Implementing an Enhanced Supplier Negotiation Process
The Problem
Faced with the need to cut costs, increase product innovation, and improve overall responsiveness to customer demands, a large manufacturing company undertook a strategic sourcing initiative aimed at consolidating its supply base, creating cross-divisional commodity teams, putting its preferred suppliers on global contracts, and instituting standard metrics against which to measure supplier performance. However, in doing so, the company soon encountered several challenges.
Barriers to Successful Implementation of the Company’s Strategic Sourcing Initiative
The company’s engineers had stronger relationships with suppliers than did members of the company’s buying community.
Suppliers were skilled at playing one division off against another.
The company rarely held suppliers accountable for commitments made.
With few exceptions, there was no way to measure whether an agreement with a supplier was competitive.
Negotiators complained of having no leverage in negotiations, because engineers had designed specific supplier component parts into product specs.
Negotiators prioritized price, often at the expense of more important issues, such as on-time delivery, quality standards, and service.
Recognizing that these challenges stemmed from an inability to negotiate effectively with suppliers, the corporate sourcing and procurement group contacted Vantage Partners. Vantage, together with a core group of sourcing executives, engaged in a rapid diagnostic analysis to better understand the barriers to implementing new sourcing approaches.
Having identified the root causes of many of the company’s problems, Vantage and members of the company’s sourcing organization set out to build enhanced supplier negotiation and relationship management capabilities throughout the company. The Vantage-led team defined a set of critical negotiation activities: setting clearly defined goals for different types of negotiations, conducting research on benchmarks and other data to help inform negotiation strategy, engaging in mid-course deal reviews during global contract negotiations, obtaining sign-off from key internal stakeholders, and conducting formal knowledge transfer of contract terms and provisions from the negotiating team to the supplier manager and others. In addition, Vantage and the client team clarified roles and responsibilities of individuals throughout the organization — from corporate sourcing to finance to the business units — to ensure that everyone impacted by the new, formalized negotiation process clearly understood what was expected of them, and how they should be involved.
Root Causes of the Company’s Challenges
The company’s development and manufacturing processes were divorced from its sourcing and procurement processes, leading to uncontrolled communication and uncoordinated interaction with suppliers.
Through strong personal relationships with the company’s engineers, suppliers often had access to sensitive information that gave them leverage during negotiations.
The company rarely maintained a single point of contact with suppliers, often sending mixed or inconsistent messages.
The company had never imposed consequences (e.g., transitioning business to an alternative source) on suppliers for unmet commitments.
Negotiators rarely had benchmark data against which to measure the competitiveness of suppliers, prices, or contract terms.
Negotiators did not adequately consult with R&D or other business stakeholders during the negotiation preparation process, and as a result did not have sufficient information when engaging in negotiations with suppliers.
Negotiation training and coaching workshops were conducted to equip all individuals involved in interacting with suppliers with the skills to effectively prepare for and engage in contract negotiations, as well as ongoing (often informal) negotiations over design changes, individual purchase orders, changes to scope, and the like. In these workshops, Vantage provided participants with a standard framework for identifying and prioritizing among interests (theirs and the suppliers), developing creative deal structures and terms (creatively addressing price and cost issues, as well as other important priorities related to quality, efficiency, service levels, etc.), exploring alternative suppliers, and applying objective standards to assess the competitiveness of agreements. The workshops were highly interactive and made extensive use of simulations and role-plays to build enhanced skills in the practical application of new negotiation tools and strategies.
Vantage also equipped participants with a common electronic workspace and toolkit using its Partnersmith® software. The workspace included tools for decision-making and developing multi-party alignment to coordinate negotiation activities across groups, negotiation preparation templates, and a knowledge repository of information about the company’s suppliers. In addition, the workspace enabled negotiators to index and archive critical information throughout the negotiation process. This information could then be accessed during future negotiations with the same supplier, and became a shared resource of benchmarks and best practices that could be shared among negotiation teams across the company.
To enable management to more effectively advise negotiation teams and gain visibility into the status of negotiations, Vantage and key sourcing executives established a deal review process. The reviews helped management to monitor compliance with the new negotiation process, ensured that negotiators met critical contract benchmarks, and provided a forum for senior management to share advice with negotiators on how to deal with complex issues and weigh complex trade-offs.
Finally, to ensure that negotiated savings and other benefits would be sustainable, Vantage trained a core group of negotiators to serve as coaches and change agents throughout the organization. Vantage equipped this cadre of individuals with the tools, skills, and techniques to continue to drive improvements in supplier negotiation throughout the company without continued reliance on assistance from Vantage. Vantage also helped this group build special expertise in working together with suppliers to identify and exploit new sources of value over time.
Overview of Results Achieved
A significant reduction in the time required to prepare for and complete contract negotiations with suppliers
Overall supply chain cost reduction of 10%
Competitive global contract terms including:
Average annual price reductions of 10-15%
Quality and delivery penalties representing, on average, 10% of order price
In many cases, no materials liability for standard items
Larger window for canceling orders at zero liability
Extended warranty coverage and greater reimbursement provisions
The acceptance of exclusivity provisions by suppliers
Identification of more than one source for several key commodities
Reduced variability in contract terms, prices, and supplier performance as a result of greater alignment and compliance with a standard negotiation and supplier relationship management process
Stronger relationships with key suppliers resulting in part from mutually agreed to criteria for assessing supplier performance, improved communication, and greater ability to spot and jointly address problems as they arise
Greater innovation with many of its suppliers as a consequence of more frequent and open communication, and shared incentive to find new, more efficient ways of doing things
Increased credibility for the corporate sourcing group throughout the organization
Improved internal relationships between the sourcing group and business units resulting in the streamlining of various steps in the sourcing process, more efficient decision-making, and expanded opportunities to leverage spend and reduce overall costs
A significant reduction in the time required to prepare for and complete contract negotiations with suppliers