The ability to negotiate with suppliers is a major differentiator in Procurement. In a world where the function is becoming more strategic – with more “administrative” tasks being automated out of existence – the ability to get value from interactions with suppliers is one of the biggest things a Procurement professional has to offer an organization. Effective supplier negotiations can unlock cost savings, provide sources of innovation to your company, and reduce risk.
But the supplier landscape is changing: suppliers now have more leverage than buyers in a number of industries due to consolidation, a rise in demand for certain categories of goods and services, and other factors. So the mindset that the buying business has all the leverage isn’t always borne out in today’s landscape. Procurement is about lowering costs. But you can find suppliers squeezing you from a price perspective if you don’t have easy alternatives to go to – which not only puts your company at risk, it lowers your value as a contributor to that company.
If you haven’t been in a similar situation before, or if you aren’t in one now, it’s likely that you will be at some point in your Procurement career. Which is why we found this great new Harvard Business Review (HBR) feature so useful. Titled, “How to Negotiate with Powerful Suppliers,” it delves into a variety of strategies for how to navigate negotiation scenarios where the supplier has more power than the buyer. It’s chock full of good advice for Procurement professionals looking to provide extra value and make their companies more competitive.
The Harvard Business Review breaks their approach into four main strategies, ordered from low-risk to high-risk, as a step-by-step guide you can use when dealing with powerful suppliers in negotiations.
Strategy One: Bring New Value to Your Supplier
According to HBR, this is the first step you can take to challenge a power imbalance between supplier and buyer. If you’re dealing with a supplier that’s set to hike prices, think about offering them new value. Even large, powerful suppliers might jump at the chance to expand alongside your company into new markets, or to lock in a long-term contract, in exchange for a discount.
Strategy Two: Change How You Buy
Working in a creative and collaborative fashion with internal stakeholders across a company, Procurement can extract value from monopolistic suppliers by changing their patterns of demand. HBR outlines how companies can consolidate their spend internally across business units – something that’s good practice to do anyway – or, if size is a consideration, form a buying group with other players in their industry to increase their leverage at the negotiating table with suppliers. Buyers can also take diverse areas of spend that they have “bundled” with one supplier and break them apart to negotiate separately for different goods or services where the supplier may not hold a monopoly. They can also draw down spend in a certain category – or even threaten to, which might cause a supplier to rethink pricing.
Strategy Three: Create a New Supplier
If the previous suggestions aren’t feasible, HBR offers some more radical and potentially disruptive workarounds that challenge Procurement’s often staid image. They offer the possibility that, in a category with very few, very powerful suppliers, it may make the most sense to create a new supplier completely – even if it means changing your business model or threatening your relationships with existing suppliers. This could mean enticing an adjacent supplier to get in the fray – for example encouraging a European supplier to enter the North American market for a certain product. It could also mean vertically integrating and bringing online new assets and capabilities – possibly as part of a partnership with an established player – to circumvent the need for a supplier in the first place. The latter is a tricky proposition, as you’d need to establish the business viability of vertical integration, but it’s an option.
Strategy Four: Play Hardball
HBR outlines, as a last resort, a Procurement strategy that’s not for the faint of heart: dealing with powerful suppliers who won’t budge by playing hardball. While it’s a risky strategy that’s worth broaching only if you can’t find a more creative solution, playing hardball has been known to be effective. Whether it’s cancelling all your orders, pursuing legal remedies, or threatening to bring in authorities to investigate monopolistic behavior, hardball options are worth considering when a supplier hikes prices and every other strategy fails.
The full feature is more than worth checking out – it delves into specific examples of how buyers in various industries were able to get a leg up in these kinds of tough negotiations.
While some of the top Procurement professionals in the field are well-acquainted with these tactics, we hope this advice is useful to those who see themselves facing down powerful suppliers in the near future, and aren’t sure how to gain leverage.
But what do you think? Are there any creative workarounds for negotiating with powerful suppliers we haven’t considered? Let us know in the comments!
Good information. I think supplier selection is one of the most critical thing in your business. Thanks for sharing these useful tips.
Thanks for your comment Najma!