How to Respond to Supplier Price Increases: Procurement Sensitivity Class
To respond more empathetically to salespeople asking for cost increases, I recently took a sensitivity class. I came up with a 3-step process to kindly say no.
1. Share a copy of an article, "How to Break Bad News to Your Boss."
2. Give them a hug and let them know everything will be OK.
3. Take them to lunch and reminisce about the great service they used to provide.
In place of these three humorous approaches, you might consider using the 10 cost avoidance negotiation steps outlined in this article instead.
10 Steps for Negotiating Procurement Cost Avoidance
In an inflationary market, fighting cost increases can be as important to achieving your procurement cost reduction goals as actual cost reduction. Follow the 10 steps below and see how the amount of increases you take diminishes.
As one step doesn’t work, move to the next step. These delay tactics are designed to buy you time to run an RFP or reverse auction and to help you learn more about the supplier.
Stating your organization's strict policy against such increases is a tactful way to communicate your stance and set the tone for further negotiation. Being straightforward may encourage suppliers to explore alternative solutions or provide more competitive pricing, enabling a more efficient procurement process in the long run.
Requesting further market data is essential. You will have a better understanding of what factors are driving price changes, such as shifts in supply and demand, industry trends, and current economic conditions. With this knowledge, you will be better equipped to assess whether a supplier's proposed cost increase is sensible and negotiate more effectively.
Taking some extra time to evaluate the proposed cost increase demonstrates diligence and responsible decision-making. Cross-referencing the supplier's data with your own research allows you to identify any possible discrepancies and assess the validity of such an increase.
Requesting a breakdown of the cost components that contribute to such an increase can reveal areas where cost efficiencies can be achieved on future occasions.
By expressing your dedication to the supplier and informing them how much you value their ongoing partnership, the negotiation process becomes humanized. Remind the supplier of the history and trust you’ve built with each other through the years.
Committing to increased purchase volumes over an extended length of time may help the supplier secure a steady stream of business, eventually allowing them to offer more competitive pricing. Proposing long-term contracts that guarantee a certain volume of business over multiple years instills confidence in their revenue stream, motivating them to offer better pricing.
This approach not only engages both parties in the problem-solving process but also demonstrates a commitment to a mutually beneficial partnership. A joint meeting can help define clear objectives and encourage out-of-the-box thinking from both sides.
This is an effective approach to negotiating, especially if additional support and leverage are needed. Establish a clear negotiation strategy with specific objectives and desired outcomes. Outline areas where cost avoidance is essential, alongside the potential compromises you are willing to make. Your boss can help convey to the supplier the importance of your company's dedication to cost avoidance.
Including higher-level decision-makers will most likely yield a well-informed resolution to the proposed cost increase.
Another effective form of negotiation, implementing an RFP (request for proposal), request for a quote, or reverse auction as a standard practice for cost increases creates a transparent and competitive environment.
An RFP is best suited when there may be alternate pricing models and options of which you might not be aware. An RFQ is appropriate when you can establish a clear cost model, and a reverse auction is particularly useful when you feel the supplier increase may be unsubstantiated and there is a competitive market. A reverse auction is a real-time bidding process in which suppliers compete to offer the lowest total cost.
Once you've determined the go-to market strategy which best suits your category, this approach helps control costs and maximize value adds. Most importantly it drives home the message that cost increase requests will not be taken lightly.
Considerations When Using the Procurement Cost Avoidance Negotiation Process
There are a couple of assumptions when using the procurement cost avoidance negotiation process. First, this assumes you do not have a contract in place. Second, the expenditure and increase amount may dictate how many steps you should work through. Especially for the salesperson, this is meant to be a time-consuming process. Your time is valuable and if the increase is small you may choose to focus on other larger opportunities. You should always have one eye on the bigger procurement cost savings/avoidance goal.
If the impact is significant, your goal is to put on your strategic sourcing hat and find alternatives prior to the salesperson threatening to stop service. That means upon step 1 failing, the strategic sourcing or category manager should immediately engage in an RFP process or at least start reviewing salesperson consolidation opportunities.
When engaging the salesperson be prepared for the worst but do not be afraid to negotiate. Very few salespersons will willingly walk away from a sale because you said, “no” to an increase request. Also, recognize if they do threaten to stop service you can simply accept the increase.
By using these procurement negotiation tactics, you can delay increases long enough to complete an RFP with alternate sources. This will give you the real firepower to determine your optimal path moving forward.
