Q: How should I respond to ‘take it or leave it’ price increase demands from our raw material suppliers?
A: If you have alternatives, just say “no”. If you don’t, then more subtlety is needed!
Most of these demands will be justified by “prices are based on costs” mathematics. However, such “reasonable” explanations often conceal suppliers’ true motives. Not all their customers will bear the pain. Are you taking the pain in order that the supplier can favour other customers? Are suppliers really under pressure or are they just trying it on to see what they can get away with? Put more faith in your own information, logic and opinions than in the “facts” given to you by suppliers. Information and planning gives power. Negotiate with this new power.
Start with a “feelings commentary”. For example: “Because of our long relationship I am disappointed that you have not consulted us about this. I feel you are delivering an ultimatum.” Get thinking time and put the supplier on the defensive. Avoid responding immediately to the demand until you have a better understanding of its motives. This may reveal where you can attack its argument.
Now probe. For example: “I need to hear more about the background to this before I consider what action to take.” Probing might reveal what the real problem is. Make the supplier realise that the demanded increase is only one means to an end and is unacceptable. Discuss other possible solutions and decide what you would like to get out of the discussion to improve the deal, or things that you would want it to give in exchange for a higher price should you agree to pay all or some of it. If you cannot reach conclusions at this stage, schedule another meeting but only if current prices are in force for the time being and deliveries are honoured.
If you eventually have to accept their demand, don’t simply agree. Aim to reduce the increase, defer it, get some concessions in return – or all three – and obtain the supplier’s guarantee that it will supply you for the immediate future.
Lastly, say you’ll now take actions to prevent your company being held hostage by such actions in future. Subsequently, examine each critical purchase supplier by supplier and prepare responses and contingency plans should they try for more increases in future.
Q: Too often, and especially with capital expenditure items, we confront a fait accompli. Technical specialists have already discussed things with favoured suppliers, and then instruct my buyers to let the contract. How should we deal with these situations?
A: Let’s assume these are significant purchases and your company is not committed contractually. If so, there is time to get control. First, check what has happened. Have buying signals been given? How much time and knowledge has the supplier contributed to developing the specification? Why have alternatives been ignored?
Next, clarify what is being bought by diplomatically challenging the need. Too often we specify things in terms of what we want to buy (for example, sugar) rather than what is needed (sweetening). Now identify who can potentially meet that need. This includes sources that have been used before and those that haven’t. Identify the roadblocks that prevent consideration of unfamiliar sources and how to overcome resistance to them. Distinguish between “hard money” factors such as cost, and “soft money” considerations such as reliability. The latter often figure too largely in rejecting untried sources, but putting a monetary value on them increases objectivity about supplier acceptability.
This may reveal that you have more choices than initially thought, so you can invite offers from the market. But don’t automatically seek bids. Parallel negotiations may be more appropriate if the need cannot be defined unambiguously. However, if there is only one choice, use the tactics for dealing with monopoly suppliers. Extol your virtues as an attractive customer and seek additional value that can be obtained for the probably non-negotiable cost.
Things may not be as straightforward as the above implies if the requisitioner feels it is their money being spent and that procurement should not interfere. Use psychology and emphasise that, whereas it is their authority to make a business decision to use budgeted money to meet a need, it is your authority to decide which source is best placed to satisfy it.
Doing all of the above has the potential to open your colleagues’ eyes to the commercial exposure that exists in supplier discussions and, with your earlier involvement in future, eliminate “fait accompli” from the vocabulary.
Dr Richard Russill (www.russill.com) is a business adviser and writer, specialising in supply, cost and relationship management
