Procurement 101Keep Your Eyes on What You Buy: Part 2 – The Art of Negotiation
After our last post about the different types of purchasing, we thought it might be helpful to go into more detail about some of the key factors in negotiations that contribute to making the process more efficient and effective. There are a number of elements that are essential to successful negotiations, including quality, price, delivery and payment, along with a willingness to consider each of these factors when making a decision.
While most people reflexively consider price to be a sole negotiation point, negotiation around many different elements can play an important role in getting the right products at the right time, for the right price. Important to note, the art of negotiation is usually required in direct purchasing.
While quality might not be your top concern when buying say, office supplies, it is certainly something that’s important when you are purchasing parts for manufacturing, or items for resale. A promised level of quality that is negotiated (or not negotiated) with a supplier can make or break a business, and can create real financial challenges for your company. Consistency is key, and it’s important that variations in quality are levelled out so that you can meet the expectations of quality that you set with your customers (imagine if the vegetables in your local grocery were sometimes great and sometimes terrible! The expectation of quality produce is ruined by inconsistency.). Negotiating on this point is important to ensure that you minimize or lose the risk of quality variance. Be open with your suppliers about your needs and establish up front that this is something important to you.
Delivery terms tend to be one of the afterthoughts of negotiations, but for seasonal products, or perhaps, during critical times of the year, this can really be a game changer. A great example of a dependency on delivery is the holiday season. In the run-up to the Christmas holidays, timing of deliveries can be extremely important, and negotiating for guaranteed dates, or priority status (i.e. you receive it before another company does) can be the difference between being in the black or being in the red. Imagine if your shipment of Christmas lights to sell only arrived on December 16th, instead of in October, ready to hit the shelves? Not negotiating for these important dates or delivery methods can result in held inventory and lost revenue.
Net 30. Net 10. Pay immediately. We talk a lot about payment terms in procurement, but how often do you think about the impact they might have on making the best possible purchase? Buyers should always be thinking about advanced options and better terms, not just focusing on unit price or volume discounts. When looking at payment terms, it is important to point out that sometimes you can use cash or advance payments to obtain very valuable benefits from the supplier. In some cases, you can still benefit even if you borrow the money from the bank. For example, you can borrow the money at 5% interest, and in return get from the supplier 10% discount for advance payment – but this is usually used when you trust this supplier enough.
What if you are able to secure a cash price vs. an instalment price? Paying cash up front or negotiating terms that are favourable to the operating conditions of your business can save you from financial burdens in the long run. Can you be flexible on your terms in order to achieve a better price?
When most people thing about negotiating, price is the number one (and often the only) element that they consider. While it’s certainly the most obvious, and the most identifiable way to gain savings, it’s important to make sure that you don’t sacrifice quality, delivery or payment terms in order to achieve a better financial scenario. You must fully consider all of the elements to know whether price savings are in fact, savings at all.
So there you have it – the four important elements to negotiating for direct purchases. It is easy to overlook some of these elements, negotiating for price alone, but it is important to look at what could be gained by different payment terms, or quality improvements (does your bottom line improve? decrease?). Buyers often tend to compromise on these other elements in order to recognize immediate and tangible savings, but if you do that math, what seems like a great deal may in fact not be the best price per unit, miss quality standards, or be delivered too late in your selling window to become a profitable investment.
This is the second in our series of posts about keeping your eyes on what you buy. Next blog posting, we’ll talk about measuring efficiency. You can also read our previous post: Types of Purchasing.
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