In the 7 Step Strategic Sourcing Process, negotiations happen near the end of the process. In procurement, negotiations typically occur after your business has sent and received responses to competitive bidding documents (RFPs, RFQs, or RFIs).The negotiations will help you compare the suppliers and ultimately determine whose services you will be enlisting. In this blog, we go more into detail regarding the negotiation process and some key tips to keep in mind for your business.
Why is Negotiation Needed in Strategic Sourcing
By definition, a negotiation is a strategic discussion aimed at reaching a mutual agreement. In procurement, you will need to negotiate with your shortlisted potential suppliers in order to determine, once and for all, who you will be working with and the terms that your interactions will entail. While a win-win outcome is ideal, it is not always possible. In negotiations, there are a variety of strategies and tactics available, but preparation is the most crucial. Negotiations in procurement or purchasing or conducted for the following reasons:
- To discuss costs
- To ensure that the buyer is getting value for money
- To discuss delivery time
- To discuss payment conditions
- To determine after-care and maintenance terms
- To outline quality standards
- To improve performance through Key Performance Indicators (KPIs) or Service-lead Agreements (SLAs)
- To solve any problems or conflicts with an open discussion
- Ensure optimal quality of the product or service by reducing defects
- Reaching a mutually satisfying agreement through collaboration
To ensure they have as much information from the suppliers as possible, your procurement team may need to conduct interviews and ask follow-up questions after responses to the RFPs, RFQs, or RFIs have been received. If needed, they can then negotiate better deals. For negotiations to be successful, the team responsible must have in-depth knowledge of the product or service you are hoping to purchase to ensure they are asking the right questions.
The Stages of Negotiation
In procurement, the negotiation process is split into seven primary stages:
- Preparation - You need to gather background information. In order to have a successful negotiation, thorough preparation is essential, including knowing the objectives, understanding concessions, and having a BATNA (Best Alternative to a Negotiated Agreement).
- Exchange and Validation of Information - Both parties will explain what they hope to achieve through the agreement.
- Testing - Here, parties try to understand what is most important to one another and where concessions can be made. During this phase, effective communication is vital. Ensure that team members with good listening and communication skills are put into play so that as much information can be gathered as possible.
- Proposing - Each party submits their proposals of what they want to accomplish, as well as their terms.
- Bargaining - This is the step where compromise is needed. Both parties offer to give up something, or alter their terms, in exchange for something else. It is referred to as a concession if one party gives something up but receives nothing in return.
- Agreement - Compromise and bargaining should lead to an agreement between both parties. Legally binding agreements must be accepted by both parties.
- Closure - This is the final stage. It includes documenting what has been agreed, whether that is through a contract or minutes of the meeting. Documentation is essential to closing - without it, the agreement is open to interpretation.
Tips for Negotiating with Potential Suppliers
- At the start of the negotiation, it's always a good idea to let the supplier representative know which parts of the contract you are happy with and what points you want to discuss; and request the same from them.
- Have key information on hand as you may need to recall it at any time. This includes all of the research you have conducted. For example, if you have research about the market conditions and how much it costs the supplier to make their goods, you will be better positioned to negotiate price.
- Be careful not to imply that you are willing to compromise too much or are ready to give in right away.
- Make sure you are familiar with the common negotiation tactics used by suppliers. Avoid using tactics yourself since they may weaken your position. Instead, approach honestly and be confident in your argument.
- Never take the first offer. Counter it with another offer and allow them to come back with a revised amount.
- The lowest prices don't always equal the best deals. If such a low price is being offered and the deal seems too good to be true, consider what is being sacrificed because it could hamper quality.
- Consider removing some of the features that you don't need to reduce the price.
Using e-procurement or e-sourcing software like Tradogram is a great way to simplify the entire strategic sourcing process. Using comparison tools, you can negotiate the best terms and pricing with only the most qualified vendors. Contact us today and one of our dedicated team members will be more than happy to answer any questions you may have.