“Never take the first offer” is one of the first lessons you’ll learn in a negotiation or business-negotiation type of class. Plus, it’s fun to say. Negotiation might seem like a niche skill, but in reality, it has a much more practical and robust role in our society. Negotiation is, in fact, an innate part of a compromise. When it’s reframed this way, suddenly it opens up the umbrella to a fuller spectrum of business and non-business-related activities. Even so, negotiation by itself has a large part to play in many of the day-to-day aspects of our economy. Especially in procurement, which is why it’s good to know what the advantages of negotiation in procurement are.
There are a variety of different places in the procurement life cycle that calls for or include an aspect of negotiation, and having strong negotiation tactics in practice places your firm or procurement department at an advantage. Understanding where and how negotiation plays into procurement also helps illuminate which negotiation tactics to use when.
Strategic sourcing is a procurement strategy that is primarily cost and value-based. The main principle of a strategic sourcing strategy is that it aims to identify and enter into contracts with suppliers and vendors based on the lowest possible cost. This is a slightly misleading phrasing, however, as proper strategic sourcing focuses not only on price-point but the actual lifetime value. This is a significant distinction because while the initial upfront cost is factored in, there are many other variables considered that paint a more accurate portrait of what the actual lifetime value of a contract will be.
These other variables considered include elements like quality, value-over-time, and other data gathered and analyzed by sophisticated procurement software.
Reverse auctions are a staple element in procurement departments across industries. The way a reverse auction works is relatively simple. The roles of a standard auction are reversed, so instead of buyers competing and negotiating with one another, the vendors and suppliers are all bidding against one another to win a contract. This means, as the procurement department, you need to be able to negotiate with everyone who comes to the table, while they negotiate and bid amongst themselves. This is an advantage of negotiation in procurement since it ultimately drives the price of the contract down, saving your organization money.
The negotiations in a reverse auction, however, start long before the reverse auction actually begins. With the assistance of powerful procurement technology and the wisdom of your procurement professionals on staff, your team will compose a list of vetted vendors and suppliers that are pre-approved for the reverse auction. This process in itself requires some negotiation which leads to the advantage of filling your reverse auction with qualified bidders and vendors. This also contributes to establishing better and more long-lasting vendor supplier relationships.
Contract management, of course, also comes with a healthy helping of negotiation. Contract management is one of the pillars of procurement in general. The contract management process is integral to retaining quality vendors, reducing operational procurement costs, and identifying significant KPIs and other business metrics within the organization as they pertain to procurement.
When it comes to the contract management lifecycle, however, there are multiple periods that call for negotiations including the onset of the contract, as well as each time that contract is up for renewal. This is important because oftentimes, the economy will evolve and change from the time that a contract is initiated through to the time it’s first up for renewal. Various factors influence the state of the economy and need to be considered when it comes time to negotiate the terms of existing contracts.
Advantages of Negotiation in Procurement: The Big Picture
There are many times in the procurement life cycle in which negotiations are necessary. Purchasing and supply chain management in 2020 taught us a lot about the volatility of the current economy and how fragile supply chains, both domestic and international, truly are. Learning from the past year, it’s important that we take action to do what we can and establish more secured supply chains, and negotiations will be a big part of that.
Keep your organization ahead of the curve, and make sure that your team has established practices when it comes to negotiation periods.
Wrapping Up on Negotiation in Procurement
A fierce negotiation can be the precipice of a law drama, or it can be the everyday life of a procurement professional. Using powerful software, like that offered by ProcurePort, however, in concert with your staff’s knowledge and an established set of negotiation tactics; your firm will be in a prime position to form and keep an advantage over the competition.
For more information on procurement technology or software, information or knowledge, or anything else procurement-related, keep browsing ProcurePort.