When Does Negotiation Influence Begin?

Waiting for a negotiation to start to begin exerting your influence may be waiting too long. There are three methods of influencing negotiation outcomes early.

Method A - Prevent Backdoor Selling

A timeless negotiation principle is that the less certainty of earning your business that a supplier has, the more leverage you'll have. So, it is important that for large purchases, you maximize your leverage by ensuring that suppliers - no matter how hard they probe - do not get clues that their proposals are acceptable. While purchasing professionals are usually adept at maintaining uncertainty, internal customers are not.
Therefore, the purchasing department should be the first entity in your organization to contact suppliers when a purchase cost is expected to exceed a certain amount. And if someone argues that the cost can't be known without contacting suppliers, then the purchasing department should be consulted when it's reasonable to believe that the purchase might approach the limit.

Method B - Get Involved In Product Design

One of the toughest negotiation scenarios is a sole source situation, where there is only one supplier who can provide a product/service. Sadly, most sole source situations are self-inflicted by buying organizations who engage suppliers in their product design process without purchasing department involvement. Those suppliers creatively lock themselves into long-term business characterized by large annual price increases.

The solution is having a purchasing professional on every design team. This person must ensure that future supplier competition is considered and part/material standardization is encouraged in design decisions.

Getting the purchasing department involved in design can be tough in many organizations. It requires top management support. To get that support, show how sole source situations have resulted in continual cost increases for previously designed products.

Method C - Get Cost Breakdowns With Supplier Proposals

A cost breakdown is an itemized list of each cost component that comprises a supplier's price and its percentage of that price. Such cost components include each major material/part, labor, overhead, and profit.
If you've ever tried to obtain a cost breakdown from a supplier you're already doing business with, you know that it's difficult to persuade a supplier to provide one. That's because the more certainty of getting your business that a supplier has, the less leverage you have. Suppliers feel that sharing a cost breakdown will give you a negotiating advantage and avoid doing so if they can refuse and still get your business.

So it's important to get cost breakdowns when obtaining proposals from suppliers. They are aggressively competing for your business and have little certainty about whether or not they will earn it. Therefore, they are more likely to provide a cost breakdown at this earlier stage. Having a cost breakdown gives you more negotiating leverage for several reasons.

First, you'll know what percentage of the price is represented by each cost driver. For example, if you learn that aluminum only comprises 10% of the cost of a product, the supplier will have a hard time justifying a high price due to inflation in the aluminum market.

Second, you can engage the supplier in joint cost reduction discussions when you know what the costs are. Perhaps your supplier is paying too much for goods or services that get factored into your pricing. By helping the supplier identify cost inefficiencies, you can achieve a win-win negotiating result: the supplier's costs go down, your price goes down, and both companies end up being more profitable at the end of the day.