The following article was prepared by Mike Taylor,
Creative Negotiation (part 4)
Note to new buyers: A concession isn't always
One of the best strategies you can use to move a stuck
negotiation forward is to change the deal. What if we; buy two instead of one,
take delivery somewhere else, agree to take it unpainted, change the packaging,
This works because suppliers and buyers have much more to
trade than just price. Consideration, concessions and incentives, come in many
forms and vary with each deal. Most importantly, the various types of
consideration we exchange have different values to each party in the contract.
That is, any one item may be of more value to the buyer than to the seller.
Great negotiators understand this principle and use it a lot.
Here are some obvious examples to illustrate the point.
- If the plant is shut down and delivery is critical are
the extra few dollars in the price worth as much to the buyer as to the
- If the product has a very short shelf life does the
minimum order quantity become a much more important issue to the buyer? What
about to the supplier if the product has to be produced in large
- If a supplier has a delivery truck already half full,
he can afford to give away the rest of the space, just to get a better freight
rate on the first half, but the buyer would have to pay full price to have it
delivered by someone else.
- A supplier's cost to produce an item isn't the retail
price charged. So a supplier can afford to deal on the second item and would
rather do so, than discount the first purchase.
Example: It costs the pump company $900 to make the pump
and cover overhead costs. They add $100 profit to sell the pump to me at $1000.
When I buy one pump the manufacturer makes $100. If I ask for a discount, the
manufacturer makes less profit. However, if the manufacturer talks me into
taking two pumps, then he can give me a $100 discount, still make a profit of
$50 on each pump, cover more of his overhead, move inventory, etc. while I get a
$100 savings. The manufacturer might save far more than he would have made in
O.K. You get the principle. We see it all the time. But,
how to consistently apply it?
Here are some suggestions:
- Compare the actual cost vs. the selling price of each
element of a transaction. Are there markups, overhead, administrative cost and
hidden costs? If so, who is paying them, how and when. Then apply all of your
skills and knowledge to reducing, eliminating or mitigating the
Example: Agreeing to pay an invoice by Electronic Funds
Transfer (EFT) is a cash flow cost to the Buyer. But generating an invoice,
matching a payment and sending it to the bank is a significant processing cost
and delay to the seller. Also the seller may have long ago paid for raw
materials and have a much bigger cash flow problem. Thus, changing payment
terms to EFT could equate to a significant reduction in seller cost that
should be reflected in the selling price. The reduction in selling price might
more than make up for the cash-flow cost to the buyer.
- Look at all of the possible variations that can affect
the deal. Check out a relatively complete list of elements to consider
negotiating in a contract. http://www.mltweb.com/tools/what.htm
Chance are, there are one or two items on the list that should be added to the
transaction and/or could be changed to save some cost or
- Example: Contingencies are a major cost for
casting and forging companies. If the first casting fails, it would be a major
expense to have to restart the furnace to pour a replacement. Quite often, to
avoid this cost, castings companies will pour extra raw castings (of course
those extras are built into the selling price). A shrewd buyer will write the
extra raw castings into the agreement and take delivery of the ones that are
not needed. The buyer may end up with a few extra castings (which would have
been paid for anyhow and could be buyer-furnished-material on future orders)
and the seller has reduced risk of unused material. [ note: I used to
love to work on casting and forging orders because there were so many money
saving variations like this]
- Consider what and how the seller has to do in order to
fill the contract. Can you get your nose into his business and save everyone
some time and cost?
Example: When a 100-line purchase order for
office supplies is received by the seller, usually the first step is to have
someone keypunch it into his computer. So, if the buyer paid someone to
keypunch the items on the Purchase Order it's a duplicate effort for the
seller to retype them that ads cost to the transaction. Finding a way to
transmit the list electronically so it doesn't have to be keypunched a second
time, is a major savings in time, possible errors and
Exercise: Brainstorm with some of your colleagues.
- Create a list of items that buyers and sellers can us
for consideration in a contract. List the ones that might have a different
value to each. Ask "what can we trade that is of value to one or the
- For each item, make a list of the ways that the value
can change for buyers and sellers. What can affect the value of 'delivery'
that we should keep in mind?
- Take a typical order and list all of the associated
costs. Look for duplications, extras and hidden costs that can be eliminated,
changed, transferred, or combined with something else.
Start being creative with how you think of the associated
costs of orders. Include all of the cost factors in a negotiation, mitigate
costs by changing the terms of the agreement and you will truly be a great
Read more articles about negotiation and creative
contract solutions in the Purchasing Toolbox at http://www.mltweb.com/prof/tools.htm
and in the BuyTrain news article archive at http://www.mltweb.com/tools/buytrain/index.htm
MLTWEB is assembled and
maintained by Michael L. Taylor, C.P.M.
articles prepared by Mike may be shared for supply chain
education provided that this source is credited and no fee is
charged. The rights for any other use are withheld.
Michael L. Taylor, C.P.M.