc. Negotiations with existing suppliers must result in an agreement that benefits both parties; this helps in building a long-term relationship with your suppliers.
Suppliers are the best knowledge bank for the information that you need. Suppliers can give you insights on how their product meets your companies need and also how you can get rid of unwanted costs. There always can be a difference of opinion with your suppliers. What makes sense from your outlook might not always make sense from a supplier’s way of looking at things. A supplier can point out to you various aspects or structures that add cost to the product/service which can be/should be avoided as it, in turn, increases your buying price.
To capture this valuable information from the supplier, it would be very important to identify areas of potential to remove over-engineered or unwanted costs.
A research or a survey on the supplier in which you can ask for suggestion from the suppliers for :
- Processes or requisites that your company imposes on your supplier that can be terminated or stopped to remove costs.
- Can change in credit terms impact the product costs
- Suggestion on the process that can be undertaken jointly to eliminate costs
- Products that can be brought in a simpler form or specification that can improve costs
Please note the above are done on your existing suppliers and hence they must not impact the suppliers’ profitability and must be in mutual benefit. Your aim must not be to cut down suppliers’ profit as such exercise can also create a negative impact. Cutting down your suppliers’ margin does bring out a pleasant situation which in today’s scenario is considered as putting down your suppliers who are also thriving to survive.
With the above exercise, you will have a huge data bank of ideas from your suppliers. Analyzing these ideas will also be a huge knowledge workshop for you. There may be various suggestions which you will definitely not be able to implement, but there will be many such ideas which will be interesting learning and source of information which you would definitely want to take forward and you will foresee great potential for saving in them.
Using an SRM tool to carry out the above survey will definitely add to your usage of digitalization mode, which is need of the hour today. Even more, such tools create a very impressive mindset on the suppliers.
Procurement team in today’s time is considered the biggest data bank. They interact with suppliers who are also suppliers to your competitors and information generation is key to success of the purchaser.
For some selected suppliers, it can be very hard to renegotiate to achieve a lower price.
To attain the desired result, data and facts must be on your tips.
Data that must be available with you are :
- Spend Analysis: If the spending with a particular supplier has increased in the recent past then you can use this as an argument or requesting better prices.
- Delivery & Quality: If the supplier has underperformed then it could be an argument for demanding a refund now for keeping the business relationship, or you can seek to get better terms moving forward.
- Stakeholders Satisfaction: If you get negative response from stakeholders, it can be a good reason to put pressure on the supplier to offer you better pricing, as the supplier is creating problems in the cooperation, which in turn entails associated costs.
It is very important to collect the responses from the stakeholders in your organization on which vendor you will wish to run a renegotiation process.
Stakeholders will be able to give you the right response for tracking the right vendor.
Data that need to be collected:
- The first process is to understand and evaluate which of your suppliers we must include in the renegotiation. The idea must always be to keep it simple and include the high-value supplies initially. You can always get more suppliers on board in due course.
- Stakeholders who deal/consume with the above-identified supplies/suppliers should be identified. For each stakeholder identify what strategic suppliers they each can/should evaluate. Again this must be kept simple and involve only the major stakeholders who you feel can create a big value add with their ideas and innovations later the stakeholders can be expanded.
- Asking the right question is also equally important. Stakeholders should be given a questionnaire which should have the following:
- Problem-solving capacity of the supplier
- Ease of working with the supplier
- Cost addition of supplier to our operations
- Support or customer for effectiveness
- You can do this using Excel or an automated solution.
- Create a report for each supplier and rank the supplier based on the feedback received. Poor ranking can again be used as a tool for a pricing argument.
- All the data accumulated by you will be an excellent tool for creation of arguments that will help you get better pricing or get better terms with the supplier.
Negotiating with existing suppliers have plenty of ways to redefine the mutually beneficial relationship. There should be a clear understanding of cost reduction, an ability to work on cross-functionally, a willingness to think outside the box, and strong analytical capabilities that can reveal a broader picture and generate useful insights. Such initiatives lead to long terms strategies rather than one-time tactical moves. With the above elements in place, what had seemed an impossible saturated negotiation becomes one that is merely challenging for you and the supplier.