Negotiating supplier contracts
Prepare for contract negotiation
Good preparation is essential for successful contract negotiation. Arguably, the biggest and the most common mistake negotiators make is failing to prepare thoroughly. Preparation can make you a more confident negotiator and make a favourable outcome more likely.
You should begin preparing for negotiations long before you meet the supplier at the negotiation table. Key things you should consider are:
- your perspective - what you need and what you bring to the table
- your supplier's perspective - their objectives, goals and objectives
- your goals in the negotiation - rank them according to importance
- your negotiation strategy - it's important that you have one
- your negotiation style - are you prepared to compromise on certain issues
- your 'best alternative to a negotiated agreement' or BATNA
- future plans - both yours and your supplier's
You will want to find out who you will be negotiating with. Set the agenda early and make sure that you bring a good negotiating team to the table who are clear on your strategy and their respective roles. Ensure all relevant paperwork is ready well ahead of any meetings. Prepare your offer and possible counter-offers before negotiations begin. See how to set objectives for contract negotiation.
Get to know your supplier
When negotiating supplier contracts, it's vital that you know your supplier well. Research the company and the people you're dealing with to gain a better understanding of your position in the negotiation. Try to find out, for example:
- Are they financially stable?
- Have they been in the market long?
- What is their reputation in the industry?
- What percent of their sales would your product or service make?
- What is their operational capacity?
- What are their business and quality systems like?
- What technologies do they use?
- Do they have any industry or standards certifications?
- Who are their competitors?
- Is their pricing in line with the competition?
This information will help you to determine your bargaining power and also the supplier's potential performance. See how to carry out supplier due diligence.
Understand your supplier's objectives
Suppliers want a fair price for their products or services. On the other hand, businesses typically want to minimise costs so it's easy to see how the two parties can find themselves at odds in negotiations.
The more you understand about your supplier's position and objectives, the easier it may be to negotiate a deal that will suit both sides. For example:
- a supplier with spare production capacity may be keen to negotiate as large an order as possible
- a supplier experiencing cashflow issues may be willing to compromise on certain terms in exchange for fast payment
- a supplier short of their monthly sales quota may be keen to close the deal quickly or negotiate more favourably on other terms
Knowing as much as you can about the supplier and its business can help you to develop a successful contract negotiation strategy.
However, keep in mind that putting undue pressure on a supplier could damage the relationship and cause the supplier to cut costs elsewhere, eg in quality or customer service. Find out more about developing supplier relationships.