How to negotiate with a SOLE Supplier (Part 1)

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By Bernie van Niekerk

You know the feeling ...Their price increases are double that of everybody else's... As far as their service is concerned well you've got 2 choices.

1. Take it or 2.Leave it!

Their ''service" personnel are insolent to say the least. But there is one thing that you both know. namely, this supplier is in charge... and they know that you know!

Without the power of an alternative can you really negotiate...?

In fact it is considered to be a good negotiation tactic to postpone a negotiation until such time that an alternative has been developed. An alternative product perhaps or an alternative supplier...

Sometimes the negotiation is postponed until the ''Appearance of an Alternative" has been developed. In other words - a credible "Bluff"!

But is it possible to negotiate with a sole supplier? (And by sole supplier I don't mean a purveyor of a certain type of fish!). I mean the kind that generally has us over a barrel.

These suppliers can greatly influence our capability to get Strategic Sourcing benefits. They can also impact the competitiveness of the organisation in a major way - if it makes up a large part of our spend.

In dealing with such suppliers the first, key action to take has to be...

a. Not getting into the situation in the first place!

"Now, this obviously must be stating the obvious, " I hear you say. However, how many times do you know of end-users signing/ forcing the company into such agreements.

Here are 3 common mistakes to avoid.

1. Not thinking carefully about the contract throughout its lifecycle, properly identifying risks and then summarily signing the supplier's contract...

A truly amazing example I heard of this week related to an Office Automation supplier who had the following clause in his contract , agreed to by the buying company. "If at any time additional components are purchased to supplement the office equipment, the entire contract is extended by an additional 5 years! In this case even though there might be alternative suppliers, the contract created a sole supplier.

One can just imagine the cute "dolly bird" offering the suppliers' contract to sign - "Its just our standard terms and conditions Sir...".

If proper contract management principles were adhered to, a professional procurement person would have thought about the lifecycle of the item (and the total cost of ownership (TCO)) , identified potential risks along the way and ensured that these are addressed. Then we could have offered the supplier "Our Contract!".

2. Getting caught by "Techno Lust"

Another way of getting set up into a sole supplier situations is through specification. As we all know, engineers suffer from "Techno Lust". (Being an engineer myself, I can testify to this truth). So the engineer (or the IT people), determine that they absolutely cannot do without the functionality in their spec.

Never mind that their specification is highly complex and suffers from high variability. This results in one only being able to buy the product form one very particular supplier. (This is also called creating a high supply base challenge by design!).

If strategic sourcing principles are followed and a cross functional team is put together to challenge the specification this type of situation can be avoided.

3. Having the "Balance of Power" shift...

This is especially prevalent in outsourcing agreements. The tendency is to outsource areas of the spend where "we are not experts" in. The supplier absolutely loves this because it means that they could write all kinds of "expert clauses" in the agreement, many of whom will come to play when the "Balance of Power shifts".

What this refers to is that once the deal has been made and our ex-internal function is being run by the supplier it becomes extremely difficult and costly to bring it back in house never mind managing the supplier.

The guideline here is to get to know the area very well before we outsource - especially throughout the lifecycle of the contract..

Think carefully about what alternatives are available should things go wrong. Remember, once the service has been outsourced and your people are now working at their company... Or your IT is now being run by them... What recourse will you have..?"

Furthermore, by calculating total cost of ownership throughout the lifecycle, we can identify the drivers of the various costs going forward and in this way ensure that we contract for the wide and disparate number of issues that can arise during the agreement. We can also contract around what happens when these drivers change.

Finally its probably a good thing to outsource on a piecemeal basis. By starting with a small part of the contract, we can learn what the supplier really means in their proposal and contract for the next phase in the correct manner. It also helps to have the rest of the deal "out there" to motivate supplier behaviour.

Ok so "not getting into a sole supplier agreement in the first place" is probably quite an obvious statement, but prevention is better than cure..

But what to do if we are already in such a sole supplier situation:

a. because some end-user - who has since left the company - has put us in this situation or
b. we really need this product and can't get it anywhere else

In the next issue

HOW to negotiate with a SOLE supplier...(Part 2),
we'll be dealing with ways to:
1. Shift the balance of power in your favour even with a sole supplier
2. Finding hidden ways to get the sole supplier on your side.
3. Creating competitive advantage through a sole supplier.

To your success!

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