Calling a Supplier’s Bluff

By Omid Ghamami

6 questions to determine how much they need (or don’t need) your business

Walking away from a negotiation is an often misunderstood tactic. Far from being a spur-of-the-moment decision or a method of dealing with heated emotions, it can actually be a strategy. When used correctly, it can enhance results without negatively impacting business relations.

Quite simply, to walk from the negotiations means that one or both sides is given time to reconsider their positions, with possibly significant consequences in the event progress is not made. The intent to walk should always be handled professionally; both sides should state their concerns, how they would like to see the situation rectified, why these issues are important to them, the logic behind these requirements, and the actions to be taken in the event no resolution is reached.

Often times, a supplier threatens to walk away if certain conditions are not met. This leaves the supply management professional unclear if the supplier is indeed serious or is using a clever negotiation ploy. As such, important measures should be taken before every negotiation to best prepare the purchasing professional.

When engaging in a pre-negotiation meeting with a supplier, six questions can provide key pieces of information to determine their level of need for the business — and, therefore, their ability to walk. If necessary, a non-disclosure agreement may also be signed by both parties to ensure confidentiality.

Question 1:

What percentage of your business will be coming from our firm with this proposed contract value?

How to interpret the response:

The intent of this question is to determine how important the business is to the supplier from a revenue perspective. The interpretation of the answer is very industry-specific. For some firms, even single-digit percentages are significant. If the organization is a conglomerate, or if its division is a separate financial entity, the focus should shift to the percentage of divisional revenue which the contract in question would represent. Concerns of detrimental reliance might come about if the percentage is too high (greater than 35% is a good rule of thumb). In such cases, the legal department should be consulted before contracting with this supplier.

Question 2:

Relative to your other customers, what is our organization’s expenditure ranking with this proposed contract value?

Calling Supplier's Bluff

How to interpret the response:

The key here is to determine how your organization ranks compared with the supplier’s other customers at this level of proposed business. The importance behind this question is that the purchasing professional might find that, despite being a very small percentage of the supplier’s business, they are one of their top customers. Again, this should be assessed at the divisional level if it is a separate financial entity. Ranking in the top 10 is considered positive, and a ranking in the top five generally indicates a business opportunity the supplier likely cannot afford to walk away from.

Question 3:

Are you currently operating at full capacity?

How to interpret the response:

Another way to ask this question is, if the supplier walks away, will it be easy to fill the demand elsewhere? If they are operating at less than full capacity, they stand to significantly benefit from your business. On the other hand, if they are operating at full capacity and have other customers vying for the business, they might be able to walk away without consequence.

Question 4:

Are you doing business in any capacity with other divisions of our organization?

How to interpret the response:

Due to enterprise purchasing system limitations in large organizations, a purchasing professional might be unable to confirm if the supplier in question is already doing business with other divisions, or the extent to which they are. If this is the case, it is acceptable to verify this with the supplier, positioning it as a validation of data gathered by the purchasing agent. If the supplier is not doing business with any other division in your firm, and stands to lose your organization as a customer entirely, this weakens their ability to walk from the deal.

Question 5:

If an agreement was reached, are there any target dates for placing the first order?

How to Interpret the Response:

This question affords the opportunity for the supplier to disclose whether or not they would like to book the revenue by a particular date. Their level of desire should be evident; the more emphatic the answer, the less likely a walk-away. (This is especially true if a supplier is operating at less than full capacity.)

Question 6:

Are there any industry segments or new markets for which you would like us to use this contract as a gateway?

How to Interpret the Response:

This question ascertains whether or not the supplier wants to do business with your organization not only for the inherent value it presents, but also as a means to break into a new industry segment — as a foot in the door, so to speak. If the supplier indicates this is indeed their intention, ask clarifying questions to gauge the magnitude. The greater the opportunity, the less likely it is that the supplier will walk away from the business.

When assessing the big picture painted by these questions, points can be assigned to each category as an indicator of supplier negotiating strength. The purchasing professional should then be able to look at this trend data and make an assessment of the supplier’s ability to walk away based on what is at stake. Once this pre-work is done, any potential walk-away situation that arises with that supplier can be handled with confidence and resolve.

Reprinted With the Permission of the Institute For Supply Management

How to Achieve a Mutually Beneficial Outcome Using Strategic Concession Management

By Omid Ghamami

The notion of “splitting the pie down the middle” is, in fact, a lose/lose proposition during a negotiation. Why? Because neither side truly achieves its objectives.

For supply management professionals, the key to reaching a true win/win outcome is to understand what each party wants from the negotiation and have a supporting process in place to achieve those goals without sacrificing total-cost objectives. Doing this requires a methodology for gathering the necessary information, as well as a corresponding framework for analyzing the results and making decisions.

Essential Preparation Tips

 The most critical — and often overlooked — part of a negotiation is the prenegotiation session. This is when the most important communication happens, expectations are set and the foundation for a successful negotiation is established.

Use this opportunity to ask the supplier what it needs to gain from the negotiation to consider it a success. Ideally, this should be an express and separate agenda item addressed during the first half of the meeting to demonstrate its importance.

Through completion of this agenda item, you can master a lost art in negotiation: effective listening. People are far more apt to agree to something if they feel their position on the topic has been heard, understood and internalized. Heeding this aspect of human behavior plays a major role in successful negotiation.

Ask questions such as, “How do you define success for this deal?” or “What will it take for you to feel good about the negotiation outcome?” Don’t assume you know the answer; expect to be surprised. The most important part of this exercise is active listening, as the supplier needs to feel it has been heard. Above all, don’t interrupt the supplier, don’t express disagreement (verbally or nonverbally) and don’t invalidate what is being said. Keep in mind that listening to the supplier’s needs and requirements doesn’t obligate you to fulfill them. Also, be sure to document the core components of what the supplier is saying as needs and requirements are conveyed.

Once the supplier has answered the question to your satisfaction, “play back” what you think the supplier said, in your own words. This clearly shows the supplier that its position has been heard. When playing back what was heard, reference the notes you took. This demonstrates you paid attention to the details.

Another benefit of this exercise is that it gives you a punch list of concessionary items you heard and can reference during the negotiation. For instance, if the supplier places significant value on early payment, payments before the end of key fiscal periods or being able to use the purchasing company’s name in advertisements, you might be able to offer these concessions as they might be of little cost to your company, yet offer tremendous value to the supplier.

With this data in hand, you can develop a strategic methodology for concession management that optimizes win/win and total-cost objectives. This process entails revisiting and categorizing the list of supplier success criteria that was developed during the supplier prenegotiation session. These criteria are then assessed to determine which are of the greatest benefit for negotiation concessions.

A cardinal rule in negotiation is that no concession should be made without receiving something of value in return. The following example methodology and format may be used to assess these potential concessions for use in actual negotiations:

As this matrix demonstrates, relative values are assigned to total cost impact of the criteria, as well as perceived supplier value for each item. By subtracting total cost impact from perceived supplier value, a net concession value can be defined. Items with high net-concession values offer you the greatest return during a negotiation. These concessions should then be mapped back to key negotiating objectives and used to obtain success with the most difficult negotiation items.

Not all supplier success criteria should be fulfilled. For example, in the matrix above, you might decide only to use those areas with net concession values of 2.5 or greater. Ranking the success criteria by net concession value lets you draw a line that defines what success criteria will be used as a negotiation concession (above the line) and what success criteria will not (below the line).

Using this methodology serves three purposes: 1) the supplier will be more inclined to move from its original negotiating position, 2) you gain an improved understanding of the supplier’s needs and requirements, and 3) you have a ranked list of powerful net value concessionary items you can use attain the most difficult total-cost objectives during the negotiation.

But most important, this methodology sets the stage for truly win/win negotiations. In the end, the supplier achieves its key success criteria, and you’re better able to achieve your company’s desired total-cost objectives.