Understanding Your Supplier’s Cost Components Can Give You a Negotiation Advantage

Understanding Your Supplier’s Cost Components Can Give You a Negotiation Advantage

Can understanding a supplier’s cost components give your company a negotiation advantage?

Based on my experience and the experience of other procurement professionals the answer is yes.

If you can purchase the same product or service at essentially the same price doesn’t that mean that you are getting the lowest price possible?

The likely response if you ask that question is yes, but I would recommend that you delve deeper.

I believe that if you can foster greater collaboration with your key suppliers that you and your suppliers can win.

If your company wanted to lower the cost of a basic component that was currently sourced from multiple suppliers where would you start?

Naturally, you could run an RFP and invite all the incumbents. This would likely lead to some price compression. Your suppliers would realize that they were in competition and would work to lower their price if they wanted to retain their share of the business.

I believe that if you take a slightly different approach that you can realize greater savings.

If two suppliers are providing essentially the same price for this component, can you draw the conclusion that their direct and indirect costs are similar?

It would be a significant coincidence if their costs were similar.

Cost accountants can use a variety of methods to allocate costs to production. I am not going to debate the merits of one approach over another.

What I am suggesting is that one of your suppliers will have lower variable costs.

This could be because the supplier has a process that is more efficient with less waste. The cost of direct labor might be lower due to location. They may have lower distribution costs. They may have greater purchasing power.

Some of their lower variable costs might be offset by higher fixed costs due to investment in newer equipment. They might operate on a lower margin.

Whatever way they determine their price to you, it will be to your advantage to work with the supplier with the lowest variable costs.

The supplier with the lower variable cost will increase profits with higher volume and that increase in profits may be very significant for them. If you offer them greater volume in return for a price concession, then both companies win.

You may be thinking that they may not be inclined to share their costs with you. You may find that this is the case with some suppliers. However, if a supplier understands that you are seeking greater collaboration so you can both win, they are much more likely to share information.

If we go back to the RFP and specify that the winning bid will capture all the business (or at least 80%) then you can start the collaboration process with the lowest two or three bids.

Gaining all the business or a significant majority of the business will be a strong incentive for the selected suppliers to seek ways to collaborate with you.

There are other factors that I have written about in past posts that will influence the supplier’s willingness to share information and foster collaboration.

Among them is how important your business is to the supplier can be a key factor.

Knowledge is power in negotiations. Every negotiation is a process and if you can get a lower price and your supplier can generate larger profits based on greater volume, you both win.

Each supplier relationship should evolve to the benefit of each party. Start today and vow to change at least one relationship this month for the better.

Action Step:  Every organization wants to increase the efficiency and effectiveness of their procurement group. If you are uncertain where to start, a procurement professional like myself can provide guidance and expertise to help your organization achieve the results you want. If you would like to explore this topic in greater detail, please contact me.

If you want to explore a purchasing or procurement topic in greater detail, I invite you to request 30-minute discovery conversation. In my experience the next step will be apparent at the end of the call. I never assume that my recommendations will be right for everyone, so don’t expect a sales pitch. You can reach me at (973) 718-7071 x875. The call will be forwarded to my mobile phone if I am not in my office, which is pretty likely.

Organizations of all sizes are reducing costs and increasing efficiency, without changing the way they conduct business. If you would like to know how, simply give me a call or send me an email with your contact information and the best time to reach you.

 

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Until Next Time, I Wish You Great Success in Your Business and in Your Life

Mike Jeffries