Negotiation in the Purchasing Process

“Negotiation in the purchasing process covers the period from

when the first communication is made between the
purchasing buyer and the supplier through to the final signing
of the contract.”

Negotiation is an important part of the role of the purchasing

professional. It is a skill that is learned, and training can help
purchasing staff in understanding what is needed when
negotiating with vendors.

Negotiation can be as simple as trying to obtain a discount on a

case of safety gloves through to the complexities of major capital
purchases.

The negotiation process has become a more important sector in

the supply chain process as companies look to reduce their
expenditure while increasing their purchasing power. This means
that purchasing professionals have to negotiate increasingly
better rates with suppliers while maintaining or increasing
quality and service.

 Process of Negotiation:

The eight steps process of negotiation is:

• Setting objectives when negotiating with suppliers

1
 • Understand your supplier

• Developing a negotiating strategy

• Negotiating team

• Conduct negotiations

• Negotiating on price

• Running checks on your supplier

• Drawing up a contract for your purchase

A. Setting objectives when negotiating with suppliers

There's a range of key considerations you need to bear in mind
when setting objectives for purchase negotiations. These might
include:

 Price
 value for money
 delivery
 payment terms
 after-sales service and maintenance arrangements
 quality
 lifetime costs of a product or service
 whether or not the product or service is essential to the business

GUIDE
B. Understand your supplier: By conducting some basic
research into a potential supplier one can work out how
valuable his business is to them. The bargaining power

2
 increases in direct proportion to the potential supplier's need
for your business.

If the supplier runs a near monopoly it is likely to have the upper

hand because:

 it has enough business already

 There are only few other sources to select from
However, if the supplier has a number of competitors - or is a new
entrant to a particular market – the purchaser will be in a much
stronger position. Also, the supplier may already be offering good
deals in a bid to increase its market share.

Alternatively, a supplier may need your business to get rid of old

stock or to fill spare production capacity. Try to find out as much
as you can about the state of its order book.

If you're a small supplier's main customer, the leverage in

negotiations may be considerable. But tread carefully – Don’t
push too far otherwise it may erode goodwill, which could
damage the services. There's also the risk they could drop the
product you require, or even go out of business.

Try to identify the key staff in the supplier's business to negotiate

with. There's no point trying to squeeze concessions out of a
junior member of staff who doesn't have the authority to grant
them.

3
Negotiating at the right time can be an important strategic tool.
For example, a salesperson may need to meet a monthly sales
quota.

C. Developing a negotiating strategy: It's essential to plan the

strategy in writing before beginning negotiations. This will
help one to set clear goals. Start by defining what the priorities
are, such as low price, high specification goods or a specific
delivery schedule.

Write down your negotiating strengths and how you might use
them to get the concessions you require. Consider ways of
defending the weaker parts of your argument and negating the
supplier's main strengths.

D. Negotiating team: It is also essential to get your negotiating

team right. Make sure it has skills in all the necessary areas.

Make sure each member of the team is familiar with the

negotiating strategy. The more confident they sound about what
they want, the more likely they are to get it.

E. Conduct negotiations: Make sure both sides are satisfied with

what is being negotiated. Get the supplier to restate any
discounts offered and payment terms. Keep these key bits of
information to hand.

4
If you have enough bargaining power, insist on using your own
terms and conditions of purchase.

For important or large purchases suggest setting out the key

points of the deal in writing.

Don't allow pressure to force you into agreeing to a point you're

not happy with. Ask for a break if you need one. Each time you
agree to a point, clarify that you've understood it correctly and
write it down.

In some trades, suppliers set artificially high prices that are then
permanently discounted. If this scenario applies to your business
then ensure that any concessions the supplier gives are real -
negotiate discounts that go beyond the standard level.

F. Negotiating on price: Never accept the first offer - make a

low counter-offer in return. The other party is likely to come
back with a revised figure. Always ask what else they can
include at the given price.
If the price is suspiciously low, ask yourself why. Are the goods of
sufficiently high quality? Do they really offer value for money?
What will after-sales service be like?

You can also try to make the asking price look high by exposing
any ongoing costs. Ask about repair costs, consumables and other
expenses. If the current state of the supplier's market means
prices are falling, point this out.
5
If the price includes features you don't need, try to lower it by
asking to remove those features from the deal. Use your
bargaining power to get a good deal. For example, if you're a big
customer of the supplier, you could ask for bulk discounts.

Even if you are a supplier's main customer and enjoy most of the
bargaining power, forcing it to meet prices at which it could go
out of business won't protect your reputation as a highly valued
customer. The supplier will soon look for other customers and is
likely to feel resentful.

G. Running checks on supplier: Before signing a contract with

any supplier it's essential to carry out due diligence to check it
can fulfill the agreement.
You should credit check potential suppliers to ensure they have
the cash flow to deliver what you want, when you need it.
This is especially important if you're entering into a long-term
contract..

The supplier will probably also run checks on you to ensure you
have the means to pay for its goods or services.

It's also a good idea to get references for the supplier from other

customers. The supplier should be happy to put you in touch with
some of its previous clients. If not, ask yourself what he is trying
to hide. However, remember that he's unlikely to put you in touch
with a dissatisfied customer.

6
 H. Drawing up a contract for your purchase: Once all the points
have been negotiated and a deal has been agreed to it's best to
get a written contract drawn up and signed by both parties.
Although verbal contracts are acceptable and legally binding,
they're very hard to rely on in court.
Both parties should agree on what the contract will cover.
Typically it will include:

 details of price, payment terms and delivery schedule

 a clause stating the supplier's right to ownership of the goods
until they're fully paid for
 a clause limiting the seller's contractual liability - taking into
account the purchaser's statutory rights
Aim to get a contract that protects your interests and that
shifts legal responsibility for any problems to the supplier.
Notify the supplier in writing how you intend to use its supplies
and ask for written confirmation that what it is selling you is
suitable.
Make sure that the contract covers the level of after-sales
service you require.
One should also consider including any dispute resolution or exit
procedures that must be followed if either party is dissatisfied
with the relationship or wants to end the contract.

7
Four Principles when negotiating with suppliers

1. Have Choices before you negotiate with suppliers.

2. Understand the Price Quoted by the Supplier.

3. Understand your positioning with the supplier.

4. Resist Price Increases

How To be A Winner In Negotiations As A Buyer

1. Sell Yourself as Someone Who Will Give Them a Lot of Business

2. Think Outside of the Price Box

3. Talk to Multiple Suppliers

4. Offer Larger Deposits for a Bigger Discount

5. Don’t Accept the First Offer

6. Consider Transferring all Your Business to One Supplier

7. Be Someone Suppliers Want to Do Business With