Within procurement from a negotiation standpoint, one of the worst things a procurement professional can do is let a supplier have the upper hand. This is prone to happening with a single source or majority source supplier. Especially if the product or service they are providing is critical to your finished goods. Typically long term contracts are locked in with these suppliers controlling price, but what happens when the contract nears the end of its term? This is the supplier’s opportunity to increase price and if you’re not careful they’re going to use their position as leverage.

The supplier will most likely site that they’ve held pricing and have postponed passing along increases due to raw material costs, inflation wage increases, etc. This may be true but if you don’t do your due diligence beforehand you have no way of validating it and have to trust the supplier. So how do you create the leverage you need to keep the supplier in check? The best way to do this is to identify a second competitive source. By doing so you have established a potential threat to the incumbent. However, if the incumbent is that critical to your operations they may stand pat and hold their position. Let’s explore some ways that we can strategically apply pressure to these suppliers without damaging the relationship. Side note, the majority of suppliers understand that even though there is an important human component to the relationship in the end it’s a business and sometimes business decisions have to be made.

One key element is timing. It’s imperative to know when your contract will reach end of term. If your contract is about to expire with any strategic supplier you’re going to have issues. Depending on the category, estimate the timing you will need to properly evaluate alternatives. For example, if engineering is required from a testing and validation standpoint ensure that this is factored into your overall evaluation timeline. You should be preparing for negotiations well before the current contract expires. Whether this involves actually going to market or locking up an extension it’s important to ensure that you have all your ducks in a row well before. Keep in mind many contracts have termination clauses requiring you to submit a notice of cancellation well before end of term. The closer you get to end of term without a resolution the more leverage the supplier has.

As I alluded to earlier, you need to create a viable alternative to your incumbent supplier in order to create real leverage. The word viable is important because if it comes down to it you need to be able to actually switch suppliers. In many cases this means that the product must be properly tested, evaluated and approved. Everything must be in place prior to your incumbent’s contract expiring otherwise you could risk significant supply chain disruption. If an alternate is being evaluated typically the incumbent catches wind of it, which increases your leverage during negotiations. In a nutshell be conscious of when key contracts are coming up to term, don’t be caught off guard, ensure you have a strategy in place well beforehand and don’t let the supplier drag out the process. If possible, always have a secondary source in order to avoid disruption.
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Michael Croasdale

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