The balance of power has dramatically shifted from buyers to vendors for many industries without clearly outlined vendor negotiation strategies. In some cases, vendors have eliminated their competitors by driving down costs or developing disruptive technologies. In others, the fast-growing demand for inputs has outstripped supply to such a degree that vendors have been able to charge what they want. In still others, buyers have consolidated demand and forced vendors’ prices down so far that many vendors exited the market, giving the remaining few more clout. Whatever the reason, companies that have gotten into a weak position with vendors need to approach the situation strategically. They can no longer rely on hard negotiations through their procurement offices. To help with the strategic reappraisal, we’ve suggested three strategies to handle negotiation with vendors.
Let’s look at each strategy in detail.
Vendor Negotiation Strategies to Make the Right Deal
Win-win vendor negotiation strategy #1: Bring New Value to the Vendor
This is the easiest approach. Try to rebalance the power equation and turn a purely commercial transaction with vendors into a strategic partnership. Companies can provide new value in two ways:
- Be a gateway to new markets
- Reducing the vendor’s risks
Win-win vendor negotiation strategy #2: Change How You Buy
Your next best alternative is to change your pattern of demand. Because this strategy can have implications for other parts of your organization, it requires close collaboration with any functions that could be affected. A company can change its demand patterns in three ways, all of which may require intensive data collection and analysis:
- Consolidate purchase orders
- Rethink purchasing bundles
- Decrease purchase volume
Win-win vendor negotiation strategy #3 Create a New Vendor
This is a high-risk option, but it can transform a company’s prospects. This strategy is necessary for industries where price negotiations have gone so far as to drive most vendors out of business, effectively giving the survivors a monopoly. Firms have essentially two paths:
- Bring in a vendor from an adjacent market
- Vertically integrate to become their own vendor
In the negotiation process, a procurement professional should learn to compromise to the best extent possible. However, one must know where and in which areas to compromise as it is important to reach an agreement that will avoid conflict and misunderstanding.
For a win-win negotiation, it is better that individuals try to adjust with each other in such a way that both parties are benefited and meets their expectation. It is always better to use a Service Vendor checklist to review your contracts for negotiation with vendors.