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Negotiating with Underperforming Suppliers

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Author: Tim Van Mieghem, The Proaction Group

In this time of crisis-related supply chain opportunities, we examined the benefits of addressing underperforming suppliers and how organizations can approach the process. In essence, that first step is about identifying perceived supplier issues and then resolving to act. Once that decision is made, the word “perceived” should be eliminated and the groundwork for negotiating can begin.

Setting the Stage for Negotiation Success

A crystal-clear understanding of what is happening and the root causes perpetuating the situation is critical before moving forward with any negotiation. A simple but effective means of getting started is through the tried-and-true exercise of conferring with one’s sourcing lead on the five W’s (who, what, where, when, and why). While this typically oversimplifies the situation, it does provide a solid foundation to build on when done properly.

Next, gather key internal cross-functional stakeholders for a collaborative review and assessment of the data compiled. As previously highlighted, it’s normal (and necessary) to discover any other factors that may be impacting the problem. Such factors are not always obvious and can lie undiscovered until multiple team members are jointly focused on the issue at hand. Items to look for may include informal design change communications, multiple sources of demand forecasts, payment processes outside of PO terms, or informal end-of-month material receipt policies to name a few. Things like this happen to some extent at every company. It’s important to discover them internally before the external supplier points them out deflates the negotiation’s credibility.

Establishing Negotiation Objectives

If the self-examination process confirms that a supplier problem exists, document in detail what it is you want to negotiate and what will constitute an acceptable result. An acceptable outcome should be one that not only resolves the pain that the company is currently experiencing, but that also avoids reoccurrence in the future. Cross-functional input and alignment across key stakeholders on negotiation objectives are critical to avoid a moving negotiation target (and again, damaging credibility).

At this stage, one should also get a group consensus on what will happen if the negotiation is not successful. Is the company willing, and able to locate, qualify, and transition to an alternate supplier? It is essential to know this before negotiations begin so that communications can avoid ultimatums that have the potential to backfire. It also typically helps to use some form of a checklist that details each term to be negotiated, what acceptable looks like for each term, and space to record supplier responses. This internal negotiation checklist can then be circulated to provide updates to key stakeholders as the negotiation process moves along. It can also be used to document final internal approvals that need to occur before amended contracts or purchase order documents proceed.

Removing Emotion and Subjectivity

The negotiation process with the supplier can be relatively simple when it starts from a solid place. Sharing objective data that illuminates the issue or issues helps to remove emotion from the equation. Evidence-backed statements like “we are currently at X but need to be at Y” give both the negotiating leader and the supplier a clear understanding of the issue, how it is being measured, and what an acceptable future state looks like. This straightforward approach will generally lead to a relatively quick confirmation of whether the supplier either can or cannot achieve the expected future-state-performance level.

Supporting a Successful Negotiation Outcome

Mutually beneficial supplier relationships are an essential element of business success. As we’ve noted, negotiations should never begin unless there are acceptable alternatives and contingencies in place. Negotiations should not be viewed in a negative light, however. When carried out effectively and without emotion, they can produce positive results for both parties. Suppliers that value customer satisfaction appreciates and act on customer feedback whenever they can. And businesses that demonstrate openness and appreciation with their suppliers are rewarded with relationships that can serve them for the long-term.

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