Estimated reading time: 5 minutes
• In procurement, the balance of power can shift towards the suppliers for many reasons. First, suppliers can eliminate competition by applying a loss-leadership strategy that drives other companies out of business.
• In other cases, demand far outweighs supply, making it hard for buyers to negotiate. Such circumstances make it important for procurement teams to draw up negotiation tactics and strategies to help them fulfill their goals.
• Procurement leaders need critical analysis skills and situational awareness to know when to apply these strategies. Here are 5 negotiation strategies to apply in purchasing.
Defining of Best Alternative
When going into purchasing negotiation strategies, it’s important for the procurement to have conducted thorough research and defined their best alternative. This means that every member of the team already knows what constitutes a bad deal for the business. Such a strategy means that the negotiators will never feel that they don’t have a choice. While this sounds easy, it requires hard work in terms of sourcing and risk assessment.
Besides the price, the teams should be briefed on other factors that influence the choice of vendor including their payment terms and cultural fit.
Having a Negotiation Framework
To smooth out negotiations, prior work needs to be done before actual negotiations take place. Both teams have to agree on the venue for meetings, modes of correspondence, and the size of the negotiation teams. It would be helpful to also agree on the most important issues for discussion so that they are prioritized during negotiations. The procurement manager must ensure that the negotiation team has people with all the requisite skills, especially when the subject matter needs technical know-how.
Giving Value to the Supplier
During the negotiations, the procurement team should find ways to give value to the supplier in order that the supplier also cedes ground in terms of price. There are several ways to do so. For instance, the team might offer to publicize the fact that they are working with that supplier. Such publicity will help firm up the suppliers’ names in new markets, leading to more business. In other cases, the buyer might be able to reduce the suppliers’ risk. By offering longer contracts, the buyer assures the seller of revenue for a longer period than they normally would. Such an assurance is worth quite a lot in volatile business environments.
Do Not Get Emotional
Negotiations can often get heated when one party feels that the other party does not see things from a particular perspective. It’s important for buyers to keep their emotions in check and not lose sight of the bigger picture. There are several ways to keep emotions under control. Having several representatives in the negotiations means that they can take turns in leading the negotiations. It’s also okay to adjourn and resume negotiations when both parties take time to consider what the other has offered. The procurement team should have experienced members in it because they are able to recognize potentially volatile situations and take charge early enough to quell them.
Remain Aware of Biases
Certain biases in the cognitive process can lead to suboptimal deals in purchasing negotiation strategies. One such bias is ‘anchoring bias. Anchoring bias occurs when the first figure mentioned in a negotiation influences the eventual decision. For instance, if the first figure the seller mentioned is $50, $40 might sound like a fair final price for the buyer even though the market rate elsewhere is $35. The remedy for anchoring bias is prior research in order to spot inaccuracies or misrepresentations meant to influence your decision-making. Mentioning high initial prices is a tactic in negotiations to make buyers feel that they are getting a big discount.
Other biases in procurement include sunk cost fallacy where the company continues to buy from a particular vendor even though they aren’t delivering as per the contract or cheaper alternatives are available. The problem here is that the management may feel that a lot of work has gone into preparing and negotiating the contract and that finding another vendor will take too much time.
Submitting Several Offers
In certain situations, it may be beneficial to submit several offers to the seller depicting different situations. This works well when margins are slim and other factors such as payment terms, delivery conditions, and packaging come into play. This approach steers the negotiations towards finding a common ground and also a quicker resolution of the negotiations. It is also a great approach when you want to establish long-lasting working relationships with the sellers.
Finally, it is important to understand the preferred negotiation style of the other party, which is often influenced by culture. Whereas some people prefer going straight to the final price and negotiations are rather brief, others may not mind the back and forth of offers and counteroffers.
Negotiate Binding Clauses
During purchasing negotiations, buyers in procurement negotiations should ensure that there are binding clauses included in the contract. These are clauses that set out penalties when a party acts in breach of the contract. When a vendor is entrusted to deliver mission-critical items, there should be safeguards for the contracting party. There should also be arbitration mechanisms for resolving disputes that arise during the life of the contract. The negotiation team should brainstorm on the most important issues likely to cause disputes and address them during the negotiations.
Finally, it’s important that the contracting process is supported by the right technology tools. Contract management software helps businesses to keep track of all their contracts through a central repository. They can set up alerts for important notifications and reminders. Reach out to Procureport for contract management software and other e-procurement tools.