May 7, 2021: Written by Mark Hudson
Summary
In the global retail landscape the balance of power has shifted from buyers to suppliers. “Retailers that have gotten into a weak position need to tackle the problem strategically,” says Mark Hudson, Vice President of Marketing at CBX Software. “They should consider the following actions to bolster vendor negotiation and reduce suppliers’ prices to a rate that is feasible for both organizations.”
Bring new value to the supplier
This is the easiest approach. Retailers can provide new value in several ways—for example, by serving as a gateway to new markets or introducing new ways to collaborate more effectively.
Change how they buy
Retailers can consolidate their purchase orders, rethink purchase bundles, or decrease purchase volume.
Increase the vendor base
Incorporating more vendor partners in your network can yield significant benefits beyond supplier negotiation for your company, including more innovation and improved procurement quality. But while the benefits are clear, it’s not always obvious or easy for retail enterprises to know how they can source new vendors, especially in different countries.
Play hardball
This is a high risk option and not recommended, but as a last resort, retailers can cancel current orders or refuse future business in order to strengthen their cost negotiation. Whatever option the buyers choose, they need to clearly understand the ramifications, work on it across functions, and think analytically and outside the box.
In the retail industry the balance of power has dramatically shifted over the last several years from buyers to suppliers. A classic example comes from the railway industry. In 1900 North America had 35 suppliers of cast rail wheels; railway builders could pick and choose among them. A century later no one looking to build a railroad had this luxury, as only two suppliers remained. Today there is just one, which means that railroad builders have no choice but to accept the supplier’s price and there is no need for supplier negotiation.
The shift has come about for various reasons, any or all of which may be in play giving the complexity of the retail industry. In some cases suppliers have eliminated their competitors by driving down costs or larger suppliers gobbled up their smaller competitors in order to increase factory size and capacity. In others, fast-growing demand for imports has outstripped supply to such a degree that suppliers have been able to charge what they want. In still others, larger retail organizations like Walmart have consolidated demand and forced suppliers’ prices down so far that many suppliers exited the market, giving the remaining few more clout to further turn down strong supplier negotiation tactics.
Whatever the reason, companies that have gotten into a weak position with suppliers need to approach the situation strategically. They can no longer rely on hard purchasing negotiations through their procurement offices. To help with the strategic reappraisal, we’ve developed an analytic framework with four steps, in order of ascending risk for stronger supplier negotiation tactics. Companies should start by assessing whether they could help the supplier realize value in other contexts. If not, they should consider whether they could change how they buy. They should then look at expanding their supplier network. If all else fails, they must consider playing hardball, which can have a lasting impact on the relationship and is a last resort in negotiations with suppliers.
Below, we’ll dive in and look at each step in more detail
#1 Bring New Value to Your Supplier
This is the easiest way to strengthen supplier negotiations is to redefine your relationship with a powerful supplier. It can rebalance the power equation and turn a purely commercial transaction into a strategic partnership. You can provide new value in several ways. For example:
Be a gateway to new markets.
The quickest and least expensive way to redress a power imbalance is to offer the supplier a market opportunity that is too good to pass up in exchange for price concessions – the simplest way to improve cost negotiations. Finding the right carrot can take some digging. Here’s a case in point: A beverage company was facing annual price hikes from a beverage-packaging supplier. It seemed to have no way out; the supplier had patented its manufacturing process, and its pricing was lower than that of other sources.
But as it happened, the buyer was about to enter two large developing markets in which the supplier had tried but failed to gain traction. The procurement manager realized that the company could give the supplier’s products a foothold in those markets. She and her team put their heads together with the marketing team and presented the supplier with an offer that was hard to refuse: In exchange for a 10% price reduction globally, the company would use the supplier’s cans in the new markets. Thus less time on purchasing negotiations and more time spent of strategy towards an outcome that works for both sides.
Introduce new innovative ways to collaborate.
As consumers grow more demanding, retailers need to ensure products are available at the right time, through the right channel and at the right price. While it seems collaboration between retailers and suppliers has existed forever, it has become more essential for success. While today’s manufacturers and retailers are each facing significant but unique challenges, there is common goals that drives collaboration – higher sales, increased profitability, and stronger business growth.
Even if many industries have already fully understood the opportunity of an optimized collaboration, Retail is still in the early stages due to both traditional past behavior of only playing hardball for purchasing negotiations and a fear of sharing sensitive information. Indeed, the retailer-supplier relationship has long struggled with distrust from both parties acting in self-interest. Retailers and suppliers can overcome this challenge by better sharing information and truly collaborating to exceed customer expectations. At its most advanced level, they are all part of a shared system, jointly pursuing opportunities to improve margins and growth across the entire value chain to benefit the end-consumer through:
- New Product Development: Collaboration eases new product development from the marketing brief (retail) to production (supplier) all along R&D and quality processes.
- Request for proposal and tender selection:Through an effective bidding process, retailers are able to choose best suppliers for product.
- Time to market improvement:It no longer simply consists of a new product a retailer is offering but also to the retailers’ ability to adapt and adjust to the changing marketing world around them. Suppliers are fully part of this new process.
- Range and product optimization:To optimize existing formula with less costly alternative or trendy ingredients, retailers have to involve suppliers in their portfolio categorization.
- New market access:Retailers must consider multi-language and localization (multi-regulatory) issues while setting up on a new marketplace. Collaborate with suppliers at this stage is essential to enter a new place in optimal condition.
Rather than shying away from seemingly unbalanced collaborations, companies can make them work by recognizing the potential imbalance, identifying the benefits of collaboration, and developing ways to share the benefits more fairly—for example, through discounts or price increases. Some companies have established joint benefit pools, using the savings to fund cost-reduction efforts or sales-improvement programs.
Overall, strong retailer supplier collaboration will decrease the need for in-depth and time consuming negotiations with vendors resulting in less back and forth supplier negotiation.
#2 Change How You Buy
If no opportunities exist to help the supplier create new value, your next best alternative is to change your pattern of demand in order to strengthen supplier negotiation. Because this strategy can have implications for other parts of your organization, it requires close collaboration with any functions that could be affected. A company can change its demand patterns in three ways, all of which may require intensive data collection and analysis.
Consolidate purchase orders for stronger procurement negotiations.
This is the least-risky option and the easiest one to implement. It may involve little more than acting on an internal audit of procurement data.
At one aircraft manufacturer, various business units were independently purchasing components from a large supplier, which was doubling or tripling the prices it had originally quoted. The supplier was reaping gross margins of about 20%, whereas the aircraft manufacturer’s were only 10%. And deliveries were unreliable, which drove up the manufacturer’s overall costs. Individually the business units lacked the power to force a change in behavior. But the unit CEOs got together, consolidated their spending data, and went to the supplier’s top executive with a threat to suspend all purchases unless changes were made. The supplier became far more responsive, cutting prices so that its margins were also about 10% and improving the timeliness of deliveries.
Small companies that don’t order through multiple units can form purchase consortiums with other firms in their industry. In 2008 an oligopoly of four suppliers controlled the ATM market in one European country. To counterbalance the group’s power, four banks created a purchasing consortium for ATM parts and maintenance, ultimately cutting their ATM costs by 25%. To succeed, consortiums must align their members’ interests and have the right governance in place. To avoid raising antitrust issues, they should not be too powerful themselves, which means that this approach is best suited to relatively fragmented, competitive industries.
Rethink purchasing bundles to strengthen supplier negotiations.
If a company cannot create large purchasing bundles for stronger negotiation within product categories or geographies, it should consider purchasing across them. One telecom company dealing with a powerful supplier for a particular component gained price concessions by pointing out that it also bought other components from that supplier—ones it could easily obtain elsewhere. Similarly, a global chemical manufacturer accustomed to buying a key ingredient from two suppliers, one in the United States and one in Europe (and each with a monopoly in its region), announced that it was considering consolidating to a single supplier and began a qualification process to choose which one. By awarding a single global contract, it would have given the winner a toehold in the loser’s monopoly territory. Faced with the threat of competition, each supplier agreed to a 10% discount.
At other times the right strategy is to pick apart your existing bundles; this may enable you to create competition among suppliers where none previously existed. When a consumer goods company decided to renegotiate its contract with a powerful information provider that offered an integrated global product and services package, the procurement team quickly realized that it needed to differentiate between data (for which the supplier held a monopoly in some geographies) and analytic services (for which the market was generally competitive). It also decided to negotiate at a country level—enabling suppliers that could cover some but not all geographies to participate. As a result it obtained savings of 10% on data and 20% on analytics.
Decrease purchase volume as a means to bolster negotiations with suppliers.
The third way to alter demand is to shift volume away from a powerful supplier, ideally by switching to a substitute or lower-cost product. The mere threat of this can increase the supplier’s openness to negotiation—but the buyer’s organization needs to stand behind its negotiation team and be willing to revisit what it purchases. Determined to reduce IT costs, one retailer we advised determined that most of its staff members did not need to create documents—they needed only to read them. It was able to eliminate 75% of its office software licenses, replacing them with a lower-cost, read-only alternative.
#3 Increase your vendor base
Adding new suppliers to existing supplier base involves much more than scanning a series of suppliers prices. Your choice will depend on a wide range of factors such as value for money, quality, reliability and service. How you weigh the importance of these different factors will be based on your business’ priorities and supplier negotiation strategy.
A strategic approach to choosing suppliers and supplier negotiation can also help you to understand how your own potential customers weigh their purchasing decisions.
This section illustrates a step-by-step approach you can follow that should help you make the right choices when adding suppliers to your existing vendor pool. It will help you decide what if need to add suppliers to your base for stronger vendor negotiation.
- Thinking strategically when selecting suppliers
- What you should look for in a supplier
- Identifying potential suppliers
- Drawing up a shortlist of suppliers
- Choosing a supplier
- Supplier negotiation strategy
Thinking strategically when selecting suppliers
The most effective suppliers are those who offer products or services that match – or exceed – the needs of your business. So when you are looking for suppliers, it’s best to be sure of your business needs and what you want to achieve within your supplier negotiations, rather than simply paying for what suppliers want to sell you.
For example, if you want to cut down the time it takes you to serve your customers, suppliers that offer you faster delivery will rate higher than those that compete on price alone which should be a factor in your supplier negotiation strategy.
For some pointers to help you identify what you want from suppliers, see the page in this guide on what you should look for in a supplier.
The numbers game
It’s well worth examining how many suppliers you really need. Buying from a carefully targeted group could have a number of benefits over and above price negotiating with vendors:
- it will be easier to control your suppliers
- your business will become more important to them
- you may be able to make deals that give you an extra competitive advantage
For example, if you’ve got a rush job for an important customer, your suppliers will be more likely to go the extra mile if you spend $1,000 a month than if you spend $250.
However, it’s important to have a choice of sources. Buying from only one supplier can be dangerous -where do you go if they let you down, or even go out of business?
Equally, while exclusivity may spur some suppliers to offer you a better service, others may simply become complacent and drop their standards.
What you should look for in a supplier
Reliability
Remember – if they let you down, you may let your customer down.
Quality
The quality of your supplies needs to be consistent – your customers associate poor quality with you, not your suppliers.
Value for money
The lowest price is not always the best value for money. If you want reliability and quality from your suppliers, you’ll have to decide how much you’re willing to pay for your supplies and the balance you want to strike between cost, reliability, quality and service.
Strong service and clear communication
You need your suppliers to deliver on time, or to be honest and give you plenty of warning if they can’t. The best suppliers will want to talk with you regularly to find out what needs you have and how they can serve you better.
Financial security
It’s always worth making sure your supplier has sufficiently strong cash flow to deliver what you want, when you need it. A credit check will help reassure you that they won’t go out of business when you need them most.
A partnership approach
A strong relationship will benefit both sides. You want your suppliers to acknowledge how important your business is to them, so they make every effort to provide the best service possible. And you’re more likely to create this response by showing your supplier how important they are to your business.
Identifying potential suppliers
You can find suppliers through a variety of channels. It’s best to build up a shortlist of possible suppliers through a combination of sources to give you a broader base to choose from.
Recommendations
Ask friends and business acquaintances. You’re more likely to get an honest assessment of a business’ strengths and weaknesses from someone who has used its services.
Directories
If you’re looking for a supplier in your local area, it’s worth trying directories such as Yellow Pages and Thomson.
Trade associations
If your needs are specific to a particular trade or industry, there will probably be a trade association that can match you with suitable suppliers.
Business advisors
Local business-support organizations, such as chambers of commerce, can often point you in the direction of potential suppliers. You can also contact our Strategic Information Center.
Exhibitions
Exhibitions offer a great opportunity to talk with a number of potential suppliers in the same place at the same time. Before you go to an exhibition, it’s a good idea to check that the exhibitors are relevant and suitable for your business.
Trade press
Trade magazines feature advertisements from potential suppliers. You can contact our Strategic Information Center for a list of specialist trade magazines.
Drawing up a shortlist of suppliers
Once you’ve got a clear idea of what you need to buy and you’ve identified some potential suppliers, you can build a shortlist of sources that meet your needs.
When considering the firms on your shortlist, ask yourself the following questions:
- Can these suppliers deliver what you want, when you want it?
- Are they financially secure?
- How long have they been established?
- Do you know anyone who has used and can recommend them?
- Are they on any approved supplier lists from trade associations or government?
Do some research and try to slim your list down to no more than four or five candidates. It’s a waste of time for you and the potential supplier if you approach them when there’s little chance of them fulfilling your requirements.
Choosing a supplier
Once you have a manageable shortlist, you can approach the potential suppliers and ask for a written quotation and, if appropriate, a sample. It’s best to provide them with a clear brief summarizing what you require, how frequently you’ll require it and what level of business you hope to place.
Get a quotation
It’s worth asking potential suppliers to give you a firm price in writing for, say, three months. You can also ask about discounts for long-term or high-volume contracts to help with supplier negotiations.
Compare potential suppliers
When you’ve got the quotation, compare the potential suppliers’ prices in terms of what matters most to you. For example, the quality of their product or service may be most important, while their location may not matter.
Suppliers’ prices are important, but it shouldn’t be the only reason you choose a supplier. Lower prices may reflect poorer quality goods and services which, in the long run, may not be the most cost effective option. Be confident that your supplier can make a sufficient margin at the price quoted for the business to be commercially viable.
Check that the supplier you employ is the one that will be doing the work. Some suppliers may outsource work to subcontractors, in which case you should also investigate the subcontractor to determine if you are happy with this arrangement.
Wherever possible it is always a good idea to meet a potential supplier face to face and see how their business operates. Understanding how your supplier works will give you a better sense of how it can benefit your business.
And remember that your business’ reputation may be judged on the labor practices of your suppliers. It makes good business sense to consider the ethical dimensions of your supply chain.
Negotiate terms and conditions
Once you’ve settled on the suppliers you’d like to work with, you can move on to negotiating terms and conditions and drawing up a contract. See our guide on how to negotiate the right deal with suppliers.
If options for changing your company’s demand profile aren’t available, you should next explore creating a completely new supply source. Like the first two strategies, this ultimately shifts demand away from powerful suppliers, but it tackles the other side of the equation. It is most likely to be necessary in industries where price negotiations have gone so far as to drive most suppliers out of business, effectively giving the survivors a monopoly. Of course, such drastic action risks alienating your supplier completely and may change your company’s business model. It will also alter the competitive dynamics and perhaps even the structure of your supplier’s industry and your own. For these reasons it is a risky proposition, but if well executed, it can transform your prospects. There are essentially two options:
Bring in a supplier from an adjacent market.
The easiest way to create a new supplier is to bring in a competitor from an adjacent geography or industry, one that might not otherwise have entered the market. One major airline reduced its food costs and improved quality by enticing a European catering company to enter the U.S. airline-catering market, which had been controlled by two well-entrenched suppliers that were reluctant to lower prices. The new entrant had an innovative, off-premises production model that enabled it to offer higher-quality food at significantly lower prices in exchange for longer-term contracts.
Because the airline would need to give the new supplier a multiyear agreement, the procurement team shared its plans with the airline’s chief operating officer, its head of airport operations, and its head of catering. After aligning these key functions on the strategy, the airline announced that it had awarded its contract at a major U.S. hub to the new entrant. After losing that share of business, one of the established suppliers replaced its management team and took a more collaborative approach with the airline.
#4 Play Hardball
If everything else fails, canceling all your orders or excluding the suppliers from future business —may be the only answer, short of going out of business. These are truly tactics of last resort during supplier negotiations.
A global financial services firm had its back against the wall because it had to reduce costs by $3 billion. To cut IT infrastructure costs, it asked its major hardware supplier for a 10% price decrease. When the supplier refused, the firm’s chief information officer contacted the supplier’s CEO to say that all the supplier’s projects in the company were suspended, effective immediately. Within an hour the supplier was deactivated in the payment system, and the procurement, IT, and development teams were notified that they were no longer to work with it. Faced with the costly loss of existing and upcoming projects, the supplier quickly agreed to the price cut.
If all else fails, canceling your orders or suspending future business may be the only answer.
In Summary
As we’ve shown, companies negotiating with powerful suppliers have plenty of ways to redefine the relationship. Whichever option they choose, they need a clear understanding of the problem, an ability to work on it across functions, a willingness to think outside the box, and strong analytical capabilities that can reveal the enterprise wide picture and generate useful insights. It’s also important that senior executives commit to strategic rather than tactical moves to get the full scale benefits of a best in class supplier negotiation strategy. With these elements in place, what had seemed an impossible supplier negotiation task becomes one that is merely one small step in bringing products to market ahead of consumer expectations. To make the negotiation process simpler, CBX’s Supplier Management Software allows for retailers to interact with their current suppliers in one easy to manage location.
