Are Procurement undervaluing suppliers?
In a previous blog, we explored the market trends impacting B2B business negotiations and determined there were two main themes from these trends. The first of these being: Procurement – undervaluing suppliers.
The way organisations buy has become more sophisticated, so more companies have introduced professional procurement managers into their negotiations with suppliers. In today’s business environment companies must pull every possible lever to improve profits, so getting a price reduction on a product or service is the easiest way to reduce costs. This is why procurement has become a bigger influence in most industries in the past decade. On face value getting cheaper prices seems an appropriate approach. However, we challenge that paradigm and identify some alternative negotiation strategies to reduce the focus on price in business negotiations.
In today’s complex business environment smart companies are looking for more than ‘blunt instrument’ price reductions. Yes, they want reduced costs, yet a price reduction is only one of many possible ways to achieve this objective. What companies need (and part of your role through negotiations is to help them understand this) is suppliers who can help reduce costs but through more than price reductions.
This requires a fundamental shift in the way you negotiate with procurement: shifting from a selling (discounting) mindset to a problem-solving, value-creating mindset. With a selling mindset, you only focus on selling products and services at the best possible price from a negotiation; with a problem-solving mindset you focus on how you can help procurement improve their company’s results.
Why is a problem-solving mindset important?
As products look increasingly identical, procurement is left with price as the only differentiator in negotiations. So, if you don’t want only to negotiate on price or due to your cost structure you can’t win business in price-based negotiations, you must have a different strategy. If products are increasingly identical, then the basis of your negotiation strategy must come from somewhere beyond your product.
Dr. Kotler and Dr. Caslione explain the importance of supplier/distributor relationships in their book, Chaotics: the business of managing and marketing in the age of turbulence.
Suppliers and distributors are the lifelines to a company’s ability to put innovation into action. Management that doesn’t realise the value of its suppliers and distributors could be costing the company money. Suppliers and distributors can help lower near-term costs and give a company a sturdy footing when turbulence hits.
Squeezing a supplier is another short-term fix that can do more harm than good. An integrated, holistic understanding of all stakeholders is crucial to the success of a company in times of change. Gaining such an understanding will help you make the right choices. If your company doesn’t already have its best and highest-quality suppliers sufficiently integrated, it may be an opportune time to take your relationships with the right suppliers and distributors to the next level.
For more detailed insights on focusing on suppliers and identifying the typical mistakes, many companies make with their suppliers read chapter 2 of The Creative Negotiator: Changing the Focus to Value.
When a company doesn’t understand the value-added ability to move new product that suppliers bring to the table, the company will not only fall behind the rest but will be trampled.
Build relationships between procurement and your suppliers before it is too late!