PART 2: How to negotiate with a SOLE Supplier

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By Bernie van Niekerk

Its that time of the year.... Your SOLE supplier is about to present you "their valued customer" with their increase. They know, and you know that there is not much that you can do about it....

Now for whatever reason (part 1 of this article dealt with making sure you aren't put in a sole supply situation in the first place!) you or your organisation is faced with no alternative supplier or product. Not the greatest position to be in when trying to negotiate a better deal!

Especially when the item is a strategic or bottleneck item that could seriously impact the performance of the company. (Not to mention the impact on the performance bonus of the procurement individual involved!)

Three questions might arise from this situation...

1. "How do I accept what they say, and still keep my pride intact?". Basically a matter of surrendering gracefully...or
2. "There has to be a way to beat these guys at their own game..."
3. "If no answer is found for question 2, How do we return to question 1, "gracefully"?

This article deals with question 2.

In other words: If the Power of an alternative, is not available, what other sources of negotiating power are available to get a better deal?

The power to satisfy a need.

It has been said that "Success in a negotiation depends 5% on negotiation (tactics) and 95% on information."

This is especially true in large and very large procurement deals. Each and every organisation has particular and varying needs depending on the situation. Unearthing the information about the needs (or interests) of the SOLE supplier will provide valuable levers that could influence the negotiation.

For example: Most suppliers would like to reduce their costs. Understanding what their costs are might unearth opportunities for you to satisfy a major need of theirs.

I've been involved with a large foods company who were complaining that they've just been presented with 14% increase from their SOLE supplier and that there is not much they can do about it. After analysing their SOLE supplier's costs we realised that a major component of the supplier's cost base was in fact a raw material item for which the Buyer was one of the largest buyers in the country. By offering the SOLE supplier a deal whereby they are able to share in the buyer's deal, four major benefits accrued to the Buyer.

1. By lowering supplier raw material costs, the SOLE supplier's price to the Buyer would be lower on the items purchased from the supplier. (Direct cost reduction benefit.)
2. By lowering supplier raw material costs, the SOLE supplier now has a lower cost across its customer base and this benefit could be shared with the Buyer. (Indirect cost reduction benefit) It is quite possible under this scenario that the buyer would have an overall price decrease rather than a 14% increase.
3. The Buyer has just increased its volume and therefore its negotiating power with its own raw materials supplier.
4. The SOLE supplier has become dependent on the Buyer in a way like never before! This might just help in future negotiations...

There are various other needs or interests that the SOLE supplier might have which will not be evident at the start. In some instances the SOLE supplier will actively try to discourage you from finding out what these are. They might be in negotiations with a third party that could directly be influenced by the nature of their business with your firm.

They might be looking for an investor. In this case, they could be desperate for a long term contract. Even though, in the past, they might have appeared immovable on certain positions, things might have changed and they could be far more willing now. They might be aware of certain legislation that is about to happen that could change the industry. Or new technologies on the horizon. This could influence their competitiveness in the market.

Now assuming they are shrewd negotiators they would divert your attention as far as possible from these issues...

Sometimes, believe it or not, the representatives of the SOLE supplier do not understand their own business well enough!

There is an excellent, recent example of a smaller local mining company who appointed a specialist to analyse their major and SOLE transportation supplier (A specific mode of transport was used. Our readers in South Africa could probably guess which SOLE supplier I'm talking about).

As usual the supplier had the view that "Although we feel your pain, we must unfortunately pass the following massive increase to you".

The mining company, who made up a relatively small portion of the supplier's turnover, countered and threatened that they would then choose another mode of transport. The SOLE supplier did not back down end effectively bid the buyer farewell. I surmise, fully expecting the Buyer to come groveling back to the table.

In response, the mining company presented senior people at the SOLE supplier with an exact analysis of what would happen to the SOLE supplier if they moved their business. These weren't idle threats but based on exact information. Information about the SOLE suppliers business that clearly indicated the effect that the Buyer's business had on the SOLE supplier's business.

Well this information along with the Power of Persuasion had a very positive effect for the Buyer. And apparently I'm putting it mildly!

Sometimes there is more to the deal than meets the eye. Although our turnover with the supplier might be small, the PRODUCT that we are buying from them might be of strategic importance!

So from procurement specialist to private investigator... to expert negotiator!

This information can lead to The Power to Obstruct. By understanding the suppliers' future plans or future trends in the industry there might be some actions we could embark on that could seriously obstruct where they would like to be heading. This information could be used to extract major concessions.

A final word on The Power of an Alternative. Its seems quite logical but the negotiation session, is not the place to find out that we don't actually have an alternative supplier or product! If a negotiation is eminent and we do not have an alternative, this might be a good time to stall the negotiation. Only enter the negotiation at such time that an alternative, or the appearance of a credible alternative (know in plain english as a credible BLUFF!) he been developed.

6 Comments

Provide Claudia with more tactics on Procurement.

A must for everyone involved in the field of Procurement

Great article, this article does set the mind in motion with regards to identifying in the first place scenarios (you put your organisation into)that might be of benefit in the short term but result in supplier having long term monopoly. Secondly, it has helped to identify possible opportunities to eradicate this (Monopoly) situation. This article helped me a lot in one of my recent contract negotiations.

Procurement Portfolio Development (PPD) is a way to go in order to encourage paradigm shift in the world of procurement. That is in terms of the function and value that procurement adds to the business. PPD is one concept that will especially assist us in South Africa where we are joining the Global Market which makes procurement function even more challenging.

Thanks for the article. I would like to see future discussions being held on PPD

I am buying shares from a sole propretor cc. I want to draw a membership agreement with these person. He sells 25% shares.The annual turnover is plus munus R1.8 million

I am buying shares from a sole propretor cc. I want to draw a membership agreement with these person. He sells 25% shares.The annual turnover is plus munus R1.8 million

Great and very informative

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