The “Great Recession” had an unexpected impact on the relationship between companies and their suppliers. At the depths of economic despair, companies reported concern for the welfare of their suppliers at roughly the same rate that they expressed worry over their own fortunes. Economic catastrophe, rather than straining these relationships, seems to have strengthened them in many cases.
Two recent trends may reverse that dynamic. One is the strengthening of the U.S. economy in general, and the supplier sector in particular. The most recent Purchasing Manager’s Index, which uses factors like production levels and new orders to gauge the health of suppliers, shows a gradual return to pre-recession levels.
The other trend is the phenomenon known as “re-shoring.” As the price of manufacturing continues to climb in places like China, U.S. companies are beginning to relocate manufacturing to neighboring countries like Mexico, in order to take advantage of lower transportation costs.
Though both trends carry different implications, they’re likely to share at least one common effect: increased prices. Basic economics dictates that increasing demand pushes prices up. And while some suppliers are moving operations to Mexico in a bid to keep costs low, “re-shoring,” may actually reflect a rising low-cost manufacturing baseline.
Thus, the question isn’t whether prices will rise, but by how much. While some inflation is normal amid improving economic conditions, companies should keep a close eye on expenditures and negotiate with suppliers to lock in favorable terms.
To do so, companies need two things: solid information and the right negotiating tactics. Here are some suggestions for both:
Strength in Numbers
Having complete, up-to-date information is essential if a company wishes to negotiate competently with its suppliers. For many companies, however, it takes a prohibitive amount of time to gather all of the necessary information and mobilize it usefully.
This is particularly true of companies that manage parts inventory. Paper systems, spreadsheets and other outmoded means of tracking inventory tend to be highly inaccurate, making it difficult to leverage information about prior purchases, current levels, etc.
Robust CMMS platforms are designed to provide quick, easy insight into inventory data with a range of built-in reports and intuitive data navigation tools. These features make it easy to see how much is being spent on inventory, how much is on hand, and a host of historical data that can be very useful during the negotiation process.
Above all, accurate data provides context and enables companies to identify specific areas in which they may be able to get more value out of their suppliers.
What to Ask for and How to Ask
Price tends to be the first thing that comes to mind when the subject of negotiations is raised. What companies should be thinking about instead is value in a broader sense. Shipping rates, delivery dates, quality, service perks, etc., should all be on the table. Many of the factors contributing to rising prices are likely to be largely beyond the ability of suppliers to control, so it’s important not to get too fixated on prices alone.
In cases where a supplier has been used for years, it can be easy to lapse into complacency. In the age of Google, companies can quickly and easily research competitors to ensure that they’re still getting the best deal. It’s also important to bear in mind that information availability cuts both ways. A supplier has access to most of the same information that their client does, so it’s going to be harder for the latter to successfully bluff and claim that better deals exist when they actually don’t. For this reason, it’s probably best to strike a tone of transparency from the start—a failed bluff is both embarrassing and can seem disrespectful, so it’s best to approach negotiations openly and honestly.
A long-standing relationship with a supplier can be the most important single factor in negotiations, but with supplier integration becoming more common in recent years, the supplier may be very different than it was in the past. It’s worth the time it takes to keep tabs on these companies and be aware of changes in management or structure that could substantively impact negotiations moving forward. Mergers and acquisitions are a common example of these sorts of changes, as staff reshuffling can cause a company to lose their former standing with a supplier.
Above all, the key is to stay active and informed when it comes to supplier relationships. Doing so enables companies to be more proactive in securing deals and terms that will benefit them in the long term. Constantly playing catch-up will have the reverse effect.
About the author
ManagerPlus is the preferred solution across the most asset-intensive industries, including Fortune 500 companies, to improve reliability and minimize downtime.