How to Negotiate the Unexpected in Supply Management
The days of tactical supply management heading to the negotiation table, eschewing how “customers are always right” are gone, says Charlotte de Brabandt, DBA, Boston-based head of information technology (IT) partner management and governance U.S. at ZF Group.
“Before the (coronavirus) pandemic, suppliers didn’t have an overabundance of power. Buyers could better dictate the terms of a deal,” she says, adding that the pandemic not only turned supply management on its head, but helped companies and suppliers forge stronger partnerships.
De Brabandt, a negotiation expert, author and public speaker, underscores the differences in products. “With indirect material, the fluctuations across the supply chain are less critical,” she says. “The marketplace can help balance supply and demand differently, providing alternatives to defined manufacturers, often through use of artificial intelligent (AI) systems.”
But when negotiating direct materials, de Brabandt says, strategic relationships and in-depth partnering come into play. “Plan to build the management of vendors by doing a category management analysis,” she says. “Understand the goals, KPIs and what it takes to be a customer of choice, because that’s what drives the win-win outcome for all parties.”
The Cause and Effect of What-Ifs
With supply management always in flux, sudden necessity may lead to unplanned negotiations with a supplier, manufacturer, distributor or logistics company. Without vital analysis to better identify the what-ifs, buyers should make a hard stop mentally and consider their desired goals but, just as importantly, those of the other party, de Brabandt says.
When having an impromptu negotiation conversation — and knowing more formalized discussions are to come — she recommends using the following questions as a self-reflective exercise to negotiate effectively:
- What are my goals?
- Do I have options?
- Is pricing the main driver?
- Should I use another supplier?
- Is there a quality issue or performance issue?
De Brabandt also advises creating a best alternative to a negotiated agreement (BATNA), which includes options to exercise should contract negotiations fall short. Think of BATNA as a just in case solution. The more complex the supply management relationships, as can happen when there are multiple parties, the more likely negotiations can hit a hurdle, making a BATNA imperative.
The Kraljic Matrix
Assuming you’ve identified the what-ifs and BATNA — and have a solid view of suppliers and customer segmentation — outlining a workable negotiation plan structure is more feasible, de Brabandt says.
When negotiating with a high value or high-risk supplier, she prefers using the Kraljic matrix for higher engagement. Some of the matrix’s redeeming characteristics support complexity, providing a different perspective. “Two facets within the matrix are the Y-axis and the X-axis. The Y addresses the proposed degree of spend. The X poses market complexities or risks,” she says.
Charlotte de Brabandt, DBA
When referencing the Y-axis, know what the supplier spend is and assess its value and that of the group of suppliers in your supply chain, de Brabandt advises. She adds that the X-axis draws focus to the existing and potential inherent risks of doing business with a given supplier. Once the X and Y are established, she says, form a team to unearth more what-ifs.
“Create a planned agenda with clear objectives before going further into negotiations,” de Brabandt says. “This agenda can then be the foundation for role playing with your team members and representatives. Internally conduct mock negotiations to uncover holes or opposing perspectives ahead of time.” Having a planned agenda, structured and shared with all parties, helps set expectations and the disbursement of power at the starting point of formal negotiations, she says.
End-to-end open dialogue goes a long way toward successful handling of just-in-case scenarios, de Brabandt says, but it remains an unknown, until it the disruption presents itself. Negotiation of vendor contracts is directly affected by the environment: “Take control of the environment or be a victim to the environment,” she says. Discussing (1) potential what-ifs beyond the immediate tier, direct and indirect suppliers and distributors, and (2) alternatives to alleviate stress that often comes with evolving contract scope, she adds.
In contentious negotiations, it may not be what you say but how you say it. “Speak candidly but eloquently throughout objective planning,” de Brabandt says, adding that the escalating velocity of change from disruption can lead to ineffective or outdated contract T’s & C’s. As such, it may necessitate amending some of what was already agreed to. This is when aligning your enterprise with trusted, vetted and reliable suppliers is essential.
“Once you have an established working relationship, it might be easier to go back to the table and ask to readjust payment structure, for example, from 30 to 90 days, or cash after 90 days,” she says. Before you go through “the ask,” assess whether the initial objectives remain valid, pivot to the supplier’s perspective and consider how it perceives your business. “Is the relationship strong? Are we attractive as an industry player? Do we communicate effectively? Are there collective goals between us? Does our BATNA still work? Does theirs?” de Brabandt says.
Bringing ESG to the Table
Understanding the cultural differences from country to country can help distill misunderstandings during negotiations. With global business adoption of environmental, social and governance (ESG) regulations, supplier contract terms should include language regarding ESG, “ensuring tight management of the supply chain, dictating the conditions throughout the value chain,” de Brabandt says.
Clear language detailing globally accepted and country-specific child labor practices, she recommends, assists in discerning legal age requirements. “Integrate process mining and rely on AI and machine learning (ML) tools to manage ESG efforts,” she says.
Know When to Walk Away
Best practices in today’s negotiating differ from those revered years ago. “Emotions can run high,” says de Brabandt, “but they can display power.” When resolution between all parties is deemed unlikely, step outside those challenging deal points, she says, and look for other ways to offer solutions. Can you provide data, optimal positioning or influence? Does your proposed partnership with a supplier bolster its ESG presence, merely by association? “Offer your strengths to help offset its weaknesses — an ‘if you do this, we will do that’ stance,’” she says.
Taking a hard, fixed position when negotiating suggests a lack of interest in the other party, setting imbalance within the supply relationship. Instead, de Brabandt says, “negotiate to discover mutually-beneficial agreement points, through fair dealings toward achieving the win-win.”