Supplier negotiation has become an intrinsic part of the supply chain process and, for many companies, this could be the most critical process in the whole chain. Katherine Barrios, Chief Marketing Officer, Xeneta (a benchmarking and intelligence platform for ocean freight pricing), looks at some of the crucial aspects in supplier negotiation.
Supplier negotiation could commence from the time that initial contact (communication) is made with the supplier, such as carriers, freight forwarders, warehouses, etc. involved in the supply chain process, until the actual signing of the contract. Therefore, it is imperative to plan and execute supplier negotiation efficiently.
Planning and preparation
1. The first step towards efficient supplier negotiation is to set priorities in terms of:
– Your organisation’s goals in terms of what you would like to achieve
– The key issues and pressure points being faced
– Which suppliers you would like to work with, as not all suppliers share the same mindset, ethics, work culture, etc. as is the case in your organisation
– The type and length of relationship that you want with the supplier: for example, are you looking for a short- or long-term contract with a carrier or are you looking for a global supplier on a multi-year partnership to drive supply chain optimisation across various logistics services?
2. The next step would be to understand, in detail, the capabilities of the potential suppliers as well as more about their processes, such as:
– Their position in your current market: for example, how many routes does the supplier offer services on?
– Is the supplier stronger than you in terms of market standing: for example, some BCOs may not want to approach the top three shipping lines because they may be intimidated by the size of the carriers. This is of importance to establish whether you have any leverage over your supplier
– You may also consider using freight benchmarking tools to become more aware of the market
3. Drum up an elite team for the supplier negotiation. This is very important as these are the people that can make it happen, thus they need to have a good balance of:
– Negotiation experience
– Negotiation skills
– The ability to perform quick analyses of current and previous freight market conditions, market volatility, volume, etc.
– The authority to negotiate and finalise negotiations
– The experience and expertise to take a holistic view to avoid sub-optimisation: driving down costs on certain services could inflict a higher cost increase somewhere else in the supply chain
4. Develop strategies and tactics which must be discussed internally with your team:
– Work on a strategy with which you secure maximum advantage from the deal: for example, if you hold the upper hand in terms of the volume that you can offer to carriers, then your strategy should be to leverage that advantage but not to the extent that you scare away suppliers
– If your volume is considered medium to low, then you may try and work on a less aggressive approach, as not everything depends on price alone. Carriers’ schedules and service reliability are just as important
– Before setting any aggressive strategy, always identify a Plan B if your first approach does not work. For some routes, you may be facing a monopoly carrier in which case you will be on the backfoot
No matter how well you have planned and how good your team is, the success of the deal will depend on how you execute your plan and use the prepared information:
5. One of the key aspects of good execution is to have rehearsed your pitch / discussion points. It is also of utmost importance that you have a ‘point man’ to spearhead the negotiations. In a negotiation with carriers, there may be certain volume, route or competition information that you may need to be selective in sharing. Ensure that your entire team is aware of these points and that the team leader should decide which information to share and when.
6. At the negotiations table, never accept the first offer and remember to test the waters to see how far you can push your suppliers and to assess their reactions at each stage. Perhaps have someone on your team to only perform these assessments and to gauge position.
7. In certain cases, letting carriers know who their competition is may also trigger some positive reactions from them, but it could also just as easily go the other way if the carrier you are playing hardball with knows their opponent’s weakness. Thus, you need to be very alert at the negotiations table and know how to steer the negotiation process.
8. Where you feel your volume on a certain route may not be that big, you may make good use of rate, lane and benchmarking information. Try to leverage this knowledge when seeking concessions on rates. This way you remain fair and can seek some concessions from carriers on other routes.
9. It goes without saying that you need to use different strategies and styles of negotiation with different carriers. For a long-term relationship with a carrier it is important that the results of your negotiation are cost-effective, durable and satisfy both parties. Remember that shipping is a two-way street.
10. Avoid discussing opinions and, whenever possible, try to have data available to obtain objective perspective into the negotiation. It is easier to sway the conversation in your direction if you have data to endorse your argument.
In conclusion, a proper supplier negotiation involves effective and clear planning, meticulous preparation of the requirements and a clinical execution of the plan. With proper planning and preparation, you may find that everything is negotiable: the ones that will get the deal are the ones that are able to bargain and execute the plan effectively with hard facts.