In today’s complex business environment, buyers & suppliers are battling to not only manage everyday transactional exchanges but are also seen working hard to build strategic partnerships. With more than 60% of corporate revenue directed towards externalized, supplier-driven costs (cited in a blog posted in Harvard Business Review), managing different types of relationship with suppliers and identifying the cost benefit tradeoffs continues to be an ongoing challenge.
Negotiation in the purchasing process is often the stage that defines or rather lays down the ground rules that later plays a vital part in molding supplier relationship. In the past, the sole intention of negotiation was to reduce the price quoted by the suppliers. With changing macroeconomic conditions and evolving business scenarios, suppliers are no longer viewed as mere providers of goods and services but as partners in the organizations’ growth story. With this new mindset, the focus of negotiations has shifted from dealing with a large supplier base to forging relationship with few suppliers who can add value through improved quality and services as against providers of lowest price.
Negotiation when procuring commoditized items is tactical in nature, premised mostly on volume commitments with focus on supplier profit margin reduction. In contrast, negotiation when procuring strategic items is analytical in nature, premised primarily on understanding of supplier cost break down with focus on supplier cost reduction. The latter is often crucial and sets the tone for future supplier relationship. So what does it take to succeed while negotiating for strategic items?
Value Chain Analysis (VCA), a concept by Michael Porter provides an answer to the above question. VCA can play an important role in the management of supply chain relationships. Gaining visibility into the Total Cost of Ownership provides buyers with the crucial cost information to optimize the negotiation process with suppliers and also places them in a strong position vis-à-vis identifying and assessing alternative course of action during the supplier selection process.
To know more about the strategies and tactics leading organizations use to maintain and improve key supplier relationships,watch Ardent Partners’ Chief Research Officer, Andrew Bartolini and Richard Waugh, VP Corporate Development, Zycus Inc., as they present and discuss “The 7 Keys to Better Sourcing and Supplier Relationships.”
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