Negotiating With Suppliers

Negotiating with suppliers and getting the best from your suppliers can be one of the trickiest parts of running a small business. The cut-and-thrust of a good negotiation is great sport to some, but it can be an extremely stressful time for others. However, love it or hate it, it’s an essential part of the business world, and should be handled accordingly.

“A lot of small businesses these days aren’t paying close enough attention to their supplier relations,” says Renee Connellan, a buyer for a network of small jewellery businesses based in Sydney’s southern suburbs. Her position has taken her around the world, negotiating supply contracts with some of the best in the business.

“Circumstances change – like the quantities of goods being ordered, or even just the goodwill that comes with having done business with a supplier over the course of a few years,” she says. “Any significant change is a good time to reconsider the needs of your business, and talk to your suppliers about getting a better deal.”

Give and Take

At the heart of any negotiation is the understanding that it is a process of give and take. Each party has a desired outcome, plus a set of options within the negotiation that they are willing to sacrifice, in order to get what they want.

“You need to go into the meeting with a very clear idea of what’s up for grabs, and what’s off the table, in terms of the concessions that you’re willing to make,” says Connellan. “If you don’t have a clear vision of the best possible outcome, and what you’re willing to give up, you run the risk of conceding something you needed during the talks.”

Understanding your own line in the sand is important, but understanding what your supplier wants to achieve from the negotiation is also essential.

Do your homework

One of the most critical aspects of entering any sort of negotiation, particularly one with a supplier for your business, is making sure that you know as much as there is to know about the market, your supplier and what you hope to achieve from the talks.

That is why research is a vital step towards ensuring that you are going to get the most from the negotiation. And there’s more to it than simply typing what you want into an internet search engine and hoping that the information you’re getting is correct.

For instance, figuring out what a good price is can be as simple as spending some time on the phone, and talking to as many suppliers as you can find – both the ones you use regularly, and any other players in your market.

“Do some market analysis, do some internal analysis, and figure out where your big spends are – that’s usually where you can be making some major savings,” continues Connellan. “Make sure that you don’t become complacent by using the same suppliers again and again. You may be able to get the same product – or even a better product – elsewhere, but you’ll never know if you don’t compare.”

Doing some on-the-ground research as well – spending time observing what your competitors are up to – can also be very useful.

“In most instances, it’s safe to assume that your margins will be broadly similar to those of your competitors,” adds Connellan. “By watching what they’re doing, how they’re marketing their goods, you should be able to figure out what sort of value they’re getting from their suppliers. If they’re getting better value, don’t be afraid to bring that up with your supplier.”

This can help you to determine what sort of price drop you should be chasing, as well. Suppliers are likely to be more forthcoming with discounts if you demonstrate a thorough working knowledge of the market.

Locked and loaded

Knowing and understanding your supplier’s most desired outcome will allow you to tailor your responses, and give you crucial insight into which elements of any offers they make are likely to be deal-breakers, and what they’re prepared to forego.

In some instances, simply letting the other person at the table do the talking can be an effective strategy. In his book Secrets of Power Negotiating, noted expert Roger Dawson outlines a technique that he calls ‘The Vise’.

It simply involves, once your supplier has made an offer, asking your supplier to do better, and then keeping your mouth shut. Dawson claims that after any sort of silence in this situation, the first person to open their mouth will be the one to make a concession, and that’s precisely what you want.

When negotiations on price look like they’re going to stall, there are a couple of different strategies you can employ. If you’re nowhere near where you want to be, often times it’s best to thank your supplier for their time, and call a halt to proceedings. This will let both parties take some time off to reflect and can create the impression in your supplier’s mind that they may end up losing you as a client unless they’re able to reach an agreement.

However, if you’ve negotiated to a point where both parties are fairly close to each other, the tactic that Dawson recommends is this: never, ever offer to split the difference. He suggests manoeuvring your supplier into making the suggestion, to which you can then agree, lending them the illusion that they’re the ones getting the best of the deal, when in reality you’re achieving one of your own goals.

Locking in with a long-term contract can seem like a great idea, especially if you’ve managed to negotiate a great price. However, there are some pitfalls that small business owners really need to be aware of.

“If you think you’ve got a good price, then try to lock it in for as long as you can, especially if your business is in an industry that isn’t prone to fluctuations,” says Connellan. “But in a more volatile industry, like the jewellery trade where the price of precious metals is constantly on the move, contracts tend to be either relatively short, or have provisions for flexibility built in.

“The nature of negotiations has changed in recent years with the recognition that we are part of a value chain,” adds Connellan. “Businesses are invested in their suppliers and vice versa – and if you have a good supplier, you both have a mutual interest in increasing your turnover.”

The end result of any negotiation you enter into should be a position that is good for you and your business. When circumstances change again, as they invariably do in the world of small business, it will be time once again to sit down and chat with your suppliers, only this time with a plan. You want to stride into that room with confidence, a plan, and be ready to negotiate.

Case study – Primo Bersani

Primo Bersani recently opened a butcher shop in the main strip of Burwood in New South Wales, and is doing a roaring trade.

How do you go about negotiating a price?

I am always negotiating the price with my suppliers, because with meat, the price is always going up or down. The market moves a lot, and so I need to make sure that my prices are predictable. When the price of meat goes up, that’s when I talk to my suppliers about getting a bit more of a discount.

How do you know when you’re getting the best price?

I check the prices with a few different suppliers, even though I normally only use the same people most of the time. I keep an eye on the market, and the competition. I know some butchers here sell meat a lot cheaper than me, but what they’re selling is coming from cheap suppliers, and of low quality.

So how are the relationships with your suppliers?

I mostly use the same suppliers all the time, because we know each other and I know that the quality of the goods I’m getting from them will be good. Quality is vital to people in this industry.

Does the quality of the goods have an effect on the negotiations?

Yes, all the time. I am happy to pay a little bit more for top quality meat, because I know my customers are prepared to pay more when they see how good the product is here. Especially with my lamb supplier. Lamb is a meat where the difference between good quality and top quality is noticeable. It is something that is very important to get right, particularly for the consumer.