Checking Your Blind Spots in Vendor Negotiations

Posted by Jim Kurtz on Feb 9, 2020 4:30:00 PM

MFG Blog image Blind Spots

In our experience, whether it’s a packaging, transportation, temp labor, or a telecom agreement, saying “no changes, here’s my signature” is a classic blunder.

Why?

Because contract renewals or extensions can be deceptively simple. For example, if a procurement manager is satisfied with their current relationship and the rep approaches them with a rate reduction approaching contract renewal, it looks like an “easy win.” The department head saves on unit prices and avoids a large batch of paperwork headaches, while still getting what they want.

Except there are some aspects of contract dynamics that are kept outside your line of sight. Yes, a solid team of strategic and operational leaders can pin-point the product features demanded by the marketplace, evaluate how the current offering stacks up against the competition, and identify the best-of-breed providers in a variety of areas. What they often can’t see without outside assistance is how a pricing offer compares to prevailing rates—in both the offshore and domestic market.

The Cellphone Parallel

When conducting contract negotiations with an incumbent vendor, terms are inevitably benchmarked against existing pricing. The problem: legacy pricing often bears little resemblance to prevailing market conditions. This is especially true of relationships that have stood for five years or longer. Think of how much the technology curve has shifted almost entirely in the manufacturer’s favor. Odds are, new features and specifications have been appended along the way with their own dynamics – meaning a fresh look at the market may be long overdue.

Here are the facts: vendors will be as aggressive with pricing as needed in order to win business. Consider the ongoing barrage of enticing offers from cellular and cable providers…available to new customers only. Loyal existing customers aren’t eligible for free phones and other such perks. If you raise enough static you might be able to wrangle a discount, but that 8% price cut may feel more like money left on the table than a bonus.

Of course, most vendors don’t advertise their competing offers like mobile networks. Shoppers can do their due diligence by checking with industry groups, but these are usually made up of colleagues also in the midst of long-term agreements. Given the various services and specs offered, it’s hard to draw an apples-to-apples comparison. That’s why there’s a competitive advantage to be gained by enlisting industry experts who constantly work with these vendors and have a view of the broader landscape.

Miami is not Denver

Leaders who reach out to peers to assess the market are likely gathering data from someone in the same geography or same industry. However, vendors face differing competitive environments in various regional markets, and it shows. In order to make inroads in Houston, for example, a given provider might be willing to be more aggressive with pricing than they would in Boston. Another may enjoy much higher margins in Denver than Miami, making a preemptive offer of a 10% cut an appealing option before a rival can upset the status quo with a 30% sweetheart deal.

The Bottom Line

Everything is negotiable. Even if you’re happy with your current relationship, don’t leave money on the table. Addressing a few vendor blind spots can generate big savings without causing disruption, both with contract renewals/extensions as well as new product or component selections. Again, the key is to work with a partner who has a broad enough frame of reference to bring such disparities to your attention. SRM uses benchmarks and a broad scope of market insight to assist clients in seeing the big picture. How may we help you?

Topics: Manufacturing, Vendors & Contracts, Contract Management, Contracts